EORUPA SCIENCE & COMMERCE ACADEMY

Q. No. 4: ANSWER: Define Partnership and explain its merits and demerits?

PARTNERSHIP
INTRODUCTION: Partnership is the second stage in the evolution of form of business organization. The partnership form of organization was developed to overcome the drawbacks of sole trading organization and to meet the expanding needs of a business requiring a moderate amount of capital. DEFINITIONS: The definitions are as follows: L. H. Haney: Partnership is the relationship between person who agree to carry on a business in common with a view to private gain. According to Peterson and Plowman: a partnership is legal form of contract between two or more competent persons to associate themselves, in the common ownership and management of lawful business enterprise. Section 4 of the Partnership Act 1932: Partnership is the relation between persons who have after to share the profits of a business carried on by all or any one of them acting for all. Persons forming partnership are individually known as partners and collectively a firm. ELEMENTS OF PARTNERSHIP: The essential elements of partnership as a form of business organization are as follows: A. Association of at least two persons: At least two persons must join together to from a partnership. B. Contractual Relation: There must be an agreement between persons desirous of forming a partnership. C. Earning of Profit: The agreement must be to share profit/loss of a business. D. Mutual Agency: The business of partnership may be carried on by all the partners or by any of them acting of all. Thus ever partner is an agent of other partners and at the same time of the firm. E. Existence of Business: The partners must have agreed to carry on a business. If the purpose is to carry on some charitable work, it will not be a partnership. ADVANTAGES/ MERITS OF PARTNERSHIP Following are the advantages/ merits of partnership. (1) Easy to form: The partnership, like the sole proprietorship, can easily be organized. There are complicated legal formalities involved in the establishment of partnership business. The partners enter into a partnership agreement and start business. Prepared By: H. ABDUL REHMAN 0321-6485593

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(2) Favorable Credit Standing: The partnership enjoys a better credit rating in the eyes of creditors. As the liability of each partner in the organization is unlimited, the liability of each partner in the organization unlimited; the financial institution can safely advance loans to the firms. Join Consultation and Fraud Prevention: In partnership careful decisions are taken through discussions and consultation. In partnership business the accounts can be checked and inspected by all the partners at any time so there are less chances of fraud in such business. Larger Capital: Partnership can bring more capital to the business by the joint efforts of the partners. The partnership is normally is strong position to raise capital and expand the business. Personal Interest: Since the responsibility of the partners is unlimited in partnership, so they take keen interest in business. Division of Responsibilities: Division of responsibilities and a spreading of the workload are possible amongst the partners. Tax Advantage: In the case of registered firm, the profits are allocated to partners. They pay tax on their individual share of profits. the partners get the privilege of lower assessment. Easy Dissolution: In partnership, partners may dissolve their business at any time without any legal formalities. Less Competition: There is a less competition if partnership firm is registered and no one can start his business with the name of registered partnership firm. Easy Exit or Entry of new Partners: If any partner wished to leave the firm or new partner wants to join it, the partners with mutual consultation can introduce the new blood in the business and can permit the disinterested one to leave it. Retention of a skilled worker: If an employee in the partnership business is found to be a man of outstanding talent and ability, he with the mutual consultation of other partners can be given a status of partner in business. Increase in the spirit of cooperation: The success of business depends upon mutual trust and cooperation of the partners. The partners are fully aware that a slight difference can cause the end of partnership. The increases in them, the spirits of working together. Sharing of losses: In partnership if a firm suffers losses, it is shared among partners of the business. In this way the risk is reduced. Expansion of business: Due to large number of partners and unlimited liability of each partner the volume of business can be expanded easily.

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(15) Services of Experts: In partnership a firm can hire the services of qualified a competent persons and in such a way it increases the profit of the firm.

Prepared By: H. ABDUL REHMAN

0321-6485593

EORUPA SCIENCE & COMMERCE ACADEMY

DISADVANTAGES/ DEMERITS OF PARTNERSHIP Following are the disadvantages. Unlimited liability: There is less possibility of taking risk because of the unlimited liability under the partnership. (2) Personal Disputes: Partnership leads to several personal disputes, which in turn disturb the proper functioning of the business. (3) Difficult to separate: No partners can sell his share to others according to his wishes. Therefore one cannot separate from the business without the permission of other partners. (4) Difficult to close: When one or more partners want to leave the business or want to close down the business the difficulty arises in the distribution. (5) Loss of business opportunities: In case of differences among the partners a delay may take place in diction making. This is a cause loss to the firm. (6) Possibility of misuse of resources: It is known to each and every partner that the resources of the firm are owned jointly. There is possibility to misuse the resource by one or more than one partners. (7) Lack of continuity: There is an absence of continuity for example on death, retirement or bankruptcy of one partner. (8) Carelessness: In partnership, business the responsibility of the partners is common. Due to this reason sometimes one partner in partnership business becomes careless about his responsibility and created much difficulty for the business. (9) Difficulty in transfer of rights: In partnership business no partner can transfer his shares to others without the consent of all the partners of the partnership business. (10) Difficulty ion withdrawal: It is very easy to invest funds in partnership business but it is very difficult to withdraw capital from the business. (11) Lack of Confidence: In the absence of legal formalities binding the partnership no partnership enjoys public confidence. (12) Shortage of Capital: Available capital may be adversely affected y a partners death when his shares withdrawn so as to pay beneficiaries. Shortage of capital reduces the sale of production. (13) Lack of Mutual Confidence: The success of partnership depends upon the mutual confidence of the partners. They may have mutual confidence at the start of the business, but it goes on shaking day by day and collapses one day. In the absence of mutual confidence the business gets setback and may be closed down. (14) Risk and Implied Authority: In partnership form of organization, each partner binds other partners by his acts done on behalf of the firm. Thus the other partners may have to pay for the follies and dishonesty of a partner. CONCLUSION Partnership form of organization is suitable where business is of medium size; the partners are of equal status, ability and resources. (1)

Prepared By: H. ABDUL REHMAN

0321-6485593