Advantages and Disadvantages of Partnership Firm

Subject: Business Studies

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Overview

A partnership form can be started by making the agreement between partners and registration concern department of Nepal government. This business does not require complex legal procedures for an establishment.

Advantages and Disadvantages of Partnership Firm

Advantages of Partnership Firms

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Source: www.slideshare.net
  1. Prompt Decision:
    As the partners are directly involved in business activity, they are always available for decision making. Because of this, the partnership firm has higher chances of getting the prompt decision. This could be much more beneficial for the emergency situation.

  2. Facility of loan:
    As a partnership firm is established by two or more than two people i.e. the size of the partnership is comparatively large. The goodwill and reputation are also high, because of this, a partnership firm has a large source of the loan. It can generate sufficient money for expansion and growth.

  3. Easy to start
    A partnership firm can be started by making the agreement between partners and concerned department of Nepal Government. This business does not require complex legal procedures for an establishment.

  4. Sufficient Capital:
    In comparison to sole trading concern, the partnership can generate sufficient capital for business. Different partners have a different source of money. Because of this, the partnership can generate a large sum of money for its establishment, growth and its expansion.

  5. Incentives to work:
    In a partnership business, the partners are directly or indirectly involved in business activities. That partner who has directly or actively been involved in business will get salary as well as share in profit. Therefore, a hardworking partner will get the incentives in form of profit share.

  6. Effective Management:
    The works and responsibilities of partnership firms are divided among the partners. Different partners are allocated with different work responsibility. This helps to bring effectiveness in the management of the business of an organization.

  7. Flexibility:
    Partnership business is more flexible than sole trading concern because the business can be easily financed for growth and expansion. On the other hand, partners may go out or come into business but the partnership business is not affected.

  8. Secrecy:
    In the partnership, there is no legal obligation to partners to publish its financial information, if the partners intend to keep the information secret. It is possible to maintain the secrecy of the information.

  9. Equal rights of partners:
    The concept of minority and majority is not allowed in partnership. All the partners have an equal right to participate in decision-making and involve in business activity. The concept of share is applied only in profit distribution.

  10. Easy to dissolve:
    A partnership business can be dissolved after making the agreement between partners regarding the dissolution of a business. The dissolution of the partnership firm does not require any complex legal proceedings.

Disadvantages of Partnership

Source: www.slideshare.net
Source: www.slideshare.net
  1. Limited Capital:
    As the partnership business is established and managed by a few partners, it has less chance of accumulating a large amount of capital. In comparison to the joint stock company, the partnership has less capital.

  2. Unlimited liability:
    The liability of the partnership firm is not limited to the property of a business. It means the partners are required to sell their personal property in case of more debt over the property of a business.

  3. Difficult to transfer share:
    The share of the partnership firm is only transferable after the agreement of the partners. A partner wishing to sell the share of a partnership must get consensus before selling it. Therefore, it has difficulty in share.

  4. Uncertain existence:
    A partnership business may face dissolution in case of death, insolvency or mental or physical illness of active partners. The partnership of business could be shut down by the partner after making the agreement between them. Therefore, it has an uncertain existence.

  5. Lack of public faith:
    Since the partnership business has limited sizes, non-existence in the eye of the law, it has less public faith. The public doesn’t believe in partnership business as much as the joint stock company because it has difficulty in both expansion and growth.

  6. Problem of dispute:
    Even though the partnership business firm is formed by the agreement of partners, the partners may not agree all the time. The partners may disagree regarding the profit and use of authority. This dispute between partners may create a problem in the existence of a business.

  7. Lack of prompt decision:
    The partners are required to build consequences before making any decision in the partnership business. For this, all the partners must be together to discuss the matter of business. It takes a long time and brings delay in decision making.

  8. Risk of implied authority:
    In partnership business, active partners are authorized to make a decision on behalf of a business or other partners. There is no certainty that active partners will make a decision for the betterment of the business. There is a risk that active partners may take a decision on personal benefits. Therefore, a partnership has the risk of implied authority.

 

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References:

Khanal, Soma Raj, Surendra Thapa Aslami and Sitaram Dhakal. Business Studies. Kathmandu: Taleju Prakashan, 2067.

Pant, Prem R., et al. Business Studies. Kathmandu: Buddha Academic Publishers and Distributors Pvt. Ltd., 2010.

 

 

Things to remember

Advantage of Partnership Firms

  1. Easy to get loan
  2. Insufficient Capital
  3. Incentive to work
  4. Effective Management
  5. Facility of loan
  6. Flexibility
  7. Secrecy
  8. Prompt decision
  9. Equal right of partners
  10. Easy to dissolve

Disadvantages of Partnership

  1. Limited capital
  2. Unlimited liability
  3. Difficult to transfer share
  4. Uncertain existence
  5. Lack of public faith
  6. Problems of dispute
  7. Lack of prompt decision
  8. Disk of implied authority
  • It includes every relationship which established among the people.
  • There can be more than one community in a society. Community smaller than society.
  • It is a network of social relationships which cannot see or touched.
  • common interests and common objectives are not necessary for society.
Questions and Answers

The advantages of partnership are:

  • Easy to get loan
  • Insufficient Capital
  • Incentive to work
  • Effective Management
  • Facility of loan
  • Flexibility
  • Secrecy
  • Prompt decision
  • Equal right of partners
  • Easy to dissolve

The disadvantages of partnership are:

  • Limited capital
  • Unlimited liability
  • Difficult to transfer share
  • Uncertain existence
  • Lack of public faith
  • Problems of dispute
  • Lack of prompt decision
  • Disk of implied authority

The advantages of partnership firm are described below:

  • Easy to start:
    A partnership form can be started by making the agreement between partners and registration concern department of Nepal government It is not needed to get  firm registered. 

  • Sufficient capital:
    A partnership can collect a large number of capital than a sole trading concern. Different partners have the different source of money. Because of this partnership can generate too large some of the money for its establishment of growth and its expansion.

  • Effective supervision:
    In partnership business, the partners are directly or indirectly involve in business activities. Besides, there is division of work and specialization among partners. Therefore, a hardworking partner will get the incentive in the form of profit share.

  • Effective management:
    The works and responsibilities of partnership forms are divided among the partners. Different partners are allocated different work responsibility. This helps to bring effectiveness in the management of the business of an organization.

  • Flexibility:
    Like, a sole proprietorship, the partnership firm also enjoys the freedom from legal restrictions on its activities. On the other hand, partners may go out are come into business but the partnership business is not affected.

  • Secrecy:
    In a partnership, the partners themselves manage the affairs of the business. There is no legal obligation to partners to publish its finance information. If the partners intend to keep information secret. It is possible to maintain information secret.

     

  • Prompt Decision:
    As the partners are directly involved in business activity, they are readily available for decision making. Because of this partnership, a form has higher chances of getting the prompt decision. This could be much more beneficial for the emergency situation.

  • Equal rights of partners:
    The concept of minority and majority is not allowed in partnership. All the partners have equal rights to participate in decision-making and involve in business activity. The concept of share is applied only in profit distribution.

     

  • Easy to dissolve:
    A partnership business can be dissolved after making the agreement between partners regarding the dissolution of a business. The dissolution of partners does not require any complex legal procedure.

The disadvantages of partnership firm are described below:

  • Limited capital:
    Due to restriction on the  maximum number of members, a limited capital can be raised. As the partnership business is established and managed by few partners it has less chance of accumulating a large amount of capital. In comparison to the joint stock, company partnership has less capital.


  • Unlimited liability:
    Liability of every partner in a partnership is unlimited as any of the partners called upon to pay all the debts even from  its personal properties.

     
  • Difficult to transfer share:
    The share of the partnership is only transferable after the agreement of own partners. A partner wishing to sell the share of a partnership must get consequences before selling it.Therefore, it has difficulty in share.


  • Uncertain existence:
    A partnership is not a permanent form of business organisation. A partnership business may face dissolution in case of death insolvency or mental or physical illness of active partners. The partnership of business could be shut down by the partner after making the agreement between them. Therefore, it has uncertain existence.


  • Lack of public faith:
    A partnership firm is not required to publish its accounts and financial statements. The partnership business has limited sizes non-existence in the eye of the law, it has less public faith. 

     

  • Problem of dispute:
    Even though partnership business form is firm by the agreement of partners the partners may not agree all the time. The partners may disagree (dispute) regarding dispute of profit/use of authority. This dispute between partners
    may create a problem in existence of business.

  • Lack of prompt decision:
    In a partnership, prompt decisions cannot be taken. The partners are required to build consequences before making any decision in the partnership business. For this, all the partners must be together to discuss the matter of business. Business opportunities may be missed.

  • Risk of implied authority:

    In partnership business, active partners authorised to make a decision on behalf of business other partners. There is no certainty that active partners will make a decision for the betterment of the business. There is a risk that active partners may take a decision on personal benefits. Therefore, a partnership has the risk of implied authority.

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