What are Advantages and Disadvantages of Partnership business? According to Business Act, 1932, Partnership is a relation which subsists between persons carrying on business in common with a view of profit.
So we can say that partnership is a relationship between two or more persons who have agreed to contribute their capitals, combine their labor or skill to carry on some business carried on by all the partners or any of them and who share the profit and loss of such business according to an agreed ratio. The main advantages and disadvantages of partnership are discussed as under:
What are the Advantages and Disadvantages of Partnership
Advantages of Partnership
The partnership form of business organization has the following advantages on the other forms of business organizations.
- Easy Formation
This form of business organization can easily be formed. There is no costly legal formality involved in the establishment of partnership. The partners enter into a partnership deed, may get the firm registered and start the business.
- Large Capital
As compared to a sole proprietorship, in partnership the partner can bring more capital to their joint efforts and can start the business on large scale and can earn more profit
- Credit Standing
As the liability of each partner is unlimited, therefore, the financial institutions can safely advance loans to the firm. So the partnership is in a better position to borrow long-term loans and expand the business.
- Better Management
As in partnership, there are many partners who take part in the management of the business so the duties and responsibilities are distributed among the partners for whom they are best qualified and suited.
- Better Decisions
It is generally stated that two minds are better than one. In partnership, all the decisions are made with the mutual consent of all the partners. So there are more chances of a better decision.
- Entry of New Partner
A new partner can he admitted in the firm at any time with the mutual consent of all the existing partners.
So when the firm needs some extra funds for business, a new partner can be entered into the firm to meet the financial needs,
- Withdrawal of Partners
If any partner wants to leave the firm he can leave it with the mutual consent of the other entire partner. Similarly, if all the partners want to retire a partner they can do so with their mutual consent.
- Extension of Business
In a partnership, there are more chances to expand the business. The partners can bring more capital to their joint efforts and financial institutions grant loans safely because of unlimited liability of each partner.
Similarly, a new partner can also be admitted to the firm to meet financial needs, in this way, the firm can expand the business easily.
- Division of Labor
In this form of business organization, the division of labor is possible. As there are many partners, the business activities can be divided and work can be allotted to each partner for whom he is, best qualified and suited. In this way, all the business activities are done smoothly.
- Easy Dissolution
The dissolution of this form of business organization is very easy. If a partner dies, becomes insolvent or unsound mind or gives a due notice in case of partnership at will for the dissolution, the firm is dissolved. All the partners can also dissolve the firm at any time with their mutual consent.
- Tax Advantage
The profit of the firm is divided among the partners and each of them is taxed on his personal income. Normally the personal income of each partner is exempt from tax.
- Business Secrecy
The accounts of the partnership are kept secret up to the partners is there to legal restriction to publish the accounts of the firm. So it is very useful for the business success.
- Less Chances of Fraud
The accounts can be checked and can be inspected by all the partners at any time, so there are fewer chances of fraud in the partnership business.
- Less Competition
If the firm is registered, no one can start the business with firm’s name, so there are fewer chances of business competition.
Disadvantages of Partnership
The disadvantages of the partnership form of business organization are as under;
- Unlimited Liability
The main disadvantage of this form of business organization is that there is an unlimited liability of all the partners in the firm.
If the firm suffers loss and the property of the firm is not sufficient to meet the claims of the creditors, the personal property of the partners can also be used for this purpose.
- Limited Life
The life of the partnership business is limited. If any partner desire becomes insolvent or becomes unsound mind the partnership is dissolved.
- Delay in Decisions
Often all the partners take an active part in the management of the partnership business. So there is sometimes delay in making important decisions and due to this firm suffers losses.
- Lack of Capital
Although the capital of the firm is greater than a sole proprietorship, but still it is less than company’s capital and is not sufficient to expand the business of the firm.
- Difficulty in Transfer of Share
In partnership, no partner can transfer his share to another partner without the permission of all the other partners. So it is one of the difficulties of the partnership.
- Unable Workers
In partnership, often the partners give chance to work with their relatives and friends who are unable and untrained. For this reason, the firm suffers losses.
- Difference of Opinion
In partnership business, mutual consent of all the partners is necessary for important matters. Sometimes there is a difference of view among the partners and which results in dissolution of the firm.
- Expansion Problems
Due to a limited number of partners, the capital of the firm is less than it is required to expand and start the business on a large scale as it is possible of Joint Stock Company.
- Withdrawal of Investment
In case of a partnership, it is very easy for the partner to invest money in the business but it is quite difficult to withdraw funds from the business. A partner can get back his capital after the dissolution of the firm.
- Less Chances of Secrecy
In case of the partnership business, all the partners can take an active part in the management of the business and can inspect the books of accounts.
So in case of withdrawal or retirement of any partner, there are fewer chances to have secrecy of the business,
- Lack of Management
The management of the partnership business is carried on by the partners who are often unqualified and unskilled. So the wrong decisions of the management may result in a huge loss to the firm.
- Difficulty in Retirement
If any partner wants to retire from the firm, he cannot do so without the mutual consent of all the Other Partners. So it is quite difficult for the partners to leave the firm before its dissolution.
