Difference Between Partner and Designated Partner

Edited by Diffzy | Updated on: October 07, 2023

       

Difference Between Partner and Designated Partner

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Introduction

We may be familiar with the term partner. The word partner may mean two different things. It may refer to an individual associated with another individual, like in a marriage, a game, a project, etc. A partner also implies a member who is involved in a partnership, especially for a business venture.

A partner and a designated partner are both related to a business partnership. A partnership is a consensus between two or more individuals or parties to start a business and manage it together. The partners would have to invest in the business and make an agreement on the profit or loss percentage to be shared among them.

We will be looking into the difference between a partner and a designated partner in the context of a business in this article.

A partner in a business is an individual who co-owns and co-manages a firm with the other partners.

In contrast, a designated partner is specially appointed to represent the partnership. Designated partners do not own any part of the company but have the right to sign legal documents for the company.

We will get a better understanding of the differences between a partner and a designated partner by the end of this article.

Partner vs Designated Partner

A partner is a member of a business firm, whereas a designated partner is a partner chosen to represent the partnership. A partner is a co-owner of a business. On the contrary, a designated partner does not own the business but is authorized to sign legal documents on behalf of a business partnership. A partner has to share the profits and losses of the business. A designated partner may or may not have a share in the profits or losses depending on the terms of the agreement.

Difference Between Partner and Designated Partner in Tabular Form

ParameterPartnerDesignated Partner
MeaningA partner is one of the owners of a partnership business.A designated partner is an individual who is selected to perform some tasks on behalf of a partnership business.
Rights and responsibilitiesA partner has equal rights and responsibilities as a co-owner of a business.A designated partner may have different rights and responsibilities than the other partners.
Profits and lossesOne has a share of profits or losses.One may have different profit and loss-sharing agreements.
Decision makingOne has the power to make decisions and take action on behalf of the partnership.One has limited power in making decisions or taking any action on behalf of the partnership.
LiabilityOne can be held liable for the partnership's debts and obligations.One may have limited personal liability or no liability for the partnership's debts and obligations.
RemovalThe other partners can remove a partner from the partnership.A designated partner is appointed for a specific period under a term or contract that would mention the conditions under which one can be removed from the post.
Identification NumberOne does not require obtaining any identity number.One is required to obtain a Designated Partner Identification Number (DPIN) from the central government.

What is a Partner?

In the context of a business, a partner is an individual who agrees with another individual or individuals to start a business venture together or join an already existing business as a co-owner. A partner co-owns and manages a business partnership with the other owners. Partners invest in the partnership business and share the risks and profits of the business in an agreed ratio. They are jointly liable to the debts and obligations of the business. Therefore, a partner is a co-owner of a partnership business who shares responsibilities, benefits, and losses with the other partners.

Who can be a Partner?

Any person who is of sound mind, not an undercharged insolvent, and not disqualified from entering into a contract by law can become a partner in a partnership firm.

Types of Partners

Partners can be of various types according to their agreement and the type of business. They are classified as follows –

  • Active Partner – We can guess by the name that this kind of partner participates actively in managing the business operations of an organization. An active partner contributes capital to the firm to run the business and shares its profits and losses. An active partner has unlimited liability to the firm and in case of insolvency, his/her assets also are used to pay off debts.
  • Sleeping or Dormant Partner – A partner who does not participate in the business management is known as a sleeping or dormant partner. A sleeping partner is bound by the decisions made by the active partners regarding the business plans and management. However, like an active partner, a dormant partner also has unlimited liability. One contributes capital for the business and shares a percentage of profit or loss from the business according to the agreement.
  • Secret Partner – A secret partner is someone whose association with the firm is kept hidden from outsiders. A secret partner also has unlimited liability and in case of insolvency, would have to pay off debts through personal assets. They participate actively in managing the company and contributing capital to the firm.
  • Minor Partner – We can guess by the name that a minor partner is someone who has not attained the age of 18 yet. A minor partner does not have unlimited liability and only shares profits. Hence, he is the partner of profits.
  • Nominal Partner – Nominal partners do not contribute any capital nor look over the management of the company. They do not even have any control over the decisions and plans made for the company. Nominal partners are individuals who only use their names and reputations for the benefit of the companies. They must be well known and must have a good reputation in the eyes of the investors or consumers to be selected as nominal partners. Although they do not have unlimited liability, they are still liable to outsiders for the debts they have given to the company after believing that the nominal partner is a partner of the firm.

There are two types of nominal partners. They are Nominal Partner by Estoppel and Nominal Partner by Holding Out.

  1. Nominal Partner by Estoppel – When an individual gives an impression of being a partner of a firm by one's initiative, he/she is called a nominal partner by estoppel.
  2. Nominal Partner by Holding Out – When a person does not deny being a partner of a firm even though he/she is not, that individual is called a nominal partner by holding out.

Characteristics of a Good Business Partner

  1. Trustworthy – Each partner must be trustworthy so that the risk of getting cheated in the business can be avoided. It is also necessary to have a trustworthy partner because second-guessing one another's loyalty would waste valuable time and energy.
  2. Leadership – A partner that has good leadership skills would lead the employees to be more efficient in their work resulting in the growth of the business. A partner with leadership skills would be a great motivator, recognize the potential of each employee, direct the staff, and would be great in delegation.
  3. Emotional Intelligence – A partner should be emotionally intelligent. The partners must be self-aware and must have control over their feelings. They must be emphatic, have social skills, and be motivated to work their way towards the growth of the business.
  4. Teamwork – A partnership only works when there is teamwork involved. Each partner may have different opinions. However, they must have healthy discussions and consider the best plans for the business even if it's not one's own.Each partner should feel free enough to express his or her thoughts about the business and all of them must participate in managing the business.
  5. Communication – There must be a free flow of communication between the partners. They must convey what is on their mind and must also listen and understand whatever others are saying. There should not be any superior or inferior complex among the partners to keep communication free-flowing.
  6. Solution-oriented – A partner should be resilient and have an "I can do it" attitude. The partners must work as a team and plan for solutions to recover from any kind of loss.
  7. Patience and perseverance – Business partners must be resilient but they should also cope with the setbacks patiently. They must not give up during tough times and persevere in working for the growth of the business.

What is a Designated Partner?

The idea of a designated partner was established by the Limited Liability Partnership Act (LLP) of 2008. A designated partner is an individual who gets appointed by the partners of a firm to manage their day-to-day operations. A designated partner is not the owner or co-owner of the company. However, he/she has to manage and deal with the various affairs of the partnership. One may also be given authority to sign beneficial deals on behalf of the partnership. Unlike partners of a firm, designated partners do not have unlimited personal liability or may not have any personal liability at all.

The work of a designated partner is the same as a director of a firm. However, a designated partner has more rights and privileges when compared to a director.

Every designated partner under LLP must have a unique Designated Partner Identification Number (DPIN). The Ministry of Corporate Affairs issues the DPIN and an individual cannot be appointed as a designated partner without it.

Who can be a Designated Partner?

According to the Limited Liability Partnership Act (LLPA) 2008, any person who is of sound mind, 18 years and above, and who is capable of handling business affairs can be a business partner. A Limited Liability Partnership (LLP) must have at least two designated partners and one of them must be an Indian citizen.

Duties of Designated Partners

Designated partners have to fulfill some specific duties for the partnership:

  • Fulfill all the compliances under the Income Tax, GST, LLP Act
  • Sign all the e-forms that are filed with the ROC (Registrar of Companies)
  • Manage and maintain all the books related to accounts, annual statements, and audit reports
  • Handle documents and produce them before the inspector as and when required.

Main Difference between a Partner and a Designated Partner in Points

  • A partner is one of the owners of a partnership firm, whereas a designated partner is not one of the owners.
  • A partner shares the profits and losses of the firm, whereas a designated partner may or may not share the profits and losses according to the terms of the agreement.
  • A partner can be removed by the other partners when found to be non-compliant with the agreement. A designated partner, however, has tenure of service and it may also get extended by the other partners according to the performance of the designated partner.
  • A partner is personally liable for the partnership's debts. On the other hand, a designated partner may have limited liability.
  • A partner participates in the major decision-making process and manages the firm. However, a designated partner may or may not have the right to make decisions for the firm.
  • A partner has the authority to bind a firm in legal business transactions, while a designated partner does not have the authority for the same.

Conclusion

A partner and a designated partner have differences even though they are related to a partnership firm. Partners agree to manage a partnership business together. Designated partners are appointed by partnership firms to manage their business and act as representatives for the partnership firms.

Partners are co-owners of a firm. They have the power to make important decisions for their company. A designated partner has limited authority over the firm and cannot make important decisions for the firm. However, they can suggest to the partners on business strategies. Designated partners have to comply with the rules and regulations provided under the Limited Liability Partnership. However, partners do not need to comply with so many rules and regulations.

Both a partner and a designated partner need unique skills to be in their positions.

References

  • https://www.uschamber.com/co/start/strategy/top-qualities-for-business-partners#:~:text=Teamwork%3A%20A%20give%2Dand%2D,everyone%20on%20the%20same%20page.
  • https://www.onlinelegalindia.com/blogs/all-about-designated-partner-and-partner
  • https://testbook.com/key-differences/difference-between-partner-and-designated-partner

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"Difference Between Partner and Designated Partner." Diffzy.com, 2024. Sun. 14 Apr. 2024. <https://www.diffzy.com/article/difference-between-partner-and-designated-partner>.



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