Advantages and Disadvantages of a Partnership Firm

A partnership firm is one of the popular types of legal entity wherein two persons join together to undertake a business for profit. In this article, we look at the advantages and disadvantages of a partnership firm.

Advantages of Partnership Firm

The following are some of the major advantages of a partnership firm:

Easy to Start

Partnership firms are one of the easiest to start. The only requirement for starting a partnership firm in most cases is a partnership deed. Hence, a partnership can be started on the same day. On the other hand, an LLP registration would take about 5 to 10 working days, as the digital signatures, DIN, Name Approval and Incorporation must be obtained from the MCA.

Decision Making

Decision making is the crux of any organization. Decision making in a partnership firm could be faster as there is no concept of the passing of resolutions. The partners in a partnership firm enjoy a wide range of powers and in most cases can undertake any transaction on behalf of the partnership firm without the consent of other partners.

Raising of Funds

When compared to a proprietorship firm, a partnership firm can easily raise funds. Multiple partners make for more feasible contribution among the partners. Moreover, banks also view a partnership more favourably while sanctioning credit facilities instead of a proprietorship firm.

Sense of Ownership

Every partner owns and manages the activities of their firm. Their tasks might be varied in nature but people in a partnership firm are united for a common cause. Ownership creates a higher sense of accountability, which paves the way for a diligent workforce.

Disadvantages of Partnership Firm

The disadvantages of a partnership firm are as follows:

Unlimited Liability

Every partner is liable personally for the losses of a partnership firm. The liability created by a partner in the partnership firm will also make each of the partner personally liable. To limit the liability of partners in a partnership firm, the LLP structure was created by the Government.

Number of Members

The maximum number of members a partnership firm can have is restricted to 20. In case of an LLP, there is no restriction on the maximum number of partners.

Lack of a Central Figure

Leadership can both uplift and derail a firm. Combined ownership takes away the possibility of leadership and lack of leadership leads to directionless operations. On the other hand, in a partnership firm, certain partners can be given the position of designated partner with more powers and responsibilities.

Trust of the General Public

A partnership firm is easy to start and does require any registration. A partnership firm can also operates without much of a structure or regulations. Hence, it often leads to distrust amongst the general public.

Abrupt Dissolution

A partnership firm would be dissolved due to the death or insolvency of a partner. Such an abrupt dissolution will hamper a business. On the other hand, the death of a partner will not automatically dissolve an LLP. Hence, continuity of business is maintained in a LLP. Know more about Dissolution of Partnership Firm.