Partnership is a form of business organization which as evolved to overcome the shortcomings of sole proprietor. As the size of business expands, one person is unable to provide the necessary capital and managerial skills. Therefore, two or more than two persons form a partnership to carry on business by pooling their financial resources and managerial skills. Thus, partnership is an extension of sole trading concern.
Characteristics of partnership firm
Unlimited liability
Proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.
Difficulty in transfer of shares
Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.
Higher capital
Many partners invest capitals and there is higher flexibility in capital because new partner can be agreed to be associated and investing can be increased.
Reduced risk
Partners have right to take part in management. They have the duty to bear risk with proportion too.
Association of two or more persons
It must be two or more person to enter into contract. Association of two or more persons can only create partnership. In association of two or more persons, maximum and minimum number of persons is not mentioned.
Agreement
It is set up by agreement between partners. It must be written and legal agreement so that it will reduce dispute.
Merits of partnership firm
Easy to start and dissolve
A partnership firm can be setup easily and quickly. There are not much legal formalities and expenditures are involved in the establishment of a partnership. Similarly, a partnership firm can be closed down very easily and quickly.
Higher capital
Many partners invest capitals and there is higher flexibility in capital because new partner can be agreed to be associated and investing can be increased.
Higher innovation
Many partners use their own ideas and innovation capacity. So there is unlimited managerial ability.
Reduction of work load
Partners mustn’t work more to earn more profit. Higher profit generation is important. So, there is no dull and monotonous work.
In case of monotony, health problem to any partner then other partners can help and reduce absenteeism.
Better decision
There is specialization in decision taking. So there can be less chances of taking wrong decisions.
Harmonization of different ability
There are many partners in this firm and many partners have different skills, knowledge and capacity.
Credit facility
In this liability of partners becomes unlimited. It will help to arrange more capital. And that’s why it has more credit. It improves more financial function.
Close supervision
There is effective management and effective supervision. They look the business themselves.
Flexible
There can be change in management, capital and production. This change can be made by mutual agreement of partners.
Reduced risk
Partners have right to take part in management. They have the duty to bear risk with proportion too.
Demerits of partnership firm
No Business secrets
The partner can keep the secrets to himself but these secrets can be known to competitors or others when there is conflict among the partners.
Uncertain existence
Death of any partner can sometime cause death of entire firm. Dishonesty, conflict and lack of resource also can collapse the firm.
No Personal contact
A partner can’t be in a position to maintain intimate contacts with his customers and employees. He cannot be able enter to the requirements of each and every customer. Then there is no close personal touch which decreases the competitive strength of the business.
Unlimited liability
Proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.
Delay in decisions
The partnership firm is completely not free to take all decisions and to implement the. The partners need to consult or seek others approval. Delay in decisions reduces the efficiency of business.
Danger of conflict
Many persons are the owners of partnership firm. There can be misunderstanding and jealousy among them and these cause problems in operation of business and profit making.
Difficulty in transfer of shares
Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.
Limited resources
There is low investment, may be higher than in sole trading but not sufficient for large scale production resulting in limited areas of operation.
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