What is Partnership? Advantages and Disadvantages

According to section 4 of the Partnership Act of 1932,”It can be defined as the relation between two or more persons who have agreed to share the profits of a business run by all or any one of them acting for all”. This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as – “Partnership is the relation which subsists between persons who have agreed to combine their property, labor, skill in some business, and to share the profits thereof between them”. The 1932 definition added the concept of mutual agency.

Meaning and Definition of Partnership

According to J.L. Hauson___” A partnership is a form of business in which two or more persons upto a maximum of twenty join together to undertake some form of business activity.

According to Kimball___”  A partnership or firm as it is often called is, then a group of men who have joined capital or services for the prosecuting of some enterprise”.

Partnership Advantages

  • More chance to procure more capital for the business
  • There is more chance have borrowing capacity
  • There is opportunity for income splitting, an advantage of particular importance due to resultant tax savings.
  • There is a wider pool of knowledge and skills
  • It’s easy to change your legal structure later if circumstances change.
  • Easy Formation.
  • More cooperation.

partnership advantages

Disadvantages

  • Limited Resources: It is very difficult for a single businessman to make more capital.
  • Instability: The partnership form of organisation may come to an abrupt end on the death, lunacy or insolvency of the partner. The partnership may also be closed if a single partner expresses his desire to dissolve the partnership or to get it dissolved by the order of court on account of wrongful act of one or more other partners. The lack of trust among the partners may lead to dissolution of the firm.
  • Lack of Public Faith: As the partnership concern is not subject to any regulation and no legal formation and functioning, the people have less faith in such organisation coupled with the fact that every now and then people listen to the dissolution of such partnership concerns. Moreover, people are note aware of the exact position of the business of the partnership, the reason is that the accounts of partnership concerns are not published.
  • Restricted Enterprise: As the unlimited liability covers even the private fortune of the partners, the partners are bound to be over cautious. This restricts enterprise. In fact, the liability of individual partner may be regarded as excessive for most purposes. Therefore, the partnership form of business organisation tends to be useful only for small scale business, such as retail trade, a modern sized mercantile house or a very small manufacturing business.
  • Restriction on Transfer of Interest: In partnership, no partner can transfer his interest to the third party. If he wants to do so, he will have to seek the consent of all the other partners. This restricts the liquidity of his investment. In case of a company, any shareholder can transfer his shares to the third party without the consent of other shareholders.
  • Loss to the Society: The abruptly closure of the firm is a loss not to the firm but also to the society as a whole because the society is deprived of its products and some workers become out of job.
  • Burden of Implied Authority: This may put heavy burden on the partners which may ruin the financial position of partners and may lead to the closure of the firm.
  • Liability after Retirement: In conclusion it can be said that the partnership form of organisation is suitable where the size of business is relatively small and the capital requirements are not high. This form of business organisation is most popular among lawyers, chartered accountants, doctors, solicitors and estate agents.