January 18, 2022


Accounting + Finance Blog

Five types of partners in a partnership business


The nature of partnership allows business owners to participate in a variety of ways. Some partners can take an active part while other partners can be inactive or contributing knowledge or name to the business. In this article, let’s talk about the several types of partners.

Types of partners

1. General Partner

Here, the partner is the risk bearer. Most times this partner or partners are the real owners. They are the ones that conceive the idea to run the business. General partners bear all the risk of the business down to their possessions.

This implies that when things go wrong when there is litigation or bankruptcy the general partners are the ones that suffer the most. However, general partners will not lose their bedding and tools of the trade. As a result, they earn a higher return from the business.

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2. Limited partners

This partner risk is low when compared to the one above. Also, they don’t take any active part in the business. They provide advice to the partnership business. In the event of bankruptcy, the limited partners will only lose their capital contributed to the business and not their personal belongings.

Since the risk is low, the reward is not as high as that of the general partners. Further, in a venture capital business, the investors are the limited partners why the general partners are the owners of the venture capital firms.

3. Active or managing partner

These partners take an active part in the partnership business. This means that in the daily activities of the business, the active partner takes the lead. They direct and control all employees in the business. This is why they are called managing partners. As a result, they are paid a monthly salary in addition to profit sharing.

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4. Dormant or sleeping partner

This is the complete opposite of an active partner. Here, the partner does not take any active role. It may not be involved in an advisory role as well. He or she contributed capital to the business. But his or her involvement in the business is nil.

This partner also takes part in profit sharing and may suffer his or her capital in the event of bankruptcy. However, they don’t receive any salary from the business.

5. Nominal partner

This partner does contribute capital to the business. They only contribute their name. A business may need a nominal partner if the use of the name will lead to having business contracts and/or popularity. Most times these persons are famous and influential in the community the business operates.

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They do not receive a share of profit but maybe compensated in other ways. Also, if the business faces litigation, the nominal partner is responsible for it.

In conclusion, when deciding if to operate a partnership business also consider the role of each partner and their involvement in the business. This will determine if the partner will be paid a salary or not. Have a share in the profit of the business and to what extent they will receive profit from it.