Advantages and Disadvantages of Partnership

A partnership business allows you to start a business with someone else without certain
formalities required for starting other businesses. On the other hand, because it has fewer legal
formalities, the public may have less faith in the business, resulting in the business’s downfall.

So, being aware of the advantages and disadvantages of a partnership business before starting the
business is very important. This article contains the advantages and disadvantages of the
partnership business for a better understanding and detailed analysis.

 Advantages of Partnership
 Disadvantages of Partnership
 Comparison Table for Advantages and Disadvantages of Partnership.
 FAQs on the Pros and Cons of Partnership

Advantages of Partnership

The partnership offers a lot of advantages, and some of the main benefits are discussed below:

1. Easier formation: It is straightforward to form a partnership business. It requires fewer

legal formalities, and the cost is also low. The registration of the firm is also not required
to create a partnership business. Only the partners should have an agreement between
them.
2. Flexibility: A partnership firm has minimum legal formalities and is also free from
government control. Hence, the partners can make changes in the firm according to their
preferences. They can make changes in the size of the capital, the size of the business, and
the management structure without any excess legal procedures. When it is necessary, the
partners can make decisions in the firm based on the external environment changes.
3. Risk sharing: A partnership firm usually has a lot of members. Since the members agree
to share profits and losses equally, the risk is also shared by all the members. As a result,
compared to a sole proprietor, the burden of risk on each partner is much lower. Due to
less load, the partners are motivated to take up riskier projects with higher profit margins.
4. Privacy: It is not required for a partnership firm to publish its accounts. As a result, the
affairs taking place in the business remain within the business. Also, the partners are the
ones who carry out the significant decisions of the business, and hence there is no chance
of leakage of trade secrets, and the privacy of the firm is maintained.
5. Division of work: In a partnership, all the firm’s work is divided among the partners based
on their knowledge and skills. Division of labor is possible in partnership. This division of
work leads to efficient management, which results in higher profits.
6. More expansion scope: A partnership has a more expansive scope than a sole
proprietorship business. In a partnership firm, the partners can arrange more considerable
funds from their capital and their borrowings. The partners also have good managerial
skills. Their organizational skills are also used for expansion and efficiency.
7. Easier dissolution: The dissolution of a partnership does not require any legal procedure.
Insolvency or lunacy, or the death of a partner, can result in the dissolution of the firm.
Therefore, it is easy and cheap to dissolve a partnership.
 

Disadvantages of Partnership

1. Unlimited liability: In a partnership business, the partners agree to share all the losses and
profits between them. The partners are also entitled to take responsibility for all the debts,
even if they are not their debts. The liability of all the partners is not limited. This is
usually a burden on the personal properties and finances of the partners.
2. Blocking of capital: If a partner wishes to withdraw their wealth from the firm, they
cannot do so alone. If the other partners agree to it, only then is withdrawal possible. The
partners are also not allowed to transfer their shares to someone else. If someone wants to
do so, then they must get the consent of the other partners. As a result, they lose the
liquidity of their investment. This is one of the significant reasons that discourage people
from investing in a partnership.
3. Uncertainty: A partnership business suffers from instability. Insanity, insolvency,
retirement, and the death of a partner may result in the sudden end of the business. Other
than the causes mentioned above, a partner can also notice the business’s dissolution to the
other partners. As a result of all these instabilities, it has become difficult to do long-range
planning and innovative ideas for business.
4. Lack of public trust: The public has less confidence in partnership firms since their
annual reports and accounts are not published. Therefore, the public does not trust their
dealings.
5. Difficulty in decision making: In a partnership business, the consent of every partner is
needed before making a decision. From minor to major, all decisions require the approval
of all partners. The acceptance of all partners is needed for policy-making choices as well.
As a result, the partners are unable to make spontaneous or quick decisions regarding the
firm.
6. Mutual differences: The details, records, and secrets of a partnership firm are known by
all the partners. If a mutual conflict arises among the partners, there is a high chance of
information leakage regarding the firm. The partners may pass the secrets of their firm to
other competitors.
Comparison Table for Advantages and Disadvantages of Partnership