Top Menu

Advantages and Disadvantages of Partnership

ADVERTISEMENTS:

Everything you need to know about the advantages and disadvantages of partnership.

Partnership organisation is admirably suitable for medium-size undertakings, where personal efforts of the owners are essential.

Besides sole proprietorship partnership is another popular form of business organisation that exist in our society. The term partnership literally means, ‘an association of two or more people as partners’.

ADVERTISEMENTS:

Thus, partnership is a form of business which involves sharing of the rights to own, manage and control business among two or more persons. It possesses some of the characteristics of the individual proprietorship organisation, and consequently most of its advantages and limitations.

According to the Indian Partnership Act, 1932, partnership is defined as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”

The advantages of partnership are as follows:-

1. Ease of Formation 2. Financial Resources 3. Talent can be Pooled 4. Flexibility 5. Reward for Effort 6. Informed, Balanced and Careful Decisions 7. Secrecy

ADVERTISEMENTS:

8. Balanced Business Decisions 9. Sharing of Risks 10. Democratic Organisation 11. Flexibility 12. More Possibility of Growth and Expansion 13. Combined Abilities, Judgement and Specialisation and a Few Others.

The disadvantages of partnership are as follows:-

1. Unlimited Liability 2. Limited Resources 3. Conflicts 4. Uncertain Future 5. Transferability of Interest 6. Public Interest 7. Not a Legal Entity

8. Lack of Continuity 9. Uncertainty of Existence 10. Risks of Implied Authority 11. Risks of Disharmony 12. Difficulty in Withdrawal from the Firm 13. Lack of Institutional Confidence 14. Lack of Prompt Decisions and a Few Others.


Advantages and Disadvantages of Partnership

8 Advantages and Disadvantages of Partnership

Partnership is a contract between two or more like-minded persons that have mutually decided to share the profits and losses by conducting a lawful business.

ADVERTISEMENTS:

The advantages and disadvantages of partnership form of organisation are discussed below:

Advantages:

Advantage # 1. Ease of Formation:

It is easy to form a partnership. No elaborate legal procedures are needed to bring a firm into existence. There is no need for registering a firm. Even when required, a firm can be registered quite easily. Likewise, one can close down a firm relatively easily.

Advantage # 2. Financial Resources:

Partners can pool their resources and expand the financial base of a firm. Creditors would be more willing to extend credit facility to a firm based on the reputation of partners and the soundness of business carried out by the partners.

Advantage # 3. Talent can be Pooled:

Partners can divide work among themselves, depending on their individual skills, and talents. This helps the firm to grow quickly.

Advantage # 4. Flexibility:

ADVERTISEMENTS:

Partners can carry out day-to­day activities in a flexible way. The nature and place of business can be altered at will. New partners can join a firm when required. Partners can switch gears and change hats depending on situational requirements. Capital infusion, profit sharing, pricing policies, etc., can be altered in sync with market demands. It has freedom to undertake any activities which is legally blessed.

Advantage # 5. Reward for Effort:

Partners can work jointly and severally for improving business and get adequately rewarded. They can oversee work from close quarters and run the show fairly independently. Since there is no separation of ownership from management, everyone can work hard, and take the firm to commanding heights.

Advantage # 6. Informed, Balanced and Careful Decisions:

ADVERTISEMENTS:

Partners can bring their skills, knowledge, and expertise to the table. Since they are jointly held responsible for losses, they are compelled to take a careful, cautious path. They are forced to take all the necessary steps to put reckless, careless decisions to rest.

Advantage # 7. Secrecy:

Partners can keep business secrets close to their chest. They need not reveal them to anyone. The firm need not even get its accounts published and audited.

Disadvantages:

Disadvantage # 1. Unlimited Liability:

ADVERTISEMENTS:

Every partner is jointly and severally liable for the debts of the firm. The dishonesty of one partner can ruin the entire business and put others in serious trouble.

Disadvantage # 2. Limited Resources:

The firm can have limited doses of capital infused by partners. It is clearly unsuitable for businesses that demand heavy investments. Beyond a point, a firm cannot expand its business.

Disadvantage # 3. Conflicts:

Partnership is built around trust and mutual confidence. When differences crop up, it is not easy to iron them out. The question of whose word is final might come in the way of running the show smoothly. The skills, talents, and competencies of partners might differ, and they begin to think, and work in different directions. When partners develop differences and work at cross purposes, the business might take a beating. It is not easy to dissolve the differences once the partners who are not running the show begin to find fault with others who run the firm.

Disadvantage # 4. Uncertain Future:

ADVERTISEMENTS:

The firm will have to draw the shutters down in case of death, insolvency, lunacy of any one of the partners. New partners can be inducted into a firm, only when all existing partners agree unanimously. Bringing someone from outside enjoying the trust of everyone is not an easy job. The life of a firm is always open to doubt, since its survival is dependent on the financial and physical health of the partners.

Disadvantage # 5. Transferability of Interest:

It is difficult to transfer the interest of one partner to an outsider unless all other existing partners unanimously agree. An investment in a partnership business, therefore, becomes an illiquid asset.

Disadvantage # 6. Public Interest:

A firm need not place its books to public scrutiny. It need not get its accounts audited. The firm is not subjected to elaborate accounting and auditing rules and regulations from the government. The ‘free-for-all kind of atmosphere’ arouses suspicion in the minds of general public. The credit worthiness of a firm is also open to doubt since it is not required to follow any specific rules.

Disadvantage # 7. Not a Legal Entity:

ADVERTISEMENTS:

A partnership firm has no legal entity separate from the members. It dies upon the death of a partner or upon separation between them. Partners are responsible for all the debts of the firm.


Advantages and Disadvantages of Partnership – Explained

Besides sole proprietorship partnership is another popular form of business organisation that exist in our society. The term partnership literally means, ‘an association of two or more people as partners’. Thus, partnership is a form of business which involves sharing of the rights to own, manage and control business among two or more persons.

Advantages:

The various advantages of partnership form of organisation are stated below:

1. Ease of formation and closure – The process of formation is relatively easy as the registration of the firm not compulsory. Also, the closure of the business is simple and may not involve too many complexities.

2. Balanced decision making – In a partnership business the business decisions may take jointly by all the partners. This helps to take advantage of individual capabilities as each partner may contribute effectively towards diverse functions as per their areas of proficiency.

3. More funds – In a partnership business each partner is expected to contribute capital for the business. As a result, there is pooling in of financial resources which enhances the financial strength of the business.

ADVERTISEMENTS:

4. Sharing of risks – In a partnership firm the business risks are shared among the partners. This helps the business to invest in risky ventures as its capacity to absorb risks is higher.

5. Secrecy – It is easy to maintain secrecy in a partnership form of business. This is because, as per the provisions of the law a partnership firm is not required to publish its accounts and share its confidential information.

Disadvantages:

The various disadvantages of partnership form of organisation are stated below:

1. Unlimited liability – The liability of partners in a firm is unlimited. Partners are said to be individually and jointly liable. This means that in case, the assets of the firm are insufficient to settle the claims against it, the personal assets of the partners may be utilised for the same.

2. Limited resources – The Partnership Act places a restriction on the number of partners that may run a firm. Consequently, it may be difficult for a firm to raise capital beyond a certain limit in order to finance its expansion plans.

3. Possibility of conflicts – In a partnership firm the right to decision making and control is shared among all the partners. Sometimes, there may be difference of opinions among them which may not only lead to delay in decision making but also result in conflicts.

ADVERTISEMENTS:

4. Lack of continuity – Partnership is not considered to be a very stable form of business organisation. This is because the death, retirement, insolvency or insanity of any partner can bring the business to an end.

5. Lack of public confidence – It is generally believed that a partnership firm does not enjoying confidence of public in its working. This outlook is based on the fact, that a firm is not expected to publish its books of account. Hence, can very easily hide its true financial status from general public.


Advantages and Disadvantages of Partnership: 5 Points

According to the Indian Partnership Act, 1932, partnership is defined as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”

Advantages:

1. Ease of Formation and Closure – A partnership firm can be formed easily with an agreement between two or more persons to carry some lawful business. Closure of the firm too is an easy task. Simply by agreement of all partners it can be dissolved.

2. Balanced Decision-Making – Special knowledge, skills and experience of different partners are available to the firm. The partners can perform different functions according to their areas of specialisation. This leads to balanced and effective business decisions.

3. Sufficient Funds – In a partnership firm, capital is generally contributed by all the partners. As a result, the business gets sufficient resources as compared to sole proprietorship. The firm can expand and undertake additional operations whenever required.

4. Risk Bearing and Sharing – Business risks are borne and shared by all the partners together. This reduces the burden and stress on individual partners. Partners perform their functions in a better way.

5. Secrecy – A partnership firm is not legally bound to publish its accounts. So, it can maintain confidentiality of information and may not disclose vital information.

Disadvantages:

1. Unlimited Liability – The liability of the partners is unlimited, both jointly and individually. Partners are even liable to pay the business debts from their personal property if the business funds are not sufficient.

2. Limited Resources – A partnership firm cannot raise huge financial resources to support big projects due to legal ceiling on number of partners. Therefore, partnership firms face problems in expansion and growth.

3. Possibility of Conflicts – A partnership firm is run by a group of persons. The decision making authority is shared. Thus, there is possibility of a conflict among the partners. In case of differences of opinion, even good decision can be delayed.

4. Lack of Continuity – Partnership comes to an end with the death, retirement, insolvency or insanity of any partner. This is a hurdle to continuity, though the remaining partners may continue the business with a new agreement.

5. Lack of Public Confidence – The partnership firm is not legally bound to publish its accounts. People are not aware of its true financial position. As a result, the partnership firm may lose the confidence of the public and investors.


Major Advantages and Disadvantages of Partnership

Advantages:

A partnership form of organization enjoys the following advantages:

Advantage # 1. Easy in Formation:

A partnership is very easy to form. No formal documents are required to be prepared. All that is required is an agreement among the partners. The expenses to be incurred for registration are not much and it is even optional.

Advantage # 2. Pooling of Financial Resources:

A partnership commands more financial resources as compared to a sole proprietorship. This helps in expanding business and earning more profits. As and when a firm requires more money, more partners can be admitted.

Advantage # 3. Pooling of Managerial Skills:

A partnership facilitates pooling of managerial skills of all its partners. This leads to a greater efficiency in business operations. For instance, in a big partnership firm, one partner can handle production, another partner can look after marketing activity, and still another can attend to legal and personnel problems, and so on.

Advantage # 4. Balanced Business Decisions:

In a partnership firm, decisions are taken unanimously after considering all the major aspects of a problem. This ensures not only balanced business decisions but also removes difficulties in the smooth implementation of those decisions.

Advantage # 5. Sharing of Risks:

Unlike sole proprietary organization, the risks of partnership business are shared by partners on a predetermined basis, this encourages partners to undertake risky but profitable business activities.

Advantage # 6. Democratic Organisation:

Every partner can participate in the operation of the business of a partnership firm. Moreover, all the partners are consulted before any decision is taken.

Advantage # 7. Flexibility:

Partners can alter capital, profit ratio, managerial duties and line of business without going through any legal procedure. Business can be easily adapted to changes in market and other environmental conditions.

Advantage # 8. More Possibility of Growth and Expansion:

As compared to a sole-trade business, partnership concern has more possibilities for expansion and growth of business activities. The partners can contribute more capital and manage the activities more systematically.

Disadvantages:

A partnership form of organization suffers from the following major disadvantages:

Disadvantage # 1. Uncertainty of Existence:

The existence of a partnership firm is very uncertain. The retirement, death, bankruptcy or lunacy of any partner can put an end to the partnership. Further, the partnership business can come to a closure if any partner demands it.

Disadvantage # 2. Risks of Implied Authority:

It is true that like the sole proprietor, each partner has unlimited liability. But his liability may arise not only from his own acts but also from the acts and mistakes of co-partners over whom he has no control. This discourages many persons with money and ability, to join a partnership firm as partner.

Disadvantage # 3. Risks of Disharmony:

In partnership, since decisions are taken unanimously, it is essential that all partners reconcile their views for the common good of the organisation. But situations may arise when some partners may adopt rigid attitudes and make it impossible to arrive at a common agreed decision. Lack of harmony may paralyze the business and cause conflict and mutual bickerings.

Disadvantage # 4. Difficulty in Withdrawal from the Firm:

Investment in a partnership can be easily made but cannot be easily withdrawn. This is so because the withdrawal of a partner’s share requires the consent of all the other partners.

Disadvantage # 5. Lack of Institutional Confidence:

A partnership business does not enjoy much confidence of banks and financial institutions. It is because the natures of its activities are not disclosed to the public and the agreement among partners is not regulated by any law. As a result, large financial resources cannot be raised by partnerships and growth of business cannot be ensured.

Disadvantage # 6. Lack of Prompt Decisions:

All important decisions are taken by the consent of all the partners. So decision making process becomes time consuming. There may be a possibility of losing business opportunities because of slow pace of decision making. The decisions are generally taken by consensus, sometimes it may be difficult to convince all the partners to agree to a particular decision.

Disadvantage # 7. Absence of Professional Management:

Modern business needs the services of those who have acquired managerial skills and render their services to business undertakings. In partnership firms, there is absence of professional management.

Disadvantage # 8. Difficulties of Expansion:

It is difficult for a partnership firm to undertake modernization or expansion of its operations because of its inability to raise adequate funds for the purpose. Limited membership (restricted to 20) and their limited personal resources do not permit large amounts of capital to be raised by the partners. Therefore, large-scale business cannot generally be organised by partnership.


9 Advantages and Disadvantages of Partnership

Advantages:

The advantages of a partnership form of business are given as under:

Advantage # 1. Ease of Formation and Closure:

Partnership is simple to form, inexpensive to establish and easy to operate. No legal formalities are involved and no formal documents are to be prepared. Only an agreement is required and the registration of the firm is not compulsory. The registration of a partnership is also not an expensive process, it can be easily formed. Correspondingly, a partnership can be dissolved easily at any time. A registered firm can enjoy certain benefits.

Advantage # 2. Larger Financial Resources:

Unlike sole-proprietorship, the partnership form of business allows collection of a large amount of capital for the firm’s operations as there are many people to contribute capital. New partners can be admitted in the firm to raise further capital whenever necessary. The credit-worthiness of business is also high because every partner is jointly liable for all the debts of the firm.

Advantage # 3. Combined Abilities, Judgement and Specialisation:

The skill and experience of all the partners are pooled together for the functioning of a partnership firm. Combined judgement of several persons helps to reduce the errors of judgement. Besides, the partners may be assigned duties according to their talent. Therefore, benefits of specialisation are also available.

Advantage # 4. Direct Motivation:

Ownership and management of business are vested on the same partners making a direct relationship between effort and reward. Every partner is motivated to work hard and to ensure the success of the firm.

Advantage # 5. Better Management:

Every partner is expected to take personal interest in the affairs of the business. Different partners can maintain personal contacts with employees and customers. Fear of unlimited liability make the partners cautious and avoid reckless dealings. Management of partnership is cheaper when expert managers are not employed.

Advantage # 6. Flexibility of Operations:

Partnership business is free from legal restrictions and government control. Partners have the flexibility to make changes in the size of business, capital and managerial structure without any approval. The activities of partnership business can be adapted easily to changing conditions in the market.

Advantage # 7. Secrecy:

The accounts of a partnership firm are not required to be disclosed in the public domain as it is done in case of a Joint Stock Company. Audit of accounts is not essential and no reports are required to be filed with the government authorities. Therefore, the affairs of a partnership business can easily be kept secret and confidential.

Advantage # 8. Protection of Minority Interest:

The management of partnership is democratic. Every partner has a right to be consulted and can express his or her opinion. All important decisions are taken with the mutual consent of all the Partners. In case a partner is dissatisfied with the majority decisions, he or she can retire from the firm or give a notice for its dissolution.

Advantage # 9. Cooperation:

Partnership encourages mutual cooperation and trust amongst people. Partners work in common for the benefit of all and do their level best to make the business prosperous.

Disadvantages:

The following disadvantages are associated with a partnership form of business:

Disadvantage # 1. Unlimited Liability:

Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapses and dishonesty of other partners. This may curb entrepreneurial spirit as partners may hesitate to venture into new lines of business for fear of losses. Private property of partners is not safe against the risks of business.

Disadvantage # 2. Limited Resources:

The amount of financial resources in partnership is limited to the contributions made by the partners. The number of partners cannot exceed 10 in banking business and 50 in other types of businesses. Therefore, partnership form of ownership is not suited to undertake business involving huge investment of capital.

Disadvantage # 3. Risk of Implied Agency:

The actions of a partner are binding on the firm as well as on other partners. An incompetent or dishonest partner may bring disaster for all due to his acts of omission or commission. That is why the saying is that choosing a business partner is as important as choosing a life partner.

Disadvantage # 4. Lack of Harmony:

The success of partnership depends upon mutual understanding and co-operation among the partners. Continued disagreement and bickering among the partners may paralyze the business or may result in its untimely death. Lack of a central authority may affect the efficiency of the firm and decisions may get delayed.

Disadvantage # 5. Lack of Continuity:

A partnership comes to an end with the retirement, incapacity, insolvency and death of a partner. The firm may be carried on by the remaining partners by admitting new partner. However, it is not always possible to replace a partner enjoying trust and confidence of all. Therefore, the life of a partnership firm is uncertain, though it has a longer life than sole-proprietorship.

Disadvantage # 6. Non-Transferability of Interest:

No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners. This makes investment in a partnership firm non-liquid and fixed. An individual’s capital is also blocked.

Disadvantage # 7. Public Distrust:

A partnership firm lacks the confidence of public because it is not subject to detailed rules and regulations. Lack of publicity of its affairs undermines public confidence in the firm.


Advantages and Disadvantages of Partnership

Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

The advantages and disadvantages of partnership form of business are:

Advantages:

The following advantages of partnership form of organisation may be noted:

1. Facility of Formation:

Partnership is quite easily formed. All that is required is an agreement among the partners. The initial expenses are not much considering that fees paid to a lawyer for drawing up the Partnership Deed and the cost of the stamps to be affixed on the Deed are by far less than all the costs involved in formation of a Company.

2. Larger Resources:

A partnership commands more resources than a sole proprietor and hence the scale of operations can be enlarged to reap important economies. As a firm requires more resources, more partners can be admitted.

3. Promptness in Decisions:

The decisions in a partnership organisation are quite prompt, because partners often meet together. Thus, partnership can take advantage of sudden business opportunities.

4. Balanced Judgment:

Partners among themselves provide various sorts of talent necessary for handling the problems of the firm. The decisions are, therefore, likely to be quite balanced. This is an important advantage over the sole proprietorship organisation.

5. Personal Supervision:

Partners look after the business personally and guard against wastage. Besides, the staff can be supervised more effectively when the partners show an active interest in management.

Management by partners may also be economical as compared to management in joint stock companies because no fixed payment by way of salaries has necessarily to be made. In the case of companies, managers have to be paid even if there are losses. This may lead to a top-heavy administration, especially if the business is run on a small scale.

6. Flexibility:

The line of business can be changed easily if the need arises. In the case of the company, a change will require Court’s sanction if the objects of the company do not permit it to engage in the proposed business.

7. Protection of Minority Interests:

Due to the rule regarding unanimity in fundamental matters, the rights of all partners are protected. In a partnership concern, each partner is assured of a voice in the management of the business. In the event of disagreement on important matters, the minority may even veto a resolution.

8. Reduced Risk:

The losses incurred by the firm will be shared by all partners and hence the share of loss of each partner will be less than in case of sole proprietorship.

9. The Wholesome Influence of Unlimited Liability:

The principle of unlimited liability helps in two ways- First, the partners are not reckless because they know that recklessness may put even their private property in jeopardy. Secondly, it becomes easier to raise loans because there is an automatic security afforded to the creditor; he can realise his dues from the private estates of the partners, if need be. Thus, a partnership firm usually enjoys good credit standing.

Disadvantages:

Against the above advantages, the following are the main disadvantages of the partnership form of organisation:

1. Lack of Harmony:

It is generally observed that there is friction and lack of harmony among the partners after the firm has worked for some time. The business may be paralysed and may come to an untimely end due to conflict and mutual bickering.

2. Limited Resources:

Because of the legal ceiling to the number of partners (10 in case of a banking business and 20 in case of any other business) and also because of the need to keep down the number as far as possible for harmonious working, the total resources of the partnership are rather limited. Therefore, large-scale business cannot generally be run by partnerships.

3. Limited Risk-Taking:

The unlimited liability of a partner commits even his private property. Partners, therefore, tend to play safe and pursue unduly conservative policies.

4. Instability:

The business is rather unstable, because anything that happens to a partner (death, lunacy or insolvency) will often put an end to the partnership. A partner can also put an end to the partnership by signifying his intention to retire. From the social point of view, this is a loss particularly if the business happens to be an efficient one. A business requiring a long period for establishment and consolidation should not be organised by a partnership firm.

5. Risks of Implied Authority:

A dishonest or incompetent partner may land the firm in difficulties because his acts would bind the firm and the remaining partners. Thus the other partners may have to pay for the follies and dishonesty of a fellow-partner.

6. Lack of Public Confidence:

A partnership may not enjoy public confidence because of the absence of the regulation of its formation and due to the lack of proper publicity of its affairs.

On the whole, the partnership form of organisation is excellent when the size of the business is not large and when partners can work in full co-operation with one another. When the firm becomes large and partners cannot cope with the needs of expansion, the business should better be organised as a joint stock company. Thus, the partnership form of organisation is suitable mainly for medium scale business.


Advantages and Disadvantages of Partnership

Partnership organisation is admirably suitable for medium-size undertakings, where personal efforts of the owners are essential. It possesses some of the characteristics of the individual proprietorship organisation, and consequently most of its advantages and limitations.

Advantages:

Partnership organisation enjoys the following advan­tages:

Advantage # 1. Facility of Formation: 

Like individual enterprise partnership can be formed without legal formality and much expense, and can be dissolved in the same way. No formal documents are required to be drawn up as in the case of joint stock companies. Partnership taxes are relatively small.

Advantage # 2. Benefits of Larger Resources:

Partnership enjoys larger resources than a sole trader, so that the scale of operation can be enlarged to reap the benefits of important economies. There is always scope for the introduction of new partners to augment resources.

Advantage # 3. Flexibility:

The business is abundantly mobile and elastic, being almost free from legal restrictions on its activities. The partners can introduce any changes they consider desirable to meet the changed circumstances.

Advantage # 4. Personal Element:

The personal element in the business and the corresponding care, efficiency and economy are ensured. There is thus an effective motivation to production. The supervision of the staff can also be carried out effectively, as the partners personally act in the manage­ment of the affairs of the firm.

Advantage # 5. Benefits of Combined Ability:

Partnership enjoys the benefits of combined ability of its partners possessing varying degrees of talent and skills. This is a distinct advantage over sole proprietorship. Two heads are better than one is an old saying.

Advantage # 6. Prompt Decisions:

The partners exercise joint responsibility and meet frequently. This enables them to make decisions promptly, which is conducive to taking advantage of sudden business opportunities.

Advantage # 7. Sharing of Risk:

Any losses sustained by the firm will be shared by all the partners with the result that the burden borne by each partner will be much less than what a sole proprietor may have to bear.

Advantage # 8. Wholesome Effect of Unlimited Liability:

The fact that the liability of the partners is unlimited and each one is liable to the full extent of his private fortune acts as a great check against dangerous speculation. This is a great safeguard against recklessness. Secondly, unlimited liability also enhances the credit of the firm in the eyes of the lending public and thus enables it to borrow easily and at low rate of interest.

Advantage # 9. Protection of Minority Interests:

The minority interest in a partnership is effectively protected by law. In matters of policy all partners must agree; and even in ordinary affairs of routine nature a dissatisfied partner may withdraw and dissolve the firm. Thus in all important matters, the minority enjoys the right of veto. In fact, the law gives each partner the right to be heard and consulted. In consequence, each partner is as important as the others.

Disadvantages:

Despite several advantages, the partnership form of organisation suffers from the following disadvantages:

Disadvantage # 1. Lack of Harmony:

There is always likelihood of friction within the firm. Difference of opinion very often results in disharmony and lack of united management. Generally, differences crop up and each partner tries to vie with the others in dishonest dealings. This frequently results in disruption and ultimate dissolution.

Disadvantage # 2. Limited Resources:

The limit of 20 on the number of partners, limits the amount of capital that can be raised. Actually, in order to secure harmony among the partners, the number has to be kept much smaller than the maximum allowed by the law. This further limits the resources, with the result that large-scale business cannot be run by partnership. Though superior to one-man business in this respect, it is inferior to more highly developed form of Joint Stock Company.

Disadvantage # 3. Restricted Enterprise:

As unlimited liability extends to the entire fortune of each partner, the partners tend to be overcautious. This restricts enterprise. In fact, the liability of individual partners may be regarded as excessive for most purposes. Therefore, the partnership organisation tends to be useful only for comparatively small businesses, such as- retail trade, a moderate-sized mercantile houses or a very small manufacturing business.

Disadvantage # 4. Instability:

The business may come to an abrupt end on the death or insolvency of any partner. The business may also be closed where a partner signifies his intention to dissolve the partnership or gets it dissolved by order of court on account of a wrongful act of another partner.

Disadvantage # 5. Social Loss:

Such an abrupt closure of business is harmful not only to its owners, but also to society particularly if it has been successful and contributing to the well-being of the community.

Disadvantage # 6. Lack of Public Confidence:

The absence of legal regulations and the fact that there is no publicity in regard to a partnership’s affairs reduces to some extent public confidence.

Disadvantage # 7. Heavy Burden through Implied Authority:

Each partner is an agent able to bind the others by his acts and omissions in the ordinary and usual course of the business of the firm. When, therefore, one partner is negligent, or commits a wrong, or is guilty of a fraud, within the scope of his authority, his partners are equally liable financially and without limit. This may put a very heavy financial burden on the partners, which may, in some cases, result in the ruin of a person.


Advantages and Disadvantages of Partnership

Advantages:

(i) Ease of Formation and Closure – A partnership firm can be formed easily with an agreement between two or more partners to carry out some lawful business. Registration of the firm is not compulsory. Closure of the firm too is an easy task.

(ii) Balanced Decision-making – Two heads are always better than one. The partners can oversee different functions according to their areas of expertise. It not only reduces the burden of work but also leads to more balanced decisions.

(iii) More Funds – In a partnership, the capital is contributed by a number of partners. This helps in raising business and earning higher profits.

(iv) Sharing of Risks – The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.

(v) Secrecy – A partnership firm can easily keep secrets as it is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations.

Disadvantages:

(i) Unlimited Liability – The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient to pay business debts.

(ii) Limited Resources – Capital investment by the partner is low as there is a restriction on the number of partners. As a result, partnership firms face problems in expansion beyond a certain size.

(iii) Possibility of Conflicts – Partnership is run by a group of persons wherein decision-making authority is shared. There is a possibility of conflicts among the partners in case of difference in opinion on some issues.

(iv) Lack of Continuity – The life of a partnership firm is highly uncertain and unstable. It can come to an end with the death, retirement, insolvency or lunacy of any partner. However, the remaining partners can enter into a fresh agreement and continue to run the business.

(v) Lack of Public Confidence – As the partnership firm is not legally required to publish its financial reports and accounts, public isn’t aware of its true financial status. As a result, the confidence of the public in partnership firms is generally low.


Advantages and Disadvantages of Partnership

Advantages:

The partnership form of ownership has three main advantages:

Advantage # 1. Additional Funding:

An obvious advantage of a partnership over a sole proprietorship is the additional funding that the partner or partners can provide. Therefore, more money may be available to finance the business operations.

Some partnerships have thousands of partners, who are all required to invest some of their own money in the business. This type of partnership has much potential for growth because of its access to substantial funds.

Advantage # 2. Losses are Shared:

Any business losses that the partnership incurs are spread across all of the partners. Thus, a single person does not have to absorb the entire loss. Each owner will absorb only a portion of the loss.

Advantage # 3. More Specialization:

With a partnership, partners can focus on their respective specializations and serve a wide variety of customers. For example, an accounting firm may have one accountant who specializes in personal taxes for individuals and another who specializes in business taxes for firms. A medical practice partnership may have doctors with various types of expertise.

Disadvantages:

Along with its advantages, the partnership has the following disadvantages:

Disadvantage # 1. Control is Shared:

The decision making in a partnership must be shared. If the partners disagree about how the business should be run, business and personal relationships may be destroyed. Some owners of firms do not have the skills to manage a business.

Disadvantage # 2. Unlimited Liability:

General partners in a partnership are subject to unlimited liability, just like sole proprietors.

Disadvantage # 3. Profits are Shared:

Any profits that the partnership generates must be shared among all partners. The more partners there are, the smaller the amount of a given level of profits that will be distributed to any individual partner.


Advantages and Disadvantages of Partnership

Advantages:

The following are advantages of a partnership firm:

1. Easy formation – A partnership firm can be formed easily as the procedure involved is simple and more over no legal formalities are to be observed.

2. Larger financial resources – A partnership firm has chances of raising more capital, as capital is contributed by all the partners. Creditworthiness of the firm is also high because every partner is personally and jointly liable for the debts of the business. There is greater scope for expansion or growth of business.

3. Greater specialisation – In partnership, the work and responsibilities are divided among partners. Similarly, since the business is on large scale, division of labour can also be introduced. This leads to efficient management of the affairs of partnership.

4. Flexibility – Partners are free to introduce any changes in the organisational set-up of the business. Activities of partnership business are free from legal restrictions. The size of the business may be enlarged or curtailed according to the requirements. Partners may change the agreement with mutual consent. A partnership firm, therefore, can adapt itself more easily to the changing conditions of production and demand.

5. Varied managerial ability – The business of the partnership is managed by all partners thus the partners can contribute their abilities and skills of management.

6. Business secrecy – A partnership firm can maintain the business secrets, as there is no need to publish the accounts.

7. Personal interest in business – Since each partner is responsible not only for his own acts but also the acts of his partners, he is vitally concerned in every move made in business and takes personal interest in the affairs of the firm.

8. Favourable credit standing – The partnership has a credit standing which is even more favourable than a proprietorship as the personal assets of partners are available to the creditors for the payment of debts.

9. Better decisions – A partnership firm can take better, sound and firm decisions since decisions are arrived at after consultation by all the partners.

10. Reduced risk – In partnership the risk of business is shared by all the partners, so the risk stands reduced.

Disadvantages:

The partnership form of business organisation suffers from the following disadvantages:

1. Limited resources – Since there is a limit of maximum partners (20 in case of non-banking firms and 10 in banking firms), the capital raising capacity of a partnership firm is limited compared to a Joint Stock Company.

2. Lack of harmony – Today’s friends can be tomorrow’s enemies even in partnership. It is generally observed that there is friction and lack of harmony among the partners after the firm has worked for some time.

3. Instability – A partnership will be dissolved on happening of various events. So, the existence of partnership depends on the existence of partners. The partnership does not enjoy longer and continuous existence.

4. Unlimited liability – The liability of partners of a firm is unlimited and joint and several. In the event of loss, private property of the partners can be utilised to pay the loss. Thus the private property of partners is at stake.

5. Non-transferability of share – A partner cannot transfer his share or interest as per his desire or on his own. Such a partner has to obtain the consent of other partners. This discourages investment in partnership firms.

6. Lack of public confidence – The public has less trust and faith in partnership firms because the accounts and annual reports of partnership firms are not published. So people do not have trust in their dealings.

7. Limited risk taking – Because of unlimited liability, the partners tend to play safe and pursue undue conservative policies which result in the retardation of firm’s growth.

8. Absence of professional management – For success a business needs the expert services of professional managers. But partners manage their own business affairs. As a result, professionalism is absent in this type of business.

On the whole, the partnership form of organisation is excellent when the size of business is not large and when partners can work in full co­operation with one another. When the firm becomes large and partners cannot cope with the needs of expansion, the business should better be organised as a Joint Stock Company.


, , ,

hit counter