A partnership can be formed without any legal formalities. Like sole traders, it is easy to form and simple to run. The partnership may be dissolved without performing any legal process. It does not possess a legal identity apart from its members but if you have written it clearly in contents of partnership deed, you may need to visit the court. There are much Partnership demerits that may be ranked differently by different writers but to me the biggest demerit is trust.
From the operating standpoint, the partnership may conduct business in very much the same manner as a sole proprietorship. The partnership is not liked more than other forms of the organization due to the following Disadvantages of the partnership business.
Disadvantages of Partnership Business | Firms
As the number of partners is limited in this form of organization so the capital remains limited. When the capital cannot exceed to a particular limit, large size business may not be started.
This is a great characteristic of the partnership that the private property of each partner is also liable to pay business debts. This factor prevents the rich man to invest large capital in such a risky business.
Lack of Prompt Decision
The number of partners creates the problem to reach a certain decision. So the difference of opinion is the great hindrance in promptness of decision. This delay brings many problems in internal communication & marketing purposes as well as in Production and management decisions.
Lack of Supervision
There are no effective rules and regulations to control the activities of partnership in our country. Audit and publication of accounts are not compulsory by law for a partnership firm. So the lack of supervision has increased the chances of manipulation and fraud in accounts.
Absence of Perpetuity
A partnership has not the capacity of continued existence. The life of the partners is connected with the running life of the partnership business. This may come to an end by the death, retirement, insolvency or disagreement of any partner.
The business of the partnership may not be expanded due to the following factors:
- The limited number of partners.
- Limited capital and financial sources.
- Unlimited liability.
- Lack of managerial and technical abilities.
But the business of the different types of joint Stock company may easily be increased due to the absence of the above-mentioned factors.
Lack of Interest
Partners do not take a keen interest in the business activities of the firm due to the following reasons:-
- The limited share of Profit or loss of each partner.
- Limited chances of growth of a business.
- Restriction in the transferring of shares.
- Frozen investment.
- Limited life of the business.
Thus the result in the absence of personal interest is the success or failure of the business.
Chances of Disclosure
Each partner is allowed to participate in the management of the business by law. So all partners know the internal affairs of the business. In case of withdrawal, dis-agreement or retirement of partners, there will be a great risk of leakage of the secrecy.
It is really hard to engage or hire highly qualified team because financial resources in the partnership are limited to some level. Whereas joint stock company advantages in this as it can boom. There are chances of dissolution in partnership because of few resources.
Chances of Friction
There should be mutual co-operation and trust among the partners and these factors are necessary’ for successful achievement of the business. But generally, there is misunderstanding, friction, and dispute among the partners which hamper the progress of the firm.
Lack of Confidence
As there is no compulsion by law for the publication of accounts in partnership so true picture cannot come to the notice of the public. Due to this situation people do not trust partnership firm and avoid to deal with and enter into a contract.
Transferability of Shares
There is a restriction to transfer the share without the consent of existing partners. If a partner transfers his share without obtaining consent, the firm may be dissolved. Thus investment remains concentrated into few hands.
Risk of Loss
As the management of the partnership generally conducted by unskilled and inefficient persons, there are great risks of losses. In case of heavy losses, the business may come to an end. But in the joint stock company the amount of losses is sustained by the number of shareholders and so business is not affected by such a situation.
Unfit for Large Scale Enterprise
This form of organization is quite unsuitable for large and heavy business due to the following reasons:
- A limited number of partners.
- Limited capital.
- Lack of technical and administrative abilities.
- Limited life.
- Unlimited liability.
- In-sufficient rules and regulation.
But foregoing factors are not found in Joint Stock Company so this form is suited for large-scale business.
In the business world, every business type has its own importance with different pros and cons. The accumulative effect of all these make market which generates employment opportunities, increase GDP, circulate money, bring competition in a market that ultimately reduce prices and improve product quality.
The combined business is better but the darker side of the partnership business may not be easy to tolerate by investors.