Advantages And Disadvantages Of Partnership Firm: Partnerships are among the most important types of business organizations. A partnership firm involves two or more parties coming together to form a business and dividing the profits accordingly.
In a partnership business, any trade or profession may be engaged. Partnership firms require fewer compliances than companies and can be formed more easily as well.
Partner companies in India are governed and regulated by the Indian Partnership Act, of 1932, which is a statute that governs and regulates partnerships. The people who form the partnership firm are known as partners.
Partnership firms are formed through a contract between the partners. Also known as partnership deeds, the contracts regulate the relationship between partners as well as between the partners and the partnership firm.
Partnership Firm- Definition, Elements and Types
A partnership is an association of persons who agree to share profits from business ventures carried out by all of them or some of them on their behalf.
An individual or company that enters into a partnership is called a partner, a firm is called a company and the name under which the business is conducted is called the firm name.
- Advantages of Partnership Firm
- Disadvantages of Partnership firm
- Comparison Table Between Advantages and Disadvantages of Partnership Firm
- FAQ’s on Advantages And Disadvantages Of Partnership Firm
Elements of Partnership firm
- A partnership is an association of persons
- A partnership must be the result of an agreement between all parties.
- A partnership is organised to carry on some business.
- There is an agreement between partners to share the profits of the business.
- The business must be carried on by all partners or any of them acting for all.
Types of Partners in a Partnership Firms
The types of Partners in a Partnership firm are-
Active/Managing Partner:
In this type of general partnership, a single partner takes on the managing role, plus he or she has to actively participate in all functions of the company. A partner of this type is known as an Ostensible Partner. Partners who participate in this type of partnership are responsible for the day-to-day progress of the business.
When an active partner leaves a partnership, he has to provide public notice of his departure. By giving public notice, he relieves himself of the responsibilities and actions of his fellow partners after his exit. These types of partners are responsible for every business decision until they retire.
Dormant/Sleeping Partner:
In a business, a dormant partner is someone who does not take part in the daily management of the firm. These partners only contribute capital to the business’s capital but do not participate in management.
When a partnership is formed, the sleeping partners are normally bound by actions taken by all of the other partners. This type of partner does not need to give public notice of retirement. Dormant partners still retain their share of company profits and losses.
Nominal Partner:
A nominal partner is one who does not hold a majority stake in the business. In other words, he is only providing his name to the business deal.
The nominal partner is not required to contribute capital to the partnership nor is he entitled to share profits among business partners. However, nominal partners are still liable for the actions of the other partners to third parties.
Partners in profits:
These types of partners do not hold any form of liability for the decisions taken by the business firm, They are only entitled to their share of the profits. Even when dealing with third parties, such partners are only responsible for matters related to profits.
Partner by Estoppel:
The term ‘Partner by Estoppel’ means that a person declares (through his actions or words) that he is seeking to become a partner in a partnership. Such partners cannot subsequently deny being business partners in partnership firms. These types of partners are not actually partners, yet have committed to representing themselves as such.
Minor Partner:
Under the Contract Act, a minor (individuals under the age of 18 years old) cannot participate officially in any type of partnership business. However, these partners may be authorized to become a partner with the consent of their fellow business partners. Although a minor can share profits from a business, he will only be liable for losses incurred by the firm if he has a share in the capital.
The minor partner is given six months after he turns 18 to decide whether he wishes to continue as a partner of the firm or withdraw. In both cases, the minor partner has to declare that he wishes to withdraw.
Advantages of Partnership Firm
The following are some of the benefits of forming a business partnership:
Ease of formation: Partnerships are simple to form, inexpensive to establish, and simple to run. There are no legal formalities to complete, and no formal documents to prepare. It only takes an agreement between two or more people to run a legal business. Even the registration of the company is optional. A partnership, likewise, can be simply dissolved at any time.
Combined abilities and judgement: All of the partners’ skills and experience are combined. The combined judgement of numerous people helps to lessen judgement errors. According to their abilities, the partners may be allocated tasks. As a result, the advantages of specialisation are available. Partners meet regularly and can make prompt decisions.
Direct Motivation: Business ownership and management are held by the same people. The relationship between effort and reward is straightforward. Every partner is driven to put in long hours and secure the firm’s success. Losses are shared, and risk is spread out.
Constant monitoring: Every partner is expected to be personally invested in the company’s operations. Different partners can keep in touch with staff and customers on a personal level. The partners are cautious and avoid risky transactions due to their fear of endless responsibility. When skilled managers are not employed, partnership management is less expensive.
Operational flexibility: Constraints and government regulation do not apply to partnership businesses. Partners can change the size of their firm, their money, and their management structure without seeking approval. The activities of a partnership business can simply be changed to changing market conditions.
Disadvantages of Partnership firm
The following are some of the disadvantages of forming a business partnership:
Limited Resources: The maximum number of partners in a firm is limited. As a result, massive financial resources cannot be gathered. Partner borrowing capacity is likewise constrained. A partnership firm may lack the necessary technical and administrative expertise. Professional management may be lacking.
Unlimited Liability: Each partner is fully responsible for the partnership’s debts. Fear of danger can stifle innovation and corporate success. Partner’s private properties might also be used to cover business debts.
An Uncertain Life: The partnership business is insecure. Insolvency, insanity, retirement, and the death of a partner can all result in the firm coming to an abrupt end. Any partner can file a dissolution of partnership notification.
Transfer of interest restrictions: A partner cannot sell or assign his or her share of the firm to a third party without the consent of the other partners. As a result, he will lose the liquidity of his investment.
A lack of confidentiality: All of the partners are aware of the partnership firm’s secrets. As a result, keeping corporate secrets is tough.
Comparison Table Between Advantages and Disadvantages of Partnership Firm
| Advantages of Partnership Firm | Disadvantages of Partnership Firm |
| It is easy to form a partnership firm | There is a lack of secrecy |
| A partnership firm has the benefit of specialisation | Other partners may face heavy losses due to the dishonesty and fault of one partner |
| A partnership firm is free from legal restrictions and government control | The liability of each partner is unlimited |
| It has a greater scope for expansion and growth | There are limited resources available to collect the huge financial resources |
FAQ’s on Advantages And Disadvantages Of Partnership Firm
Question 1.
What is the dissolution of a Partnership firm?
Answer:
When a partnership firm ceases to carry on business, It is said to be dissolved.
Question 2.
Types of Partners in a Partnership firm?
Answer:
The types of partners are:-
- Active partner
- Secret partner
- Dormant partner
- Limited partner
- Minor as a partner
- Quasi partner
- Partner in profits only
Question 3.
Can a single person form a Partnership firm?
Answer:
No, a single person cannot form a partnership firm
Question 4.
What are the minimum and maximum limits to forming a partnership?
Answer:
A minimum of two persons is required to form a partnership firm and a maximum of 10 in the case of banking business and 20 in the case of other types of business.