Merits and demerits of Partnership firm

MERITS AND DEMERITS OF PARTNERSHIP FIRM

MERITS

1)Easy formation

Formation of partnership firm is easy, less expensive and does not involve complicated legal formalities and procedures. It can be formed simple by an agreement among the partners. The partners can sign the agreement and get the firm registered with the registrar of partnership firm.

2)Business secrecy

Partnership firm are not required to publish their annual accounts like profit and loss A/c,balance sheet. There fore,the third parties including competitors cannot take undue advantage of the inner information of the firms.

3)large capital

Partnership firm can collect large amount of capital. This is because the funds of several persons are contributed together. There is enough scope for admission of new partners to increase financial resources. Further, due to unlimited liability it is easy to get loans from bank and financial institutions.

4)Quick and quality decisions

 The business policy of the partnership firms are framed by all partners. Naturally, they have to meet frequently to decide future plans. Thus, the frequent meeting of partners facilities quick and quality decisions.

5)Flexibility in operations

The partners may expand or diversify the business, can change the line of business, and can even close down the business, if required. Thus, there are no strict rules on the management of business.

6)close contacts

The partners who are managing the affairs of the business have close contact with customers as will as with employees. By developing close contact with customers, partners will come to know the likes and dislikes of the customers which will result into increase in profit. Close contacts with employees will result into better team work. 

7)specialisation

The partners can specialise in various areas because some partners may be good at technical skills, others may be good in financial management and some may be good in marketing. Thus, division of work bring specialisation.

8) spreading of risks

In partnership firm risk of business  is spread over all the partners of the firm. In the case of loss, each partner will have to bear only a part of and not the complete loss. Thus, there is division of risk among the partners of partnership firm.

DEMERITS

1)liability

The liability of each person is unlimited and is joint as well as several. Unlimited liability means, if business property is not sufficient to pay the debts then the private property of partners will be used.

           Joint and several liability indicates that each partners is jointly as well as separately liable for the debts of the firm.

2)less capital

Modern business requires large amount of capital. But limitations of number of partners, partnership cannot raise huge amount of capital. Again, unlimited liability and non transferability of shares disturbs the collection of capital.

3)Disputes 

There can be constant conflicts and disputes among the partners. Some partners prefer working for self -interest. Partners often put the blame on other partners for wrong decision. Thus, conflicts and lack of team spirit among partners may results into loss of reputation and finally dissolution of the firm.

4)problem of continued existence

A partnership can come to an end by debts, insolvency and insanity of a partner. It may also come to an end by the desire of an individual partner. Thus, partnership business face the problem of existence.

5)Difficulty in transfer of shares

The share of partnership firm is not freely transferrable. For this the consent of all partners all partners is necessary. This creates inconvenience to partners and results into closure of partnership firm.

6)limited membership

The upper limit of partners in a firm conducting banking business is 10 and non-banking business is 20. Due to limited  number of partners a  partnership firm can have limited financial and managerial resources.

7)irresponsibility of some partners

 Some partners may be irresponsible because of spreading of risk. Thus, he may not apply the necessary skill. Again, there is no 100% direct relationship between efforts and rewards . hence, partners do not show interest in the organization.

8)Difficulty in admitting new partners

Due to restrictions on the maximum numbers of members and also due to objection from other partners, it becames difficult to admit new partner in the firm.