Partnership Definition Characteristics Advantages & Disadvantages

Sat, 11/14/2015 - 03:47 -- Umar Farooq

Expanding business activities gave rise to partnership as the sole proprietorship with its limitations could not rise according to the demand of time and requirements of expanding business activities. More capital, enhanced risk greater managerial talents and Abilities were being expected from the sole proprietorship which it was unable to meet. Hence the birth of partnership as another form of business organization.

Definition

A partnership business organization refers to plurality of persons wherein the persons establish a relationship by agreeing to carry on operations either all of them or any one of them acting for all and agreeing to share profits arising of the same

Characteristics

Number of Persons. There are at least two partners if the business is of ordinary nature than minimum partner are 2 and maximum is 20. While in case of banking organization minimum are 2 and maximum number of partners is 10.

Management and Control. In partnership business organization all the partners can take part in managing the business. However, they may elect any one of them as their representative in partnership agreement.

Unlimited Liability of Partners. Partners Liability is unlimited, if facing insolvency the assets are not sufficient to fulfill the liabilities then creditors have the right reserved to sue the partners. Liabilities if any, must be considered as the liabilities of the partners according to legal status of business. It means in case of insolvency of the business, their personal properties can be sold for the recovery of all its debts.

Taxation. It enjoys the tax advantages over other forms of business organizations. For the purpose of income tax owners and business are treated as same thing. Income from its operations is treated as the personal income of the partners. There all are personally liable to pay the tax to the government, if income becomes taxable.   

Flexibility. It is less flexible as compare to sole proprietorship due to more owners, more resources and difference of opinion among the partners.

Advantages and Disadvantages of Partnership Business

Advantages

Easy Formation. It is very easy to establish, just like sole proprietorship no special legal formalities are required in order to establish a partnership business, even the registration of the firm is not compulsory. The partners' consent is sufficient to set up the business.

Sharing of Risk. In sole proprietorship a single person is responsible to bear all the losses if any, while in partnership organization every part member share the losses suffered by the firm.

More Capital. It is in a better position to raise more capital and to expand the operations, because in partnership capital is collected by the joint efforts of all the partners. While In sole proprietorship capital depends upon the savings and borrowing capacity of the individual,

Better Credit Standing. In general partnership the liability of each partner is not limited to the business and enjoys better credit standing in the eyes of creditors as compared to sole proprietorship due to large number of owners

Better Management Performance. In this form of organization duties and responsibility are assigned among the partners according to their capabilities and experience. Therefore, the partners may perform their duties for which they are suitable. It will ensure efficiency and high profits.

Disadvantages

Unlimited Liability. The liability of each partner is not limited to his invested amount. Each partner is individually and jointly liable to pay the debts of the firm. If its assets becomes short for the payment of debts, then the personal property of the firm partners can be sold to clear all the debts.

Transfer of Share. The shareholders of the public limited company can transfer their shares at any time to any person while it is not possible in partnership business organization. No partner can transfer his share to any person without the consent of all the partners. It is very easy to invest but difficult to transfer.

Limited Life. Its future is uncertain due to many reasons i.e. if a partner dies, becomes bankrupt or happening of any unpleasant matter with the life of all partners may end its life. On the other hand Joint Stock Company is free from this defect.

Business Decisions Making. Every partner have the right to involve in the decision making process. All the member are take part in decisions making process and take decision with the mutual consent and agreement. Therefore it may miss the business opportunities .due to delay in decision making process as a result of differences of opinions in partners.