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Advantages of Partnership

The advantages of partnership are as follows:

1. Easy Formation
2. Larger Financial Resources
3. Flexibility
4. Combined Abilities and Balanced Judgment
5. Direct Motivation
6. Division of Risks
7. Business Secrecy
8. Protection of Minority Interest
9. Encouragement of Mutual Trust and Interdependence
10. Easy Dissolution

Easy Formation

Formation of partnership is easier and no legal formalities are to be observed to establish it. At the same time, unlike a company not much of expenses are incurred for its formation. However, as compared to sole trader’s concern, it may involve certain difficulties, especially in the selection and organization of partners, etc.

Larger Financial Resources

In a partnership, since several persons pool their financial resources into a common business, the amount of capital accumulation becomes much higher than what can be contributed by one person in the sole trader’s concern. The scale of operations can be enlarged to reap the economies of scale. There is always scope for the introduction of new partners to augment resources.

Flexibility

It’s a highly flexible organization. Changes can be introduced easily. The necessary additional capital can be raised; new partners can be introduced, and the place and object of the firm can be changed. The business of the firm can also be expanded or contracted according to the requirements of the business.

Combined Abilities and Balanced Judgment

In a partnership firm, better management of the business is ensured because the capital and brain of two or more persons are pooled. Combined abilities and balanced judgment produce appreciable results. Two heads are better than one is an old saying.

Direct Motivation

Since the partners themselves manage the business, they are likely to manage it with great care, caution, and interest. Moreover, partnerships provide a fair correlation between rewards and efforts on the part of owners, and as such partners are motivated to apply the best of their energy and capacity for the success of the business.

Division of Risks

In sole proprietorship, the risks of business are to be shouldered by one person alone; but in partnership, the risks are to be shared by all the partners. Thus, partnership is more useful for risky business.

Business Secrecy

The annual accounts and reports of a partnership firm do not require circulation and publicity and, therefore, secrecy can be maintained about the business.

Protection of Minority Interest

The Partnership Act provides equal rights and powers for all the partners irrespective of their capital contributions. Every partner has a right to participate in the management of the business.

All important decisions are to be taken with the consent of all the partners. If a majority decision is enforced on a minority, affected partners can get the business dissolved.

Encouragement of Mutual Trust and Interdependence

Each partner is an agent for the others. Therefore, all the partners act with utmost mutual trust. They also develop a sense of interdependence and team spirit. At the same time, each partner develops his individuality through his responsibility for others and the firm as a whole.

Easy Dissolution

A partnership firm can easily be .dissolved. It is a kind of voluntary association for carrying on business operations. Therefore, it can be dissolved by the partners merely by expressing to each other their intention to do so. In the case of a partnership-at-will, it can be dissolved by giving 14 days’ notice to other partners.

Disadvantages of Partnership

The disadvantages of partnership are as follows:

1. Unlimited Liability
2. Limited Resources
3. Instability
4. Non-Transferability of Interest
5. Lack of Public Confidence
6. Risk of Implied Authority
7. Lack of Centralized Authority

Unlimited Liability

The partners, like sole proprietors but unlike shareholders of a joint stock company, may be personally held liable for the debts of the firm. Their private property also remains at stake. Due to the dangers associated with unlimited liability, partners are over-cautious and play safe. This restricts the expansion and growth of the business.

Limited Resources

There is an upper limit to the number of partners in a partnership firm 20 in a general business and 10 in a baking business. Due to this, in spite of the pooling of the resources by all the partners, it becomes difficult for a partnership to manage the increasing requirements of capital and managerial skills of expanding business. This limitation limits the growth of business beyond a certain size.

Instability

A partnership firm suffers from the uncertainty of duration; because it can be dissolved at the time of death, lunacy, or insolvency of a partner.

Sometimes petty quarrels among the partners may also bring the partnership to an end. The discontinuity of the business is not only inconvenient to the consumers and workers but is also a social loss.

Non-Transferability of Interest

Partners cannot transfer their interests in the partnership firm to outsiders without the consent of all other partners.

This non-transferability is a drawback of the partnership firm and dissuades many persons from investing in such a firm. On the other hand, shares of a joint stock company are easily transferable and, thus, provide liquidity to the investment.

Lack of Public Confidence

Since there is no publicity of the working of a partnership through its published periodical accounts and there is the absence of legal control over it, the general public may not have full confidence in it.

Risk of Implied Authority

A partner, being an agent of the firm and his co-partners, can make deals and contracts that would be binding on other partners.

Therefore, when a partner is negligent or commits a wrong, or is guilty of fraud, within the scope of his authority, other partners are equally liable financially without any limit. Thus, the honest and efficient partner may have to pay the penalty for follies and vices of other partners.

Lack of Centralized Authority

The power of management is vested in all the partners; there is the absence of a supreme and central authority. Consequently, many problems crop up, particularly when there is an absence” of mutual understanding and cooperation.

Constant opposites and disagreements on the part of partners hamper the growth of the partnership business at every stage and, ultimately, may even put an end to the existence of the partnership, after a short span of life.

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