Before moving towards the advantages and disadvantages of partnership, it is important to know what partnership? Partnership is an association of two or more persons to carry on a business and share its profit and loss among them”. It is not same like sole proprietorship, where a single person may take the capital and start his business. In partnership two or persons get together, brings capital, organized the business activities and share the profit and loss as per the agreement and capital ratio. It is formed to meet the need for more capital, division of work, effective supervision and control and spreading of risk in business. Important fundamentals of Business:
- Association of at least two persons.
- Contractual relation.
- Earning profit.
- Mutual agency.
Advantages and Disadvantages of Partnership
- Advantages of Partnership
The main advantages of partnership business are as under
- Easy to Form
The main advantage of partnership is that it can be easily organized. There are no legal formalities required in this type of business. The partners enter into a partnership and start business.
- Favorable Credit Standing
The second merit is partnership enjoys a better credit rating in the eyes of creditors. As the liability of each partner in the organization is unlimited, the financial institutions can safely advance loans to the firms.
- Large Capital
Another advantages is that it brings more and more capital to the business by the joint efforts of the partners.
- Greater Management Ability
As we know that there are many partners involved in the business operation of the partnership, due to which the firm can distribute the duties and responsibilities to each partner as best suited to him.
- Profit Incentive
The profit is always shared by the partners according to the agreement.
- Tax Advantages
It is a registered firm, so they pay tax to government on dividend, and then share profit among the partnership, which leads the partners to get the benefit of lower assessment.
- Advantages of Secrecy
As the partners can keep the business secrets with themselves leads not to require any law to publish its profit and loss account and balance sheet.
- Ease of Dissolution
The partnership can easily be dissolved with the mutual consent of partners or according to the contract. There is no formal document to be drawn up as in the case of a joint stock company.
Disadvantages of Partnership
The main disadvantages of partnership are as under
- Unlimited Liability
One of the basic demerits of partnership is that the partners are personally and jointly responsible for all the debts of the firm. In case the business suffers losses and then the personal property of partners can be sold under the court order for the clearance of the debts of the business.
- Limited Life of Firm
The second demerit is that the duration of business is always uncertain. It can be dissolved in case of partner’s death, withdraws and sell his interest etc.
- Frozen Investment
It is very easy to invest his money in the partnership by a partner but very difficult to withdrawn any funds from the business.
- Dispute Among the Partners
As we know that every partner has his own thought of views, in this type of business sometime dispute occurred among the partners on decision making, so quick action required to be taken by all the partners for the remedial measurement.
- Possibility of Misuse of Resources
As the resources of the firm are owned by the partners jointly leads to misuse these resources by the partner/ partners.
- Loss of Business Opportunities
One of the demerits is that in case of differences in view among the partners, a delay may take place in decision-making. This can cause loss to the business.
- Lack of Public Confidence
Partnership form of organization may not be enjoying public confidence due to lack of publicity and regulations.