Meaning of Sleeping Partner
A sleeping partner is a type of partner in a partnership firm who contributes capital and shares profits and losses but does not take part in the day-to-day management of the business. Under the Indian Partnership Act, 1932, a sleeping partner is recognized as one who remains passive in business operations but is still legally considered a partner. As per Section 4, a partner is one who agrees to share profits of a business carried on by all or any of them acting for all. Thus, even though a sleeping partner is inactive in management, they are liable to third parties for the acts of the firm.
Rights and Liabilities of a Sleeping Partner
A sleeping partner has the same rights as other partners with respect to profit sharing and access to accounts under Sections 12 and 13. However, they do not interfere in management unless agreed upon. Importantly, liability is unlimited, meaning that if the firm incurs debts, even the sleeping partner’s personal property may be used to satisfy creditors. Their limited role does not exempt them from joint liability, as outsiders dealing with the firm are entitled to hold all partners responsible.
Importance in Business
Sleeping partners are essential in partnerships where financial contributions are needed but not everyone can manage operations. They provide capital and stability to the business while leaving management to active partners. This arrangement allows skilled partners to manage and investors to support without involvement in day-to-day risks. However, since liability remains unlimited, a sleeping partner must carefully evaluate the partnership deed and trustworthiness of co-partners.
Real-Life Example
Suppose Mr. A and Mr. B run a textile business, and Mr. C invests ₹10 lakhs but does not participate in management. Mr. C is a sleeping partner. If the business earns profits, he will get his agreed share. However, if the firm defaults on loans, creditors can also proceed against Mr. C’s personal assets despite his non-involvement in management. This shows how sleeping partners remain liable even when inactive.
Mnemonic to Remember – “CAP-L”
To recall the key points about sleeping partners, remember CAP-L:
- C = Contribute capital
- A = Access accounts & share profits
- P = Passive in management
- L = Liability unlimited
Think of it as: “Sleeping partners bring CAPital but still bear Liability.”
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