What is the Pros and Cons of a Partnership?

Introduction 

When we look up the pros and cons of a partnership, we should also know that it is an easy way to form new business and run any existing business. A partnership is one type of document between two or more than one person. Here in partnership, the agreed person who wants to be involved in the firm business prepares the agreement known as a partnership deed.

What is a Partnership Deed?

The partnership deed is one kind of document that is stat 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. That 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 that misconduct.

Through the partnership deed, the firm’s partner can easily decide their share and the ratio of profit and loss in the firm’s business. The Indian Partnership Act,1932, has described some rules and regulations related to the partnership firm and a firm partner. That rules protect the rights of partners of the firm. 

Now, after understanding of 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 other than 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 formating 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 into the partnership deed.

Getting more flexibility:

Here, there is more flexibility in a partnership firm business, such as the formation of the firm, easy registration, diversity of working process, easy to manage business operations, etc. Also, it has fewer legal formalities; there are no hard and fast rules from the government’s side. The firm’s partners can easily make any changes whether they are required.

The firm partners are enabled to resize the business, capital, business structure as per their required without covering any lengthy and mandatory legal formalities. 

Minimum risk factor:

We know that there is a minimum of two or more members becoming partners in the partnership firm. That’s why they decide the terms, conditions, profit, and losses with mutual understanding and as per their desire. Here, in that case, the risk is also divided between them that may be smaller. That’s why they always feel less burden, enabling them to take more risky business actions with excellent profitability.

Diversity of business management with skills and knowledge:

Through the partnership firm, the business 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 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: 

Privacy is the most crucial factor of every business. If we are talking about partnership business, there is no requirement to publish books accounts. That’s how the affairs the firm takes can be put in secret by the partners. On the other hand, there is necessary to publish certain documents for a company. In a partnership firm, every business task is done by the partners who play an active part in the management. So there is no chance to declare their task that can be kept secret.

Good for decision making:

Good decision-making is a crucial part of every business. That’s the reason some companies may suffer unexpected losses by making wrong choices. In a partnership firm, that can be quickly sorted out because more than one partner can play an active role in business management. That may help them reduce risk and give better options for any problem. More so, the partners have more power to decide on the firm’s behalf. They can undertake any transaction on behalf of a firm without taking consent from other firm partners. 

The easy way for expansion scope:

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 they can also arrange by borrowing funds from borrowers. Also, the partners have versatile, practical, and professional managerial skills that can be helped for 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, 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 consents of other partners, that can be easy to dissolve the firm if we talk about some of the other instances when any partner becomes insolvent, lunacy, or death it can be dissolved on that basis. 

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:

In the partnership business, there is no individual legal status of the firm. It does not exist on its legal status from the partners. That way, if there are no terms mentioned in the partnership deed, it can be dissolved when the death or resignation of one partner.

Partner can not take an individual decision as own business:

In a proprietorship business, there is a possibility that the business owner can make his own decision of 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 conflict while making an important decision of 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 from the business. 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 decide to sell his part from the partnership firm, he must take the consent of the other partners of the firm. Some partnership models do not include the terms and conditions that legal heirs of death partners can automatically transfer the partnership rights. Those difficulties become the disadvantages of the partnership business. 

Unlimited liability of the partners:

As we discussed above, the partnership business’s lack of individual legal status makes the partners personally responsible for the profits and loss. Unlike the limited company, if the partnership business suffered loss, the firm’s partners are personally liable for that. All partners are directly or indirectly connected with the firm business. That’s the reason if due to misconduct of one partner, the firm is getting lost in the business. The other partners are also liable to bear that loss. Sometimes that 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.

Sometimes, the 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 can often see that the partnership business decision-making process might be slower than proprietary firms. The managing partner has to discuss and consult with the other partner in the partnership business. Naturally, it takes time to discuss and negotiate with them. Sometimes it happens that good opportunities can be missed out 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 the profit of the partnership. Moreover, the individual tax rate may be higher than the company’s tax rate. That way, the partnership business can not get taxation benefits like a private limited company. The private limited company has opportunities for tax planning 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 formations; however, it also has some advantages and disadvantages that we should be considered before entering into the partnership business. 

Also read: Why does a firm seek reconstitution of partnership? (know the Modes, Types with FAQ)

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