Define Partnership firm? Explain its merits and demerits?
Meaning: - Partnership is a voluntary association of two or more people who contributes skill and time for carrying on a lawful business for their benefits. It is the second stage in the evaluation of commercial organization. It comes into existence under the partnership act 1932. The liability of the partner is joint several and unlimited.
The merits of partnership firm’s points are explained briefly as under
- Easy formation
- Business Secrecy
- Limited Government control
- large capital
- Flexibility in operation
- Easy dissolution
- Effort-Reward Relationship
1. Easy formation: -The formation of a Partnership is quite easy, less expensive and does not involve any legal formalities. An oral or written agreement is sufficient to start partnership.
2. Business Secrecy: -Business Secrecy can be maintained because the annual accounts are not required to be published. Business secrets are known to partners only. Hence, there is a chance of maintaining maximum business secrecy.
3. Limited Government control: -Partnership is based on mutual trust, confidence and co-operation, registration is not compulsory. There fore interference from government in partnership business is limited.
4. Large capital: -Partnership is an association of several persons. Large amount of capital can be raised through large number of partners; as compared to sole trader the partners can collect or generate huge funds from their savings and borrowings from their friends, relatives and also by the way of loans from banks.
5. Flexibility in operation: -The working of a partnership firm is flexible there are no statutory restrictions on the management of business. Partners are allowed to bring about change this brings about operational flexibility.
6. Easy dissolution: -Like formation dissolution of partnership is also easy. Events like death, insolvency and insanity of a partner are some of the reason for dissolution.
7. Effort-Reward Relationship: -There is often a direct relationship between efforts and rewards. Each and every partner puts in best efforts and the rewards are shared among themselves. The active partners may get a higher share in profits as compared to dormant partners.
The Demerits of partnership firm’s points are explained briefly as under:
1. Limited Membership: -There is a limit to the number of partners in a partnership firm. A maximum of 10members can run a banking business and a maximum of 20 members are permitted in case of an ordinary partnership.
2. Unlimited Liability: -The liability of the partners is joint, several and unlimited. It means partners will be held responsible to pay off debts and obligations of the firm even out of their private estate.
3. Lack of Stability: -A partnership firm lacks stability. The life of partnership is affected by events like retirement, death and insolvency of the partners.
4. Problem of Continued Existence: -There is a problem of continued existence. Initially partners are united and the relations are friendly but with the passage of time, conflicts, misunderstanding, are commonly affected which lead to dissolution of partnership firm.
5. Lack of Public Confidence: -A partnership firm is not required to publish final accounts, sales returns etc.due to this; public confidence is limited towards this type of partnership firm. Ans as such, public may not lend money to partnership firm
6. Difficulty in admitting new partner: -There is often a difficulty in admitting new partners. This is because, some of the partners may object to such admission. Secondly, because of the restriction on the maximum number of partners, imposed by the Indian partnership Act, 1932.
7. Difficulty in Transfer of shares: -The Partners cannot easily transfer share or interest to an outside party. Prior consent is required to be obtained from all other partners. Often the other partners do not allow for such transfer of interest to an outside party.