Advantages and Disadvantages of a Partnership Firm

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.

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Frequently Asked Questions

Common questions about Partnership Firm Advantages & Disadvantages in Business.

A partnership firm is a type of business entity where two or more individuals come together to start and run a business for profit. It is formed by a partnership deed outlining the terms and conditions of the partnership.

According to the article, a partnership firm can have a maximum of 20 partners. In contrast, there is no restriction on the maximum number of partners in a Limited Liability Partnership (LLP).

One of the primary advantages of a partnership firm is that it is easy to start. The article mentions that the only requirement for starting a partnership firm, in most cases, is a partnership deed, which can be created on the same day.

Decision-making in a partnership firm can be faster as there is no concept of passing resolutions. Partners in a partnership firm enjoy a wide range of powers and can often undertake transactions on behalf of the firm without the consent of other partners.

Compared to a proprietorship firm, a partnership firm can more easily raise funds. Multiple partners can contribute to the capital, and banks may view a partnership firm more favorably while sanctioning credit facilities than a proprietorship firm.

The primary disadvantage of a partnership firm is the unlimited liability of the partners. Every partner is personally liable for the losses of the partnership firm, and the liability created by one partner will also make each of the partners personally liable.

The article states that a partnership firm would be dissolved due to the death or insolvency of a partner. Such an abrupt dissolution can hamper the business, which is not the case in an LLP, where the death of a partner does not automatically dissolve the entity.

The article suggests that the general public might distrust a partnership firm because it is easy to start and does not require any registration. Additionally, a partnership firm can operate without much structure or regulations, which can contribute to the lack of trust.

In a partnership firm, every partner owns and manages the activities of the firm, creating a higher sense of accountability. On the other hand, the article does not explicitly mention the ownership and management structure of an LLP.

According to the article, the sense of ownership in a partnership firm is an advantage. It creates a higher sense of accountability among the partners, which paves the way for a diligent workforce, as they are united for a common cause.