question_answer

Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

Answer:

Ans.     Partnership is considered by some to be relatively unpopular form of business ownership because:

(i) Uncertainty of duration: A partnership suffers from a possible limited span of life. Legally, a partnership firm must be dissolved on the retirement, death, bankruptcy, or lunacy of any partner or demanded by any partner. The probability of any one of these events occurring when the number of partners is much greater than in the case of a sole proprietor.

(ii) Risks of additional liability: It is true that like the sole proprietor, each partner has unlimited liability. But his liability may arise not only from his own acts, but also from the acts and mistakes of co-partners over whom he has no control.

(iii) Lack of harmony: The old saying that "too many cooks spoil the broth" can be apt for a business partnership. Harmony may be difficult to achieve, especially when there are many partners. Lack of centralized authority and conflicts in policy can disrupt the organization.

(iv) Difficulty in withdrawing investment: Investment in a partnership can be simple, but its withdrawal may be difficult or costly when this aspect is considered from the point of view of individual partners. This is so because no partner can withdraw his interest from the firm without the consent of all partners.

(v) Lack of public confidence: A partnership may suffer from lack of public confidence because, like that of a company there is no legal mechanism to enforce the registration of a partnership firm and the disclosure of its affairs.

(vi) Limited resources: A partnership is good as it can be started with limited capital. However, it becomes a handicap in the growth and expansion phases of the business. There is a limit beyond which it is almost impossible for partners to collect capital. This limit is generally up to the personal properties of the partners.

(vii) Unlimited liability: Unlimited liability discourages partners to undertake risky ventures, and therefore, their risk - taking initiative is very risky.

Merits of Partnership

1. It is easy to set up.

2. It has more capital, which can be brought into the business.

3. Partners brings new skills and ideas to a business.

4. Decision-making can be much easier with more brains to think about a problem.

5. Partners share responsibilities and duties of the business.

6. Division of labour is possible as partners may have different skills.

Limitations of Partnership

1. There is an unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell off their personal belongings.

2. Disagreement among the partners can lead to problems for the business.

3. There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.

4. There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.