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Advantages and Disadvantages of a Partnership

ArticleID 69  
Writer Grace Odinga
Category Personal Article

Advantages

(i)Ease of formation: Formation of partnership is easy because all that is essentially needed in a partnership is an agreement between the partners. The partnership agreement is usually prepared in writing although an oral control is also acceptable. In other words formation of a partnership is free from complicated legal requirements.


(ii)May provide additional sources of capital: Partners can sometimes raise more capital than a sole trader since ownership vests in a group of two or more (maximum twenty), each of whom can contribute capital. A partnership is also likely to be more creditworthy than a sole trader.


(iii)Broader management base: Each partner may have expertise in different functions of the firm such as finance and sales. The partners can, therefore, be called upon to be responsible for those functions in which they are specialized. This may lead to increased performance and profitability. Decision making and consultations are shared for mutual benefit.


(iv)Ease of expansion: Expansion can be done very easily by increasing the size of the partnership, including addition of specialist skills.


(v)Sharing of losses and liabilities: Liabilities are better spread to a number of persons thus reducing the burden on anyone person. This spreading of risk to many encourages more people to join partnerships because the risks are less than in sole proprietorship.


(vi)Duration: Partnerships have longer life than sole proprietorships because death or retirement of one partner cannot interrupt the partnership where the partnership has more than two partners and also where provisions have been made to perpetuate the partnership.

Disadvantages

(i)Lack of continuity: A partnership has a limited and uncertain life. A partnership can be terminated very easily especially if the partners disagree or if one partner dies or is incapacitated.


(ii)Divided authority: Since a partnership consists of two or more owners, authority is divided and decisions may be difficult to reach. Delays may also occur when reaching decisions because all the partners have to be consulted. Delayed decisions may not be fully effective and may result in the firm losing many opportunities. Sometimes the partners cannot compromise and the only recourse may be to dissolve the partnership.


(iii)Unlimited personal liability of at least one partner: The liability of general partners is unlimited. This means that if the assets of the partnership are not sufficient to pay its debts, the partners are obliged to pay the debts from their personal resources.


(iv)Hard to raise large sums of capital: Partnerships have difficulties in obtaining large sums of capital especially long term financing. This is a serious problem especially if the firm intends to finance major development projects.


(v) Hard to find suitable partners


(vi)Difficult to dispose of a partnership interest: If a partner is no longer committed or interested in the partnership, it is often difficult to withdraw his investment. The buying out of a partner may be difficult unless specifically arranged for in the written agreement. Partners who may wish to withdraw find it impossible to do so and this leads to dissatisfaction and lack of commitment to the firm.


(vii)Sharing of profits: Since partners have to share in the profits of the firm, this leads to minimization in direct benefits accruing from personal efforts of individual partners. This is more so where some partners may be contributing more than others to the well-being of the firm. Also, the fact that profit is shared reduces the amount receivable by each partner.


Sole Proprietorship, Partnership, Advantages, Disadvantages, Starting a Business, Type of Business
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