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What are the merits and limitations of Partnership?

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Merits and Limitations of Partnership

merits and limitations of Partnership-Studentsopedia


You have learnt about partnership and the main features of partnership. This would help you to identify the merits and limitations of this form of organisation which are as follows.

Merits

1 Easy formation: Although the formation of a partnership firm is not as easy as the sole proprietorship. but it is much less difficult as compared to a company. The partners agree to in business together and draw up and sign the partnership agreement. After that there are no complex government laws regulating the establishment of the partnership.

2 More capital available: Unlike sole proprietorship, there are two or more partners in partnership firms. So. a partnership firm does not have to rely on a single individual as the source of its funds. The added financial strength of the partners increases the bon-owing capacity of the firm.

3 More diverse skills and expertise: The partnership involves more people in decision making because there are more owners. An ideal partnership brings together partners who complement each other, not partners who have the same background and experience. One partner might be a specialist in manufacturing, another in marketing, and the third partner might be an accountant. Combined judgment of all these partners often leads to better decisions than otherwise.

4 Flexibility: Like sole proprietorship, the partnership business is also owned and run by the partners themselves. They can easily appreciate and quickly respond to the changing conditions.

5 Secrecy: In partnership firms, some secrecy can be maintained because there is no obligation to publish accounts of the firm.

6 Keen interest: Since partners are liable to losses and risks of a business, they take keen interest in the affairs of the business.

7 Protection: Due to the rule of unanimity in fundamental matters, the rights of all partners are fully protected. If a partner is dissatisfied with the working of the firm, he can ask for dissolution of the firm and withdraw from the business.

8 Checks and controls over careless decisions: Since the partnership is run on collective basis and all partners participate in major decisions, there is lesser scope for reckless and hasty decisions.

9 Diffusion of risk: The losses of the firm will be shared by all the partners. Hence, the share of loss in the case of each partner will be less than that sustained in sole proprietorship.

Limitations

1 Limited capital: Since there is a limit of maximum partners (20 in non-banking firms and 10 in banking firms), the capital raising capacity of the partnership firms is limited as compared to a joint stock company.

2 Unlimited liability: The most important drawback of a partnership firm is that the liability of the partners is unlimited.

3 No public confidence: Since the accounts are not published and publicised, the firm may not be able to command confidence of the public.

4 Non-transferability of interest: No partner can transfer his interest in a firm without the consent of the partners.

5 Uncertainty: The sudden death, lunacy or insolvency of a partner leads to the dissolution of partnership. This breeds uncertainty in the continuity of a partnership firm. However, this could he partly avoided if such matters arc specified-in the partnership agreement.

6 Conflicts among partners: Then is scope for misunderstanding and conflicts among the partners. This may cause delays in decision making and may lead even to dissolution of the firm. To some extent, this problem could be avoided if the partnership agreement clear and detailed.

7 Risk of implied authority: Since each partner acts as an agent of the Firm, acts of one partner would bind the firm and all the remaining partners. A dishonest or incompetent partner may lend the firm into difficulties and the other partners may have to pay for it.

 

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