Lawblog4u
Introduction
When we look up the pros and cons of a partnership, we should also know that it is an easy way to form a new business and run any existing business. A partnership is one type of document between two or more than one person. Here, persons who want to be involved in the firm business prepare the agreement, known as a partnership deed.
What is a Partnership Deed?
The partnership deed is one document that states the rules and regulations between the parties of that agreement. Through the deed of partnership, every partner of the partnership firm could regulate their business operations. This deed is also legally binding to the parties of an agreement.
Every partner of the partnership firm knows the rights and duties of the partnership firm. If any partner does wrong, other partners have the legal right to accrue him for his misconduct.
Through the partnership deed, the firm’s partner can easily decide the profit-sharing ratio of the firm’s business. The Indian Partnership Act of 1932 has described some rules and regulations related to the partnership firm and a firm partner. Those rules protect the rights of the partners of the firm.
Now, after understanding the partnership deed, we should know it has some advantages and disadvantages of partnership which are given below;
Pros of a Partnership
Many advantages can be described of partnership. Here some of the main pros are given below;
Easy to form:
Forming a partnership is easy compared to a private limited company or a public limited company. However, it requires some legal formalities necessary for building up a partnership. If we talk about the registration of a partnership, there is no mandatory requirement to register while forming a new partnership business. But, some of the benefits can be acquired through the registration of a partnership. Otherwise, the firm’s partners can start their business after entering the partnership deed and without making it registration.
Getting more flexibility:
Here, there is more flexibility in a partnership firm business, such as easy formation, easy registration, diversity of working process, easy-to-manage business operations, etc. Also, it has fewer legal formalities, but there are no hard and fast rules. The firm’s partners can easily make any changes whether they are required.
The firm partners can easily resize the business, capital, and structure according to their requirements without covering any lengthy and mandatory legal formalities.
Minimum risk factor:
We know there is a mandatory requirement for the partnership to have two or more members becoming partners in the partnership firm. They decide the terms, conditions, profit, and losses with mutual understanding and desire. Here, in that case, the risk is divided between them in smaller. That’s why they always feel less burdened, enabling them to take more risky business actions with excellent profitability.
Diversity of business management with skills and knowledge:
Through the partnership firm, management can be diverted with versatile expert members. That’s why whole responsibilities can not lie on a single person. But, they can be divided among the firm’s other partners. As a result, the firm can maintain the management with expert skills partners and utilize them in the business operation.
The firm can divide business functionalities between partners. That way, the responsibility of each partner is lesser for managing a business.
Privacy of business strategies:
The firm does not need to publish book accounts, and the operations can be put in secret. On the other hand, it is necessary to publish certain documents for a company. In a partnership firm, every business task is done by the active partners in the management. So there is no chance to declare their task, which can be kept secret.
Good for decision-making:
Good decision-making is a crucial part of every business. That’s why some companies may suffer unexpected losses by making wrong choices. A partnership firm can quickly sort out that problem because more than one partner can play an active role in business management. That may help them reduce risk and give better options. Partners have more power to decide on the firm’s behalf. They can undertake any transaction on behalf of a firm without obtaining consent from other partners.
The easy way to expand:
The partnership business has an excellent opportunity to expand the firm’s business. It is easy because the firm partners can contribute or manage more funds and arrange by borrowing funds from borrowers. Also, the partners know to have versatile, practical, and professional managerial skills that can help in the expansion of the firm’s business.
Benefits of the division of work:
There is a good chance for work division among the partners in the partnership firm. That can be divided into various factors based on their work abilities, skills, experience, and expertise. As a result, it converts sound management systems, enabling them to get more profits.
The easy way for dissolution:
There is no complicated legal procedure required for the dissolution of the partnership. In some cases, according to the mutual understanding and consent of other partners, that can be easy to dissolve the firm. If we talk about other examples, when any partner becomes insolvent, lunacy, or dead, it can be dissolved.
Cons of a Partnership
After all, when we consider the many advantages of partnership, we should also be aware that it has some disadvantages, which are given below;
No independent legal status of business:
The partnership business has no individual legal status of the firm. It does not exist on its legal status from the partners. It can be dissolved when the death or resignation of one partner If there is no term mentioned in the partnership deed.
Partner can not make an individual decision as own business:
In a proprietorship business, there is a possibility that the business owner can make his own decisions about the business. But in the partnership, a firm partner can not make that without consideration of other partners. It happens because, in a partnership, a partner is not the business’s sole owner. Other partners are also co-owners. Those also have the right to participate in the firm’s business decision-making. Sometimes, it becomes a conflict while making a significant decision in the partnership business.
Profits ratio share among the partners of the firm:
As we know, In the partnership business, there is a partner more than one. All partners contribute their affords, time, and money as per the firm’s partners’ understanding and terms and conditions. That’s why they also bear the cost of running the business, and they have the right to get profits. Unlike the proprietorship business, you can not claim the sole profits of the partnership business.
Difficult to sell the partnership business:
When the partner of the partnership firm wants to sell the firm’s business or his part, that can not be easy because partnership businesses are built based on trust.
If one partner wants to quit the business and decides to sell his part from the partnership firm, he must obtain the consent of the other partners of the firm. Some partnership models do not include the terms and conditions that legal heirs of dead partners can automatically transfer the partnership rights. Those difficulties become the disadvantages of the partnership business.
Unlimited liability of the partners:
As discussed above, the partnership business’s lack of individual legal status makes the partners personally responsible for the profits and losses. Unlike the limited company, if the partnership business suffers a loss, the firm’s partners are personally liable for that. All partners are directly or indirectly connected with the firm business. That’s why if the misconduct of one partner, the firm gets lost, the other partners are also liable to bear that loss. Sometimes, those disadvantages create more trouble for the partners.
Limitation for raising more funds:
It is true that in the partnership business, the partners of the firm can contribute more funds. It is good, unlike the proprietorship business. However, sometimes it is more difficult for the firm to raise more funds, unlike the limited company.
However, Banks or other financial institutions hesitate to provide funds to the partnership business because no personal legal status occurs. That’s why they prefer private limited companies. The partnership business can not issue shares or securities like a private limited company.
Difficulties for decision-making of the business:
We often see that the partnership business decision-making process might be slower than firms. The managing partner discusses and consults with the other partner in the business, which takes too much time. Sometimes, it happens that good opportunities can be missed during that process.
Taxation count based on the individual:
Because a partnership has no personal legal status, that’s the way it does not pay income tax. Every partner’s tax rate can count as the profit of the partnership. Moreover, the individual tax rate may be higher than the company’s. That way, the partnership business can not get taxation benefits like a private limited company. The private limited company has opportunities for tax planning, but it is missing in a partnership business.
Conclusion
We can understand that any business model can not be fully accrued; it has pros and cons. The partnership business model is easy to form; however, it also has some advantages and disadvantages that we should consider before entering into the partnership business.
Also read: Why does a firm seek reconstitution of partnership? (know the Modes, Types with FAQ)
