Sole proprietorship suffers from limited resources, hasty decisions and temporary existence etc. As remedy, partnership emerged as a form of business organization.
Partnership as such is an agreement between two or more persons to carry on business with profit motive, carried on by all or any one of them acting for all.
Features of Partnership
The essential features and characteristics of a partnership are:
1. Agreement: The partnership arises out of an agreement between two or more persons.
2. Profit sharing: There should be an agreement among the partners to share the profits of the business.
3. Lawful business: The business to be carried on by a partnership must always be lawful.
4. Membership: There must be at least two persons to form a partnership. The maximum number is 20. But in case of banking business the maximum is 10 members.
5. Unlimited liability: The liability of every partner is unlimited, joint and several.
6. Principal-agent relationship: Every partner is an agent of the firm. He can act on behalf of the firm. He is responsible for his own acts and also for the acts done on behalf of the other partners.
7. Collective management: The firm and the partners are one. When a contract is made in the name of the firm all the partners are responsible for it individually and collectively.
8. Non-transferability of shares: A partner cannot transfer his share of interest to others without the consent of the other partners.
Advantages of Partnership
The following are the advantages of partnership business:
1. Easy to form: A partnership firm can be formed without any legal formalities and expenses. Even if the fum is to be registered, the expenses are not much compared to company form of organization.
2. Access to more capital: A firm consists of more than one person. Therefore it can secure more capital from combined resources.
3. Skill and talent: Talented persons may be taken as partners. More skill and talent will be available..
4. Division of labor: Division of labor can be introduced which increases the efficiency in the management. One partner may take care of purchases, another sales, a third accounts and so on.
5. Contact with customers: All the partners in a firm may take part in the management of the business. So, they get in touch with the customers during the course of the business. It enables them to study the tastes and needs of the customers.
6. Borrowing capacity: The creditors will lend Loans not only on the basis of the firm’s assets but also based on the personal properties of the partners. So the borrowing capacity of a firm is more.
7. Incentive to work hard: Every partner is liable for the debts of the firm. Also every partner has a share in the profits. This makes them to work hard for the success of the business.
8. Expansion of business: Due to the availability of sufficient finance and skill the business can be expanded very easily.
9. Wise decisions: In partnership, decisions are taken with the consultation of all the partners. So naturally the decisions are wiser and more beneficial.
10. Co-operation between partners: The partnership enables partners to provide mutual help to each other. Partners behave as members in a joint family.
11. Flexibility: Changes in the business can be adopted easily. There are no legal restrictions.
12. Economy in operation: If there is co-operation among the partners the firm can be run efficiently. A good number of economies in management can be derived.
13. Division of risks: All losses and risks of the business are shared by all the partners. So risky ventures can also be taken up.
14. Maintenance of secrets: Business secrets can be maintained easily if the number of partners in a firm are limited.
15. Incidence of tax: Compared with company form of organization the tax payable on the incomes of the partners will be less.
Disadvantages of Partnership
The following are the disadvantages of a partnership firm:
1. Division of responsibility: In a partnership the management is divided. As such responsibilities are also divided. Every partner might try to shift the burden on to the shoulders of others; finally none takes the responsibility properly.
2. Delay in decisions: Sometimes the partners may not agree with one another in taking decisions. As a result partners will not be in a position to take quick decisions.
3. Lack of continuity: A partnership gets dissolved on the death, insolvency, insanity or retirement of any partner. So, there is no guarantee for the continuity of the firm.
4. No transferability of share: In a firm the partner cannot transfer his share of interest to others without the consent of the other partners.
5. Lack of secrecy: It may not be possible to maintain secrecy in partnership because of the number of partners.
6. Unlimited liability: The creditors of a firm can recover their loan amounts from the personal properties of the partners when the firm’s sources are not enough. Therefore the personal properties of the partners are not safe..
7. Joint and several liability: Every partner is jointly and separately liable for the firm’s debts. In case of insolvency of partners, the solvent partners have to pay the debts of the insolvent partners also.
8. Internal conflicts: Differences and disputes among the partners are very common. These conflicts harm the firm as a whole.
9. Misuse of assets: The partners may use the assets of the firm for their personal purposes. Misuse of assets is harmful to business interests.
10. Lack of public confidence: A partnership firm is purely a private organization. It is not controlled or regulated by the Government. As such public may not have confidence in the firm.