Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.


By Harshvardhan, the Subject Matter Expert at Edumarz

Solution: Partnership is “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.”

The partnership is considered by some to be a relatively unpopular form of business owners mainly because of the Unlimited Liability of all Major Partners.

The following points describe the advantages of a partnership firm:-

(i) Ease of formation and closure: A partnership firm can be formed easily by putting an agreement between the prospective partners into place whereby they agree to carry out the business of the firm and share risks. There is no compulsion with respect to the registration of the firm. Closure of the firm is an easy task. 

(ii) Balanced decision making: The partners can oversee different functions according to their areas of expertise. Because an individual is not forced to handle different activities, this not only reduces the burden of work but also leads to fewer errors in judgements. As a consequence, decisions are likely to be more balanced.

(iii) More funds: In a partnership, the capital is contributed by a number of partners. This makes it possible to raise a larger amount of funds as compared to a sole proprietor and undertake additional operations when needed. 

(iv) Sharing of risks: The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.

(v) Secrecy: A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain the confidentiality of information relating to its operations.

A partnership firm of the business organisation suffers from the following limitations:-

(i) Unlimited liability: Partners are liable to repay debts even from their personal resources in case the business assets are not sufficient to meet its debts. The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so. 

(ii) Limited resources: There is a restriction on the number of partners, and hence contribute in terms of capital investment is usually not sufficient to support large scale business operations. As a result, partnership firms face problems in expansion beyond a certain size. 

(iii) Possibility of conflicts: Partnership is run by a group of persons wherein decision-making authority is shared. Differences in opinion on some issues may lead to disputes between partners. Further, the decisions of one partner are binding on other partners. Thus an unwise decision by someone may result in financial ruin for all others. In case a partner desires to leave the firm, this can result in termination of partnership as there is a restriction on transfer of ownership.

(iv) Lack of continuity: Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in a lack of continuity. However, the remaining partners can enter into a fresh agreement and continue to run the business.

(v) Lack of public confidence: A partnership firm is not legally required to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public in partnership firms is generally low.

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