Merits and Demerits of Partnership firm?

Introduction: - Partnership firm comes to existence because of limitations and failures of the sole proprietorship mainly due to limited finance and managerial skill. A business owned and managed by more than one person where the entire owners share in the profits and losses of the business as well as the liability is called a partnership firm. The owners are partners and the organization is called a firm. This form of organization is governed by the Indian Partnership Act 1932.
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Definition: - “Partnership is the relation between the persons who have agreed to share the profits of a business carried on by all or any one of them acting for all”   (Section 4 of the Indian Partnership Ac 1932)

Merits of Partnership Firm are as Follows:

1.       More Financial Resources: -Since more than one person is contributing resources the capital of the firm is larger than a sole proprietorship. One of the most important reasons for formation of a partnership firm is to have more capital. Moreover, new partners may be admitted if the business is to be expanded.

2.       More Manpower Resources: -The skills and abilities of all the partners are combined to run the business. There can be higher degree or division of labour and specialization. As a result, the business can be conducted more efficiently.

3.       Easy Formation: -There is no need to fulfill many legal formalities for the establishment of partnership. Only written agreement is necessary to start any lawful business on partnership basis. Registration of partnership is compulsory in Maharashtra from April 1985.

4.       Simple Dissolution: -The procedure involved in dissolution of partnership firm is also simple. Partnership at will gets dissolved when a partner serves a 14 day's notice to other partners. A particular partnership gets dissolved on completion of the specified venture or period for which it was formed.

5.       Rational Decisions: -Since every partner bears unlimited liability and is at risk for losses, the partners are very cautious and very careful. Each one contributes to his fullest and keeps a check on the other partners to try to minimize the wastage. The decisions taken are based in the consultations among all the partners.

6.       Secrecy: -Partnership firms are not required to publish their annual accounts like profit and loss account and balance sheet. Therefore, the third parties including competitors cannot take undue advantage of the inner information of the firm.

7.       Personal Contacts: -Partnership firms, business can maintain personal contacts with customers and supply them goods and services as per their needs and requirements. This helps in customer's satisfaction and the firm earns goodwill in the market similarly good relations can be maintained with employees.

8.       Division of Risk: -In sole trading concern all the responsibilities and risks belong concerns to the sole trader, but in partnership firms risk is divided among all the partners.

9.       Flexible organization: -There is no strict rule on the management of business; changes can be brought in the terms and conditions of the partnership deed easily. Moreover the business activities can be expanded or curtailed or diversified as pre the changing business circumstances easily and quickly.


Demerits of Partnership firm are as Follows:

1.       Unlimited Liability: -In general partnership the liability of partners is unlimited, joint and several. If the business assets are not sufficient to pay off the third party liabilities of the firm even the personal property of partners can be used for the purpose.

2.       Limited Resources: -The upper limit of partner in a firm conducting banking business is 10 and non banking business is 20, so the financial resources remain confined to the capital of the partner and their capacity to raise loans. At the time of expansion of business financial resources prove to be insufficient. Due to limited number of partners, a partnership firm can have limited financial and managerial resources.

3.       Disputes Among Partners: -There can be constant conflicts and disputes among partners. Some partners prefer working for self interest at the cost of the interest of the firm. Partners often put the blame on other partners for wrong decisions. The mutual conflicts and lack of team spirit among partners may lead to loss of reputation and finally to dissolution of the firm.

4.       Risk of Implied (indirect) Authority: -Each partner works in two capacities as a principal and as an agent. Every partner has an authority to act on behalf of the firm i.e. any partner can enter into contracts with third parties. A wrong decision of a single partner may lead to have losses and due to unlimited liability, all partners will have to make those losses good.

5.       No Separate Legal Status: -The Indian Partnership Act 1932 does not give an independent legal status to partnership firms distinct from the partners.



6.       No Succession: -Not being a legal entity the firm is dependent on the mutual undertaking of the partners and the death or insolvency of the partners can lead to an end of the firm. If all the partners except one dies, retires, becomes insane or insolvent, the partnership is compulsorily dissolved.