What are the Advantages and Disadvantages of a Partnership Firm?

Advantages

1. Easy formation:

Formation of partnership is easy. Even the registration of a firm is optional; hence no legal formalities are required.

2. Better Capital:

As the partnership is formed by two or more persons, capital contribution is higher and there are greater managerial abilities.

3. Greater specialisation:

The principle of division of labour can be applied to a greater extent in a firm, which results in greater specialization.

4. Secrecy:

The statement of accounts of the firm need not be published and this ensures secrecy.

5. Credit-worthiness:

As the liability of the partner is unlimited, severally and jointly, careful management of business is ensured and this increases the credit-worthiness of the firm which in turn enables to obtain credit from third parties easily.

6. Flexibility:

Partnership business is flexible, as suitable changes can be easily introduced whenever necessary.

7. Minimum legal restriction:

It is not subject to excessive legal restrictions; therefore it enjoys freedom in administration.

8. Sharing of risks:

Risk does not fall on one individual’s shoulder in this type; it is shared by all the partners.

9. Sound decision:

As the decisions are taken by two or more persons collectively, it is likely to be more balanced.

10. Risk and reward:

As each partner is interested in profits, he tries to do his best to get more reward and this increases efficiency.

11. Protection to partners’ interests:

As every partner has a right to express his opinion, everybody’s interests are protected.

12. Simple dissolution:

It can be easily dissolved. Any partner can give 14 days’ notice to other partners and dissolve the firm with the consent of other partners.

Disadvantages:

1. Lack of co-operation:

As there are more than two persons in the business, unity among them becomes utmost essential. If unity is not secured, disputes arise and disturb the smooth working of the business.

2. Limited capital:

As there is limitation on the total number of partners, the capital that can be raised becomes limited.

3. Lack of public confidence:

There is no Governmental supervision over the affairs of the business of a partnership and publishing accounts is also not necessary. Hence, public may not have full confidence in them.

4. Unlimited liability:

The liability of the partners is unlimited, jointly .and severally. This discourages many people from becoming the partners of the firm.

5. Non transferability of interest:

A partner cannot transfer his interest to a third party without consent of other partners. This blocks the money invested by a person and it may discourage many investors from becoming partners of the firm.

6. Lack of faith:

Utmost good faith is the essence of partnership. If a partner acts dishonestly, it may land all others in trouble, because he is an agent of the firm.

7. Lack of stability:

Partnership lacks continuity of existence, as the death, insolvency or insanity of a partner leads to its dissolution.

8. Limited organising sources:

The radical changes in the methods of production and distribution in modern business leads to large scale business operations. This may not be adapted by partnership due to limited capital and managerial resources.