Merits and Demerits of Partnership Form of Organization

Partnership is an association of two or more individuals (but not more than 20) who agree to share the profits of a lawful business which is managed and carried on either by all or by any, or some of them acting for all. According to Haney, “Partnership is the relation between persons competing to make contract who agree to carry on a lawful business In common with a view of private gain.” The formation of partnership is easy and simple. It is formed to meet the need for” more capital, effective supervision and control, greater specialization, division of work between proprietors and for spreading of risk. The main merits claimed of partnership organization are as follows.

Advantages of Partnership

The partnership, like the sole proprietorship, can be easily organized. There are no complicated legal formalities involved in the establishment of partnership business. The partners enter into a partnership agreement and start business.

The partnership enjoys a better credit rating in the eyes of creditors. As the liability of each partner in the organization is unlimited the financial institution can safely advance loans to the firms.

In case of sole proprietorship, the capital is limited to the savings of one owner or his borrowing capacity. Partnership can bring more capital to the business by the joint efforts of the partners. The partnership is normally in strong position to raise capita and expand the business.

As there are many partners involved in the operation of a business, the firm can distribute the duties and responsibilities to each partner for which one is best qualified and suited. Division of labour and specialization, thus, can promote efficiency of the firm.

There is a bid age saying that two heads are better than one. In case of partner the partner mutually consults each other about the lay out, production procedure, marketing channels, etc. and as a result, a wise course of procedure results.

The profits are shared by the partners as per agreement. They are encouraged to do more work to earn more profit. Higher the profits, higher will be the partners share.

The partners can keep the business secrets to themselves. The firm is not required by law to publish its profit and loss account and balance sheet.

If an employee in the partnership business is found to be a man of outstanding talent and ability, he with the mutual consultation of other partners can be given a status of a partner in the business.

As liability of partners is unlimited, the partners, therefore, tend to be careful in taking business decisions. They adopt sound practices in the conduct of business. There is a brake on hasty decisions.

A death or lunacy of a partner may not cause dissolution of the partnership. His minor can be admitted only to the benefits of partners with the consent of other partners.

The success of business depends upon mutual trust and cooperation of the partners. The partners are fully aware that a sight difference can cause the end of partnership. This increases in them the sprit of working together.

The profits of a registered firm, after payment of super fax, are divided among the partners. They pay tax to the government on their shares of profit. Thus the partners of registered firm get the benefit of lower assessment.

The partnership can also be legally dissolved much difficult by mutual consent of the partners or in accordance with a contract by the partners. There are no formal documents required to be drawn up as in the case of a joint stock company.

Disadvantages or Demerits of Partnership

The partnership form of organization suffers from certain disadvantages also. These in brief are as follows.

One of the basic defects of partnership is that the partners are personally and jointly responsible for all the debts of the firm. In case the business suffers losses and the business assets are not sufficient to satisfy the claimants on liquidation, the personal property of one or more than one partners can be sold under the Court order for the clearance of the debts of the business. The rich and wealthy persons, therefore, avoid to be enlisted in partnership because each individual partner in liable for the firm’s debt.

The duration of the partnership is always uncertain. I partner dies, injured, withdraws, sells his interest, or a new partner is admitted into the business, or their arises difference, the partnership may come td an end. There are every possibilities of the dissolution of the firm due to internal differences.

It is very easy for a partner to invest money but it is most difficult to withdraw the from the business. A person who wishes to withdraw investment has to consult his partners, find a substitute with equal business ability. Unless the above conditions are fulfilled, the funds remain difficult to transfer and as such remain a frozen investment which creates lack of interest.

The partners should be like minded, have a common objective, be large hearted, have a cool temperament, should not unnecessarily cause friction and confusion among the partners. The choosing of partner is in fact like choosing a wife. Marry in haste and repent in leisure. In case of dispute among the partners, quick action should be taken by all the partners for the remedial measures.

It is known to each and every partner that the resources of the firm are owned jointly. There can and does arise the misuse of resources by a partner/partners.

In case of differences among the “partners, a delay may take place in decision-making. This can cause loss to the firm.

In a partnership, the work of the business is divided among the partners according to their ability, choice and taste. Divided control - and responsibility sometimes creates confusion and delay in making decisions. The lack of efficiency on the part of one partner can upset the whole structure of the business and ultimately lead to dissolution of the firm.

Partnership form of organization may not enjoy public confidence due to lack of publicity and absence of regulations.

Implied authority is the authority vested in a partner to bind the firm with any of his acts done in connection with the business of the firms. In partnership form of organization, each partner binds other partners by his acts done on behalf of the firm: Thus the other partners may have to pay for the follies and dishonesty of a fellow partner.

Partnership form of ownership is suitable where business is of medium size, the partners are of equal status, ability and resources.