Q.2:- Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all.” Some people consider partnership to be relatively unpopular because the inherent features of partnership such as joint risk bearing and profit sharing, collective decision making, unlimited liability of partners, etc. Sometimes lead to conflicts among partners and undue burden on some of the partners. Besides, public confidence in partnership firm is low. But partnership as a form of business organization actually has both merits and limitations as discussed below
Merits of Partnership
(i) Ease of Formation and Closure A partnership firm can be formed with minima] legal formalities by an agreement between the prospective partners whereby they agree to carry out the business of the firm and share risks. Registration of the firm is also not compulsory. Closure of the firm can be done easily too.
(ii) Varied Expertise and Effective Decisions The partners can look after different functions according to their areas of expertise. This reduces the burden of work on individual partners and leads to more effective decisions.
(iii) More Capital In partnership, the capital is contributed by many partners. Thus, larger amount of funds are available as compared to a sole proprietor to undertake additional operations when needed.
(iv) Risk Sharing All the partners share the risks involved in running a partnership firm. This reduces the anxiety, burden and stress on individual partners. (v) Secrecy A partnership firm is not legally required to publish its accounts and submit reports. Hence, it can maintain confidentiality of information relating to its operations.
Limitations of Partnership
(i) Unlimited Liability The partners of a firm have unlimited liability. Personal assets may be used for repaying debts if the business assets are insufficient. Further, the partners are jointly and individually liable for payment of debts. Hence, if some partners are unable to pay the debt proportionate to their share, the others will have to repay the entire debt causing excessive burden on them.
(ii) Limited Resources Partnership firms usually do not operate on a large scale as there is a restriction on the number of partners and hence, contribution in terms of capital investment remains insufficient for business expansion beyond a point.
(iii) Conflicts Decision making authority in a partnership is shared by all the partners. Difference in opinion may thus lead to conflicts between partners. Decisions of one partner are binding on other partners and a wrong decision by one may result in financial problem for all others. If a partner decides to leave the firm due to conflicts, this can result in termination of partnership as there is a restriction on transfer of ownership.
(iv) Lack of Continuity Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity if the remaining partners do no enter into a fresh agreement to continue the business.
(v) Low Public Confidence Due to lack of transparency in the business of a partnership firm, the confidence of the public in partnership firms is generally low. It is difficult for the public to ascertain the true financial status of a partnership firm as it is not legally required to publish its financial reports or make other related information public.