Business Partnership Models in India

Business is profitable but at the same time, a big risk. Be it a small street shop or a huge corporation, people put their life savings into it with no guarantee that it will succeed. That is why, many opt for a partnership business under which everything, from responsibilities to liabilities is shared, potentially reducing the burden on a single person. But then, the profit has to be divided as well. So is it beneficial? Well, in the vibrant and diverse business landscape of India, understanding the nuances of different partnership types is crucial for success.

So in this blog, we are here with our insights into the five primary business partnership models in India, providing clear definitions and valuable tips for entrepreneurs and business owners.

Unraveling Business Partnerships in India

A partnership business is like a marriage. Certain things are similar, like you have to work together to keep it running; merge your finances; share responsibilities, profits & losses, ideas, money, property, etc. But if a partner messes up, the other can try to settle things up or can sue the one who messed. Although in partnership two or more people form a contract to manage and run a business.

In short, it is a form of business organization where two or more individuals draft a formal agreement stating certain terms and objectives that every partner has to follow and contribute accordingly and any breach in it leads to consequences that can be handled legally.

Types of Business Partnerships in India

In India, business partnerships can take various forms, each with its own set of characteristics, advantages, and legal implications. It is classified either based on duration or liability.

Partnership based on duration has three categories.

1. Partnership at Will -

A partnership without a specified expiration date in the agreement can last as long as the partners wish. Easy to form and dissolve, but partners face the risk of one-sided termination and unlimited liability.

2. Partnership for a Fixed Term -

Formed for a specified time, it provides clarity and direction. Dissolution is unanimous, but conflicts may arise over the partnership's duration, and unlimited liability remains a concern.

3. Particular Partnership -

Established for a specific business venture or project, dissolution requires unanimous agreement. Duration aligns with the business, and like other models, partners bear unlimited liability.

While partnership based on liability is divided into 5 types that are most commonly formed and they are as follows:

1. General Partnership

Its name itself states clearly that it is the most basic form of partnership. They are easy to form and dissolve, meaning they don't require forming a business entity. The firm’s registration is voluntary and not mandatory and its continuation depends upon the partners’ death, insanity, insolvency, or retirement. It is formed simply by signing a partnership agreement that clearly outlines the various rights and responsibilities of individual partners.

A prevalent form of business partnership in India, the general partnership involves shared responsibilities and profits among partners. They also share equal rights in connection with the management of the business. In a general partnership, all partners have independent power to bind the business to contracts and loans and even bind the entire group to a legal obligation.

Each partner also has a total liability that is unlimited and joint, meaning they are personally responsible for all of the business's debts and legal obligations. For example, say a general partnership has four partners and one of them takes out a loan that the business cannot repay, all partners may now be personally liable for the debt caused due to other partners’ embezzlement or ethical misconduct.

2. Limited Partnership

Limited partnerships or LPs consist of two kinds of parties – one is a general partner who is fully responsible for the business and faces unlimited liability, while others are limited partners who provide money but do not actively manage the business, which means not only they have limited decision-making power, but they are also not responsible for their debts and liabilities. Despite these distinctions, both general and limited partners share in the business profits.

In a limited partnership, partners can limit their liability based on their initial business investment. However, not all partners can avail themselves of this protection. To maintain the limited liability status, at least one partner must assume the role of a general partner, exposing themselves to full personal liability for the business's debts.

Compulsory registration distinguishes a limited partnership from its general counterpart, providing a crucial advantage in legal proceedings. Another distinctive feature is perpetual succession, ensuring the continuous existence of the partnership regardless of events such as the death, insolvency, or insanity of any individual partner.

Features of limited partnerships

• They are more stable than general partnerships.
• General partners have total liability over the company's legal obligations & debts but also enjoy exclusive benefits of ownership.
• Limited partners are silent partners who only invest and can't assign their shares to an outsider without the consent of general partners or withdraw any part of the capital they contribute.

3. Limited Liability Partnerships (LLP)

A Limited Liability Partnership (LLP) is a type of business structure that combines elements of a general partnership with the limited liability protection typically associated with corporations. LLPs are commonly chosen by professionals such as lawyers, accountants, and consultants, where individual partners want to limit their liability for the actions of other partners in the business. It means that each partner is protected from the other partner’s misconduct. In an LLP, business owners may have protection against business debts but they're still responsible for their actions.

The formation of a Limited Liability Partnership (LLP) stands out for its flexibility, as there is no mandatory minimum capital requirement or a maximum cap on the number of partners. Additionally, the cost of registering an LLP is relatively lower compared to alternative partnership structures. However, it's important to note that LLPs lack the concept of equity or shareholding. While the absence of such ownership components simplifies the organizational structure, it also means that partners don't hold shares in the traditional sense. Moreover, it's worth considering that LLPs face higher tax rates compared to other forms of partnership, presenting a trade-off in terms of taxation benefits.

Features of LLPs

• Combines features of both partnerships and companies.
• Partners' liability is limited to their investment.
• A separate legal entity, distinct from its partners.
• Mandatory registration with the Registrar of Companies (RoC).

4. Public-private partnerships

To deliver a specific service such as building public infrastructure and community facilities, a collaboration of government and private sector entities takes place which is called Public-private partnerships or PPPs. They are formed to fulfill the purpose of financing, designing, implementing, and operating infrastructure development (such as roads, bridges, and airports), public service delivery (such as public transportation), healthcare facilities, educational institutions, and utilities (water and wastewater treatment plants) and other projects and services that were traditionally provided by the public sector; by bringing together the resources, expertise, and efficiency of both public and private entities.

Investing in PPPs requires financing from the private sector as well. Private entities may contribute or secure financing through loans, and may even receive payments from the public sector over the project's lifecycle. They are typically formed through contractual agreements and a supportive regulatory framework is essential for the successful implementation of PPPs. Hence it is the government that establishes clear rules, regulations, and procedures to facilitate private sector participation and ensure fair competition.

Features of PPPs

• Collaboration of private and public entities for a specific project or purpose.
• Partners contribute resources, share risks, and enjoy mutual benefits.
• Can be a contractual arrangement or involve creating a separate legal entity

5. Limited Liability Limited Partnerships

A newly formed partnership that combines elements of both limited partnerships (LP) and limited liability companies (LLC). Limited liability limited partnerships or LLLPs comprise two partners: general and limited partners who aren't responsible for any debt or legal obligations the company incurs.

One of the primary features of an LLP is that the general partners have limited liability protection which means that their assets are shielded from the debts and liabilities of the partnership. This is a key distinction from a traditional limited partnership where general partners may have unlimited personal liability.

But, at present, this form of business entity is recognised only under United States Commercial Law.

Features of Limited Liability Limited Partnerships:

• Similar to a limited partnership, an LLLP must have at least one general partner and one or more limited partners.
• Offers flexibility in the management structure.
• The duration of an LLLP is often determined by the partnership agreement. Additionally, the transferability of ownership interests may also be specified in the agreement.

Tips for Forming the Right Partnership

The kind of partnership formed significantly impacts the success and dynamics of your venture and hence while picking the type you must be very careful or it is advisable to understand the business partnership law from an expert before jumping into a trap. Here's what you must keep in mind while picking a form of partnership.

• Choose a partner with similar values, work ethics, and long-term goals for the business. Alignment in vision can help avoid conflicts in the future.
• Ensure your partners have skills and strengths that complement yours to form a well-rounded and efficient team, as each partner brings unique expertise to the table.
• Consider past experiences, references, and reputation when evaluating a potential partner because trust is the most important factor in a partnership business.
• Open & effective communication is key. Assess your potential partner's communication style and problem-solving approach. A partner who is willing to address conflicts constructively is essential for a healthy partnership.
• Ensure that you and your partner have compatible financial habits and goals. Discuss financial expectations, investment capabilities, and risk tolerance to avoid misunderstandings related to money matters.
• A partner with a clean legal record and a commitment to ethical business practices is essential for the long-term success and reputation of the business. Verify before committing to anything.
• Consider the professional experience and track record of your potential partner. A partner with relevant industry experience and a successful track record can bring valuable insights and connections to the business.
• Discuss and agree upon an exit strategy upfront. Knowing how to handle situations such as a partner wanting to leave the business or retire is crucial for avoiding potential conflicts in the future.
• Draft a comprehensive partnership agreement with the help of legal professionals for proper documentation of the roles and responsibilities of each partner, profit-sharing arrangements, decision-making processes, and other crucial aspects of the partnership.

Wrapping up

We all know that there are numerous things to brainstorm before starting any business but while everyone focuses mainly on finances, its legal matters are often taken lightly which leads to complications later. Therefore, when entering into a business, especially in partnership, understanding the business partnership law is very crucial which you can learn from the experts in it in our law firm - Parker and Parker Co. LLP, known for its outstanding Intellectual Property Services in India.