Meaning of Dormant Partner
A Dormant Partner, also called a Sleeping Partner, is one who invests capital in the firm but does not take part in its day-to-day management. Under the Indian Partnership Act, 1932, though no specific section defines a dormant partner separately, his rights and liabilities are governed by the general provisions of the Act (especially Sections 4 and 12). He shares in the profits and losses of the firm just like an active partner but remains hidden from the public eye since his name is not used in the firm’s business dealings. His role is purely financial, and he trusts the active partners to manage the firm effectively.
Rights and Liabilities
Despite not being involved in management, a dormant partner is liable to third parties for the acts of the firm as long as he is a partner (Section 25 – joint liability of partners). He can, however, retire from the firm by giving notice to all partners, though public notice is not mandatory since he is not known to outsiders. A dormant partner also has the right to inspect accounts, receive a share in profits, and recover his capital upon dissolution. Thus, while his role is passive, his legal responsibilities remain similar to those of active partners.
Real-Time Example
Imagine a law graduate who invests ₹10 lakhs in a legal publishing partnership firm but does not participate in its daily operations. He trusts the other partners to handle sales, marketing, and client relations. If the firm makes profits, he will receive his share, and if it incurs losses, he must also bear them. To outsiders, his involvement is invisible, but legally, he remains liable for debts of the firm if creditors sue. This example shows how dormant partners contribute financially while staying away from business management.
Mnemonic to Remember Features of Dormant Partner
👉 “NPL” = No role, Profit share, Liability
- N → No role in day-to-day management
- P → Entitled to Profit share like any partner
- L → Shares Liability for acts of the firm
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