A partnership firm is a legal business undertaking wherein two people mutually agree on a business to generate profit which is then earned by all or anyone on behalf of them. In India, registration of partnership firms is one of the more popular business formats due to the minimum requirement of only two partners for the registration process as well as the seamless and hassle free nature of its registration process. A partnership is the simplest and quickest way to form a legal entity in India.
Merits of a Partnership Firm
The most significant merits of running a Partnership Firm are as follows:
- Easy to Register and Start
Starting from the registration process to the accounting of profit margins to filing for tax returns among others, partnership firms have a simple, hassle free process most of which can be conducted online. There are fewer legal obligations in partnership firms, for instance, a partnership firm need not complete a confirmation statement and the plethora of other possible Companies House forms that a limited company may need to submit.
There are also fewer records to maintain in this business format, in particular, a business partnership does not need to maintain a set of statutory books like a limited company would be required to.
- Relatively Seamless Decision Making
The process of decision making is often simpler in this arrangement as the partners have mutual support for each other as well as a holistic understanding of their business unlike in a limited company. Each partner is not only entitled to bring their unique perspective to the business but is also encouraged to do so in order to personalise their trade as well as create their unique identity through the process.
- Ownership and Control
Most often in a limited company, the ownership is shared by shareholders or directors but in a business partnership the joint owners usually retain absolute power over their enterprise. As long as the partners agree on the same issues, they’re free to pursue their independent whims without the interference of others. They have more flexibility and the drive to adapt more quickly to changing circumstances.
- More Capital
When compared to a proprietorship firm, a business partnership firm can secure funds more easily. Two or more partners combine to make more contacts as well as invest larger amounts to the business unlike a sole owner. Moreover, banks view a partnership more favourably while sanctioning credit facilities instead of a proprietorship firm in most instances thus increasing their borrowing capacity as a team.
- Better access to experience, contacts, skills, etc
In a partnership arrangement, the business is not only run and managed by a number of unique and talented individuals but also a joint venture of individual experiences of the owners. The partners may have unique areas of expertise thus making the venture more dynamic than a limited firm.
Demerits of a Partnership Firm
As with most things, there also exist various demerits of running a partnership firm. Some of them are as following:
- Lack of Independent Legal Status
A business partnership has no independent legal existence distinct from the partners involved. A business partnership will be immediately dissolved without a partnership agreement if one or more of the partners die or leave the enterprise. This impending possibility can cause insecurity and instability, divert attention from developing the business as well as create tension among the other partners. The lack of separate legal identity renders a partnership firm with more limitations.
- Unlimited Liability
Due to the lack of a separate legal entity, the partners are entirely liable for debts and losses incurred by the firm. A partner is liable for the other in this arrangement. Personal assets can be seized if the firm runs into heavy losses which is not the case for limited companies.
- Shared Profits
All profits generated in this arrangement are shared by all the partners equally, although that position can be amended by a partnership agreement. The shared profits further brings in a plethora of questions wherein the individual efforts of the partners are brought into question before an equitable distribution of profits which can lead to conflicts and disagreements.
- Limits on Business Development
Due to the absence of sole ownership, the development of the brand has to be approved by all partners involved in this arrangement that can only be amended by a partnership agreement. The lack of legal personality becomes an important factor here too. Without it, the business cannot own property, enter into contracts or borrow in its own right, these difficulties become more pronounced as the business grows.
- Differences and Conflict
The presence of multiple partners and multiple perspectives can lead to disagreements and conflicts galore. Each partner would be required to be more flexible and ready to make compromises on their personal vision for the growth of the business unlike in limited companies with sole owners.
Now you have all the information in hand to make the right choice. Will you be opting for a partnership firm?