Advantages and Disadvantages of Partnership

Advantages and Disadvantages of Partnership

There are various forms of ownerships that people go for while establishing a business. These forms put control in different people’s hands, and in different proportions. There are many forms of ownership. These include sole proprietorship, private corporation, and limited liability company (LLC). Another form of ownership is a partnership. Like all other forms, it has its own advantages and disadvantages.

As the name suggests, a sole proprietorship puts controls in the hands of one single owner. It is a type of enterprise one person owns and manages and in which there is no legal distinction between the owner and the business entity. It is also generally called as a sole trader or individual entrepreneurship. Also known as a closely held corporation, unquoted company, or unlisted company, either non-governmental organizations or a relatively small number of shareholders or company members, own a private corporation. It does not offer or trade its company stock (shares) to the general public. An LLC combines the characteristics of both a corporation and a partnership or sole proprietorship.

WHAT IS A PARTNERSHIP?

As the name suggests, a partnership is a form of business where two or more people share ownership, as well as the responsibility for managing the company. They also share the income or losses the business generates. These business partners agree to cooperate to advance their mutual interests. It is not necessary for business partners to be individuals. They can be businesses, interest-based organizations, schools, or governments. The management and operation of the business should be performed either by all the partners or any of them, acting for all the partners.

A minimum of two persons are required to begin a partnership. Additionally, minors, insolvent and persons with mental difficulties cannot become members. However, a minor can be admitted to a partnership to share profits. Partners share unlimited liability on a company. This means if the assets of the company are not sufficient to repay its liabilities, personal assets of all or any partner can be claimed by the creditors.

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The partnership business is undertaken by all the partners or any of the partner, who acts on behalf of all the partners. So, every partner is a principal as well as an agent. Further, the acts of partners bind each other as well as the firm. By law, partnerships are not required to register themselves. However, is it recommended. It allows partners to file a suit against another partner in case of a conflict. It also allows also the firm can file a case against outside parties.

WHAT ARE THE TYPES OF PARTNERS IN A PARTNERSHIP?

There are various types of partners in a partnership firm. They are mainly differentiated by their roles or responsibilities in the firm. The types of partners include working partner, sleeping partner, nominal partner, partner by estoppel, limited partner, secret partner, partner by holding out, sub – partner, and partner in profit.

Advantages and Disadvantages of Partnership

A partner who contributes capital to the business and takes active part in its management is called an active partner. A sleeping partner only contributes only capital to the business. They do not take part in the day to day functioning of the firm. They are also called dormant partner or financing partner. A nominal partner is a partner only in name. They do not contribute capital or help with the functioning. Their name might lend goodwill to the firm. Partner by Estoppel is not a partner of the firm but by their words and conduct he leads the outsiders to believe that they are also a partner of the firm. Usually this arises, when the outgoing partner fails to give notice about his retirement. A secret partner is not a partner of the firm in the public’s eyes.

Advantages of Partnership

More Resources

Since multiple individuals come together to form a partnership, they bring in multiple resources. This allows the firm to have access to a larger pool of resources in terms of quantity as well as variety. The more partners there are, the more money there may be available from their combined resources to invest into the business, which can help to fuel growth. Together, their borrowing capacity is also likely to be greater. Each partner will bring their own knowledge, skills, experience and contacts to the business, potentially giving it a better chance of success than any of the partners trading individually. Thus, they can divide work among themselves, depending on their individual skills, and talents. This helps the firm to grow quickly.

Flexibility

The way of formation of a partnership allows the partners to modify the firm as and when needed.  The nature and place of business can be altered at will. They can switch responsibilities and roles depending on situational requirements. They can also add new partners with ease if the need arises. Capital infusion, profit sharing, pricing policies, etc., can be altered in sync with market demands.

Ease of Formation

It is easy to form a partnership. No elaborate legal procedures are necessary to bring a firm into existence. However, it is helpful to register a partnership as it provides certain benefits The partners can agree to create the partnership verbally or in writing. It is not a legal obligation to register partnerships. It gives the firm a legal standing. This also documents how the partnership will work, the rights and responsibilities of partners and what would happen in various possible situations, including if the partners fundamentally disagree or someone wants to leave.

Privacy

The partners of partnership firm can keep the business to themselves. They are not legally obligated to disclose their accounts and operations to the general public. In the case of a company, nothing is secret. They have to publicly disclose their tradings, their functioning, et cetera.  A partnership firm is not expected to get its accounts audited and published. This is the distinctive advantage partnership enjoys over the joint-stock company.

Disadvantages of Partnership

Unlimited Liability

This is one of the major disadvantages of a partnership agreement. It means that not only is the partner liable for their share in the company, they also have to be accountable for the overall debts of the firm.

In case of insolvency, the personal assets of the partners can help to recover the debt amount.

Advantages and Disadvantages of Partnership

Risk Of Disagreements

Every partnership arrangement rests very precariously on the assumption of a harmonious relationship between the partners. Trust and stability between them lead to a certain degree of assurance for the company.

However, things can be jeopardized very quickly if there is friction or disagreement between the respective partners. The dependence on something that superficial and intangible is a risk that every partnership firm has to bear.

Each Partner Is An Agent Of The Partnership

Partnership is the only form of business arrangement where you have to assume the risks of other stakeholders in the business. As an agent of the partnership, the trade-off that you make is that you become liable for the debts of your partner.

Thus, having a share or debenture in a company might be more preferable or palatable to people in general.

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No Independent Legal Status

The status of the business is not independent of the partners. This means that the death of one of the partners will lead its dissolution. In such circumstances, existing partners have to draw up a new agreement.

You can imagine the degree of instability that will create for a company. It also leads to a compounding of legal pressures. Each business wants minimum administrative hassles and this becomes one.

Pros and Cons of Partnership

PROS

CONS
More resources

Unlimited liability

Flexibility

Risk of disagreements
Ease of formation

Each partner is an agent of the partnership

Privacy

No independent legal status

 

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Rhythm Bhatia