Discuss the merits and demerits of partnership.

Merits of Partnership — The partnership form of business organisation enjoys the following advantages:

1. Ease of Formation — Partnership is simple and inexpensive to establish and easy to operate. No legal formalities or formal documents are involved. Only an agreement is required. Even the registration of the firm is not compulsory. Similarly, a partnership can be dissolved easily at any time.

2. Larger Financial Resources — It is possible to collect a large amount of capital due to a number of partners. New partners can be admitted to raise further capital whenever necessary. Credit-worthiness is also high because every partner is jointly and severally liable for all the debts of the firm.

3. Combined Abilities and Judgement — The skill and experience of all the partners are pooled together. Combined judgement of several persons helps reduce the chances of errors of judgement and leads to balanced decisions. Partners may be assigned duties according to their talent. Therefore, benefits of specialisation are available.

4. Direct Motivation — Ownership and management of business are vested in the same persons. There is direct relationship between effort and reward. Every partner is motivated to work hard and to ensure the success of the firm.

5. Close Supervision — Every partner is expected to take personal interest in the affairs of the business. Different partners can maintain personal contacts with employees and customers. Fear of unlimited liability makes the partners cautious and avoids reckless dealings.

6. Flexibility of Operations — Partnership business is free from legal restrictions and government control. Partners can make changes in the size of business, capital and managerial structure without any approval.

7. Secrecy — A partnership firm is not required to publish its annual accounts. Audit of accounts is not essential and no reports are to be filed with the government authorities. Therefore, the affairs of a partnership business can easily be kept secret and confidential.

8. Protection of Minority Interest — Management of partnership is democratic. Every partner has a right to be consulted and can express his opinion. All important decisions are taken with the mutual consent of all the partners.

9. Cooperation — Partnership encourages mutual cooperation and trust amongst people. Partners work in common for the benefit of all and do their level best to make the business prosperous.

10. Scope for Expansion — There are greater possibilities for the expansion and growth of business. More partners can be taken in to meet the financial and managerial requirements of growing business.

Demerits of Partnership — A partnership suffers from the following limitations:

1. Limited Resources — There is a limit to the maximum number of partners in a firm. Therefore, it is not possible to collect huge financial resources. Borrowing capacity of partners is also limited.

2. Unlimited Liability — Every partner is fully liable for the debts of partnership business. Fear of risk may restrict initiative and growth of business. Private properties of partners can also be taken up for business liabilities.

3. Uncertain Life — Partnership business suffers from instability. Insolvency, insanity, retirement and death of any partner may cause an abrupt end to the business.

4. Conflicts — Lack of confidence, unity, and inefficiency among partners may lead to delayed decisions. Chances of conflict are high because each partner has an equal right to take part in the management of the firm.

5. Risk of Implied Agency — Every partner is an implied agent of the firm. A dishonest partner may cause a great loss to the firm. All the partners may suffer due to the negligence or dishonesty of one partner.

6. Lack of Public Confidence — A partnership does not enjoy the trust of the public. The reason is that the affairs of a partnership are not given publicity. No reports are published by a partnership concern and it is free from government regulations.

7. Blocking of Capital — A partner wanting to withdraw his capital from the firm cannot do so unless other partners agree to it. He cannot transfer his share to outsiders without the approval of the other partners. He may, therefore, be deprived of a higher return on his capital outside the partnership.