Advantages and Disadvantages of Partnership

After reading this article you will learn about the advantages and disadvantages of partnership form of organisation.

Advantages of Partnership:

The partnership form of organisation is most suitable when the size of business is medium and, thus the capital can be contributed to meet its needs by the partners themselves.

The following are the advantages of partnership form of organisation:

1. Easy Formation:

Like sole proprietorship, partnership form of organisation can be formed without legal formalities. No formal documents are required to be prepared as required in the case of joint stock companies. An agreement which may be oral or written is sufficient to enter into partnership form of organisation. Even the registration of partnership is not compulsory.

2. Large Resources:

The partnership form of organisation enjoys large resources than a sole proprietorship so that the scale of operation can be enlarged to get the benefit of large-scale economies.

More partners can be taken into partnership if capital needs are large. The partnership firms can also arrange money from the outside sources.

3. Flexibility:

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

4. Combined Skill and Balanced Judgement:

The partnership form of organisation enjoys the benefit of the ability, experience, and talents of the partners. This is the distinctive advantage partnership enjoys over the sole proprietor because everything is done by mutual consultation.

According to S. S. Chatterjee, “Combined abilities and judgement, when properly integrated produce a result that becomes appreciably greater than the sum of all individual capacities.”

5. Sharing of Risk:

Any loss sustained by the firm will be borne by all the partners equally with the benefit that the burden borne by each partner will be much less whereas the sole proprietor has to bear the entire loss of the business.

6. The 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 staff can also be carried out effectively, as partners, personally act in the management of the affairs of the partnership firm.

7. Maintenance of Secrecy:

The partners of partnership firm can keep the business to themselves. In the case of a company, nothing is secret. A partnership firm is not expected to get its accounts audited and published as is necessary for a joint stock company. This is the distinctive advantage partnership enjoys over the joint stock company.

8. Prompt Decisions:

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

9. Relationship between Reward and Work:

In partnership form of business organisation, there is an direct relation between reward and work. This enables the partners to put more labour to earn more and more profits. The more they work, the more will they be benefited.

10. Wholesome Effect of Unlimited Liability:

The fact that the liability of each partner is unlimited and each partner individually is liable to the full extent of his private fortune acts as a great check against reckless speculation.

11. Protection of Minority Interests:

The minority interest is, effectively protected by law. In partnership concern all important decisions are taken with the consent of all partners. In policy matters, all partners must agree, and even in ordinary affairs of routine nature a dissatisfied partner may withdraw and dissolve the firm. The law gives right to each partner to be consulted and heard.

Consequently all the partners, individually and collectively are important. In the case of a company, the interests of the minority are not well-protected. This is the distinctive advantage partnership concern enjoys over the company.

12. Easy Dissolution:

Dissolution of the partnership concern is very easy. The partnership can be dissolved on the death, lunacy or insolvency of a partner. There are no legal formalities involved in the dissolution. If the partnership is ‘at will’ then any partner can get the partnership firm dissolved by giving notice to other partners.

Disadvantages of Partnership:

The partnership concern suffers from the following disadvantages:

1. Lack of Harmony:

There is always likelihood of lack of harmony amongst the partners. Difference of opinion very often results in disharmony and lack of management, when differences arise, each partner tries to blame the other partner about his dishonest dealings and working against the interest of the firm. This is bound to result in disruption and ultimate dissolution of the firm.

2. Limited Resources:

The limit that more than twenty cannot be member of partnership form of business organisation, limits the amount of capital that can be raised. Actually, in order to secure harmony amongst the members of the firm, the number has to be kept much smaller than allowed by the law. This further limits the resources with the result that the large scale business cannot be run by partnership form of organisation.

3. Instability:

The partnership form of organisation may come to an abrupt end on the death, lunacy or insolvency of the partner. The partnership may also be closed if a single partner expresses his desire to dissolve the partnership or to get it dissolved by the order of court on account of wrongful act of one or more other partners. The lack of trust among the partners may lead to dissolution of the firm.

4. Lack of Public Faith:

As the partnership concern is not subject to any regulation and no legal formation and functioning, the people have less faith in such organisation coupled with the fact that every now and then people listen to the dissolution of such partnership concerns. Moreover, people are note aware of the exact position of the business of the partnership, the reason is that the accounts of partnership concerns are not published.

5. Restricted Enterprise:

As the unlimited liability covers even the private fortune of the partners, the partners are bound to be over cautious. This restricts enterprise. In fact, the liability of individual partner may be regarded as excessive for most purposes. Therefore, the partnership form of business organisation tends to be useful only for small scale business, such as retail trade, a modern sized mercantile house or a very small manufacturing business.

6. Restriction on Transfer of Interest:

In partnership, no partner can transfer his interest to the third party. If he wants to do so, he will have to seek the consent of all the other partners. This restricts the liquidity of his investment. In case of a company, any shareholder can transfer his shares to the third party without the consent of other shareholders.

7. Loss to the Society:

The abruptly closure of the firm is a loss not to the firm but also to the society as a whole because the society is deprived of its products and some workers become out of job.

8. Burden of Implied Authority:

Each partner is an agent able to bind the others by his acts and omission in the ordinary and usual course of the business of the partnership. Accordingly, when there is one partner who is lazy, negligent, has done some blunder, is guilty of corrupt practices or is playing foul means within the scope of his authority, his partners are equally liable financially and without limit. This may put heavy burden on the partners which may ruin the financial position of partners and may lead to the closure of the firm.

9. Liability after Retirement:

In partnership form of business organisation, the retiring partner continues to be liable for all acts done when he was a partner. In the case of a company of limited liability, the liability of the shareholder ceases immediately on the transfer of shares.

In conclusion it can be said that the partnership form of organisation is suitable where the size of business is relatively small and the capital requirements are not high. This form of business organisation is most popular among lawyers, chartered accountants, doctors, solicitors and estate agents.