Advantages and Disadvantages of Partnership Firm

A 'partnership firm' is a popular legal structure in which two people join forces to operate a company for profit. They decide to share the business's responsibilities and profits and losses. All of the qualities and facets of the partnership are governed by the Indian Partnership Act of 1932.

Depending on their objectives and company concepts, various business forms will be appropriate for various individuals.

Here, we will discuss the advantages & disadvantages of a partnership firm:

Advantages of Partnership

• Easy Formation

Creating any partnership firm was fairly simple. The establishment of a partnership business does not involve many legal formalities. The company does not have to be registered. An oral or written deed is required to establish a partnership firm. Only a few states in India need the registration of partnership firms. In certain states, you merely need to complete a partnership deed; registration is not necessary.

• Sharing of risk

One of the partnership firm's most important benefits is that the risk is distributed evenly among all the partners. A partnership has numerous partners, which helps to balance the risk.

• Utilization of Skills

All partners in a partnership firm participate in the company's management. This uses each partner's diverse skill sets while business administration activities.

• No Annual Returns

A yearly return is not required to be filed with the Ministry of Corporate Affairs. If we compare a partnership firm to an LLP, the limited liability partnership requires us to satisfy several compliance requirements, while the partnership firm does not need us to file an annual return with the Ministry of Corporate Affairs.

• Division of work

Work can be divided among partners based on their abilities and talents. This allows the company to expand swiftly.

• Winding up

In a partnership business, dissolving the partnership is a pretty straightforward process. A partnership firm's partners may engage in a dissolution deed at any moment or add a clause to the deed providing for its winding up. The process for dissolving a partnership business is noticeably less formal. Closing a Private Limited Company requires waiting a full year. All year long, you have to remain current with all compliance requirements. And closing a corporation takes more than a year. Dissolution is a relatively simple way to end a partnership.

• Quick Decision

A partnership business can make decisions quicker because there is no idea of resolutions being passed. In most circumstances, the partners in a partnership firm can act on behalf of the partnership firm without the other partners' permission, and they have a wide variety of capabilities.

• Raising of Fund

A partnership firm may raise money more easily than a sole proprietorship. The contribution of the partners is more realistic when there are more partners. In addition, banks look favorably towards a partnership when approving credit facilities as opposed to a proprietorship firm.

• Sharing of Profit and Loss

Each partner in a partnership business receives an equal share of all profits and losses, according to any predetermined ratio. They split it evenly among themselves if it is not given.

• Privacy

The partners can keep the commercial dealings private by the partners in contrast to a limited company. In contrast, a limited company's shareholders can view different registers and papers the firm must preserve, and certain records are open for public inspection at Companies House.

• More resources

Because there are more members in a partnership firm than in a sole proprietorship, it has more business resources.

• Convert to Private Limited

You can change even if you initially started as a partnership. There are precise procedures for converting to a private limited company or any other sort of business entity. Therefore, you may convert your firm if it expands and require the advantages of private limited businesses, such as restricted liability or the potential to attract investors.

• No Compliance

You don't want to start your business burdened with compliance; you want to concentrate on your company. Unless you engage someone to handle things for you, there will always be something getting in the way of a private limited corporation. You avoid this headache when you establish a partnership firm.

• Safety

Each partner's interests are protected from any potential fraud in a partnership.

However, not everything is rosy in the world of partnerships since there are also some negative aspects.

Disadvantages of Partnership

• Absence of harmony

The partnership agreement specifies that each partner has an equal number of rights. When there is a disagreement between one or both partners, mistrust and conflict may grow.

• Unlimited Liability

Each member in a partnership firm is individually responsible for the business's losses. Each partner will be personally responsible for the debts that one of the partners in the partnership firm causes.

• Hard to trust

When it comes to trust, you should know that a partnership business does not need to be registered. Therefore, this firm's structure is not necessary. Additionally, the company does not have to publish its financial statements due to the absence of governmental oversight. It is now very difficult to win anyone's faith, especially the public, for something that even seems aimless.

• Uncertainty

A partnership firm is used to do business, which makes it exceedingly unstable and unclear. This is because the partnership is instantly dissolved when one of the partners passes away, becomes bankrupt, or retires.

• No Central Authority

All partners are joint proprietors and enjoy complete management authority. There is no single authority that controls all partners. As a result, bringing them together is challenging.

• Lack of public scrutiny

There is no public scrutiny of the revenue a business makes since it is not required for all partnership firms to be subject to audits. The public is left with doubts about the company's creditworthiness.

• Lack of Leadership

Leadership is absent in managing the firm's operations since all partners in a company are on equal ground and share the same responsibilities.

• Limited partners

The maximum permitted number of partners to create a business is fifty, as set down in the law. However, there can be two hundred stockholders in a private business.

• Interest Transferability Restrictions

Without the approval of all partners, a partner cannot transfer his ownership stake in the partnership to a third party. Additionally, a partner is not permitted to bring any new partners without the approval of the other partners. This demonstrates that the transfer of an interest is restricted.

• Absence of legal status

The Indian Partnership Act of 1932 does not grant the partnership its distinct legal existence. There is no distinction between a partnership company and its partners because registration is not required, except in some states.

• Blocking of Capital

Partners cannot act alone if they want to withdraw their money from the company. Withdrawal is only possible with the other partners' consent. They thus lose their investment's liquidity. These are among the main factors deterring individuals from entering a partnership.

• Difficulty in decision making

Before choosing a partnership firm, all partners must agree. Every choice, no matter how big or little, needs to be approved by all partners. Additionally, decisions about policy-making require the consent of all partners. Because of this, the partners cannot make quick or spontaneous choices for the company.

• Mutual differences

Each partner knows the partnership company's specifics, documents, and trade secrets. Information about the company is likely to leak if there is a quarrel between the partners. The partners could disclose their company's trade secrets to competing firms.

• Sudden Dissolution

A partnership firm would be dissolved if a partner died or became bankrupt. A firm will suffer as a result of such a sudden breakup. However, the demise of a partner does not immediately dissolve an LLP. As a result, an LLP maintains company continuity.

The Conclusion

In conclusion, creating a partnership firm to do business offers both numerous benefits and drawbacks. In comparison to businesses, partnership firms are subject to fewer rules. Due to this, managing a partnership firm is far simpler than running a business. However, a business handled by a partnership firm is more unpredictable than a business operated by a company since it lacks a unique identity.