7 essential merits and demerits of partnership form of business

Merits of Partnership

The partnership form of business organisation enjoys the following advantages:

1. Ease of formation:

Partnership is simple to form, inexpensive to establish and easy to operate. No legal formalities are involved and no formal documents are to be prepared. Only an agreement is required. Even the registration of the firm is not compulsory. Similarly, a partnership can be dissolved easily at any time.

2. Larger financial resources:

It is possible to collect a large amount of capital due to a number of partners. New partners can be admitted to raise further capital whenever necessary. Credit-worthiness is also high because every partner is jointly and severally liable for all the debts of the firm.

3. Combined abilities and judgement:

The skill and experience of all the partners are pooled together. Combined judgement of several persons helps reduce errors of judge­ment.

The partners may be assigned duties according to their talent. Therefore, benefits of specialisation are available. Partners meet frequently and can take prompt decisions.

4. Direct motivation:

Ownership and management of business are vested in the same persons. There is direct relationship between effort and reward. Every partner is moti­vated to work hard and to ensure the success of the firm.

5. Close supervision:

Every partner is expected to take personal interest in the affairs of the business. Different partners can maintain personal contacts with employees and customers.

Fears of unlimited liability make the partners cautious and avoid reckless dealings. Management of partnership is cheaper when expert managers are not em­ployed.

6. Flexibility of operations:

Partnership business is free from legal restrictions and gov­ernment control. Partners can make changes in the size of business, capital and mana­gerial structure without any approval. The activities of partnership business can be adapted easily to changing conditions in the market.

7. Secrecy:

A partnership firm is not required to publish its annual accounts. Audit of accounts is not essential and no reports are to be filed with the government authorities. Therefore, the affairs of a partnership business can easily be kept secret and confiden­tial.

8. Protection of minority interest:

Management of partnership is democratic. Every part­ner has a right to be consulted and express his opinion. All important decisions are taken with the mutual consent of all the patters. In case a partner is dissatisfied with the majority decisions, he can retire from the firm or give a notice for its dissolution.

9. Cooperation:

Partnership encourages mutual cooperation and trust amongst people. Partners work in common for the benefit of all and do their level best to make the business prosperous.

Demerits of Partnership

1. Unlimited liability:

Every partner is jointly and severally liable for the entire debts of the firm. He has to suffer not only for his own mistakes but also for the lapses and dishonesty of other partners.

This may curb entrepreneurial spirit as partners may hesi­tate to venture into new lines of business for fear of losses. Private property of partners is not safe against the risks of business.

2. Limited resources:

The amount of financial resources in partnership is limited to the contributions made by the partners. The number of partners cannot exceed 10 in bank­ing business and 20 in other types of businesses.

Therefore, partnership form of owner­ship is not suited to undertake business involving huge investment of capital.

3. Risk of implied agency:

The acts of a partner are binding on the firm as well as on other partners. An incompetent or dishonest partner may bring disaster for all due to his acts of omission or commission. That is why the saying is that choosing a business partner is as important as choosing a life partner.

4. Lack of harmony:

The success of partnership depends upon mutual understanding and co-operation among the partners. Continued disagreement and bickering among the partners may paralyze the business or may result in its untimely death. Lack of a central authority may affect the efficiency of the firm. Decisions may get delayed.

5. Lack of continuity:

A partnership comes to an end with the retirement, incapacity, insolvency and death of a partner. The firm may be carried on by the remaining part­ners by admitting new partner.

But it is not always possible to replace a partner enjoy­ing trust and confidence of all. Therefore, the life of a partnership firm is uncertain, though it has a longer life than sole-proprietorship.

6. Non-transferability of interest No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners. This makes investment in a partnership firm non-liquid and fixed. An individual’s capital is blocked.

7. Public distrust:

A partnership firm lacks the confidence of public because it is not subject to detailed rules and regulations. Lack of publicity of its affairs undermines public confidence in the firm.