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Partnerships may be classified according to their purpose and according to the extent of the liability of the partners. Classified by purpose, partnerships are either trading or nontrading and are either general or special. A trading partnership buys and sells goods and services commercially. A nontrading partnership provides professional and noncommercial assistance, such as legal, medical, or accounting advice. A general partnership conducts a general business such as a retail store; a special partnership may be formed for a single transaction, such as the purchase and resale of a farm.
Sometimes a construction project (for example, a large dam, bridge, or office building) is too big for a single firm. Two or more firms may then associate, combining their resources in a joint venture to complete one complex project only. Because the joint venture is so similar to a partnership, which also may be formed to complete a single job, many courts treat it as such. Another example of a joint venture is a group of individual investors combining their capital and time to acquire a large tract, of land to develop for homes. Death of a member does not dissolve the venture; the venture normally continues until the intended project is finished.
Classified by extent of liability of partners, partnerships are either general or limited. In a, general partnership, all the partners assume full personal liability for debts of the firm, as does a sole proprietor. In a limited partnership, at least one partner must be a general partner, with unlimited liability. However, one or more partners may be limited partners who are liable only to the extent of their investment in the business.
Unlike a general partnership, a limited partnership can be created only by proper execution, recording, and publication of a certificate stating essential facts about the agreement and identifying the partners. Limited partners contribute capital and share profits and losses with general partners. Because limited partners do not share in the managerial control of the business, their liability for firm debts and. losses is limited to the amount of capital they invest. Limited partners who participate in management lose their status and become liable without limit as general partners.
General partners may be further classified as silent, secret, or dormant. A silent partner may be known to the public as a partner but takes no active part in management. A secret partner is not known to the public as a partner yet participates in management. A dormant partner is neither known to the public as a partner nor active in management. All such partners are liable without limit for partnership debts. A nominal partner is not a partner. However, such persons hold themselves out as partners, or let others do so. Consequently, if a partnership liability arises, they are liable as partners. A third party, acting in good faith, may rely on the nominal partner and extend credit to the firm. If so, all partners who consented to the misrepresentation are fully liable, on the legal theory of estoppel. If all members consent, the firm is liable. Parents sometimes become nominal partners to assist children who have taken over the family business.
Five types of partners | |||
Type of Partner | Participation in the Business | Relationship to the Public | Degree of Liability |
General | Active | Known | Unlimited |
Secret | Active | Unknown | Unlimited |
Silent | Not active | Known | Unlimited |
Dormant | Not active | Unknown | Unlimited |
Limited | Not active | Known | Limited |
Answer the questions:
1. What is a trading partnership?
2. What is a nontrading partnership?
3. What is a special partnership?
4. What is a joint venture?
5. What is the difference between a general partnership and limited partnership?
Give definitions to: silent partner, secret partner, dormant partner and nominal partner.
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