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Home / Benefits & drawbacks of Partnership
Benefits & drawbacks of Partnership
Before taking any decision in respect of registering a partnership for carrying any business, it is necessary to analyze the benefits and drawbacks of the Partnership, which are outlined below:
Benefits of Partnership
- Easy to form: It is very easy to form a partnership, as there are no mandatory registration requirements. Partners are required to enter into a partnership deed between themselves and they can start functioning straight away. It is not necessary to have any written partnership deed but it is always recommended to have a written one.
- Availability of large resources: Since two or more partners join hands to start a partnership business, it may be possible to pool together more resources as compared to a sole proprietorship. The partners can contribute more capital, more effort and more time for the business.
- Better decisions: Partners are the owners of the business and each of them has equal right to participate in the management of the business. All the business decision are taken by the partners keeping in view the interest of the business as whole case of any conflict, they can sit together to solve the problem. Since all partners participate in the decision-making process, there is less scope for reckless and hasty decisions.
- Flexibility in operations: A partnership firm is a flexible organization. At any time, the partners can decide to change the size or nature of the business or area of it’s operation. There is no need to follow any legal procedure. Only the consent of all the partners is required.
- Sharing risks: In a partnership firm all the partners “share” the business risks. For example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular period, then all partners may share it and the individual burden will be Rs.4000 only. Because of this, the partners may be encouraged to take up more risk and hence expand their business more.
- Protection of interest of each partner: In a partnership firm, every partner has an equal say in decision making and the management of the business. If any decision goes against the interest of any partner, he can prevent the decision from being taken. In extreme cases an unsatisfied partner may withdraw from the business and can dissolve it. In such extreme cases the “partnership deed” is required. In absence of the partnership deed, no legal protection is given to the partners.
- Benefits of specialization: Since all the partners are owners of the business, they can actively participate in every aspect of business as per their specialization, knowledge and experience. If you want to start a firm to provide legal consultancy to people, then one partner may deal with civil cases, one in criminal cases, and another in labor cases and so on as per the individual specialization. Similarly, two or more doctors of different specialization may start a clinic in partnership.
Drawback of Partnership
- Unlimited liability: The most important drawback of partnership is that the liability of all the partners is unlimited and in case the assets of the partnership are not sufficient to pay off the debts, that the additional funds shall be arranged out of the personal property of the partners.
- Liability for acts of other Partners: In partnership all the partners are agent of other partners and are therefore full liable for acts done by them.
- No legal Identity: Partnership is not recognized in law as an identity separate from the partners constituting it. A partnership is recognized by its partners and not by its own name. Since partnership is not legal entity, therefore it cannot purchase property or cannot sue partner or third party in its own name.
- Uncertain life: The partnership firm has no legal existence separate from it’s partners. It comes to an end with death, insolvency, incapacity or the retirement of a partner. Further, any unsatisfied or discontent partner can also give notice at any time for the dissolution of the partnership.
- Limited Number of Partners: A Partnership cannot have more than 20 persons as its partner and therefore it cannot expand its business by including addition partners and it also act as hindrance towards introducing funds and expertise in the business.
- Limited capital: The partnership is recognized by its partners and therefore goodwill and credibility of partners plays an important role, for arranging funds for the business. Moreover, Partnership is not regulated, there no requirement of any audit or financial disclosure. Due to aforesaid factors partnership doesn’t enjoys good credibility among investors and financial institutions and therefore they hesitate to provide funds to the business.
- No transferability of share: If you are a partner in any firm, you cannot transfer your share or part of the company to outsiders, without the consent of other partners. This creates inconvenience for the partner who wants to leave the firm or sell part of his share to others. Moreover, the process of transferring ownership interest is not easy.
- Lack of expertise: Due to limited number of partners and limited availability of funds , it is not possible for the partnership to hire or engage expert knowledge for the business.
- Lack of harmony: In a partnership firm every partner has an equal right to participate in the management. Also, every partner can place his or her opinion or viewpoint before the management regarding any matter at any time. Because of this, sometimes there is a possibility of friction and discontent among the partners. Difference of opinion may lead to the end of the partnership and the business.
- Not Recognized: Partnership is not recognized for the purpose of carrying business under various regulations like partnership are not allowed to carry on the business of insurance.
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