Question

Attempt the following:

Explain the demerits of Partnership firm.

Answer 1

The demerits of a Partnership firm are as follows:

1. Non-transferability of Interest: In a partnership firm no one partner can transfer his share of interest to another outsider without the consent of all the partners.
2. Limited Capital: There is a limitation in raising additional capital for business. The business resources are limited to the personal funds of the partners. The borrowing capacity of partners is limited. The maximum number of partners is fifty only. So Financial capacity is less.
3. Absence of Legal Status: The Indian Partnership Act, 1932 does not give legal status to a partnership firm. There is no independent legal status. The firm and its partners are one and the same.
4. The problem of Continuity: The partnership firm is not a separate legal entity. The firm is dependent on mutual trust between partners. If a partner dies, becomes insolvent or insane, the firm has to be dissolved compulsorily whether the partners wish or not.
5. Risk of Implied Authority: A partner works in two capacities. He has a dual role Principal and Agent. He acts as an agent of the business. He can enter into a contract with a third party. However, a wrong decision can result in heavy losses, which has to be borne by all partners.
6. Limitations on the number of Partners: No partnership can go beyond the maximum number prescribed (i.e. 50 members) by the Indian Partnership Act. This restriction affects the raising of capital for further expansion.
7. Disputes: It is difficult to maintain harmony among partners. They may have different opinions and may not agree on certain matters. Partners may have conflicts if some partners work for self-interest. This reduces team spirit and may finally lead to the dissolution of the firm.
8. Difficulty in Admission of Partner: As the consent of all partners is required to take any decision in the partnership firm, it becomes difficult to admit a new partner. This is a disadvantage to the firm as it cannot bring in new talent if the other partners are not agreeing to it.
9. Unlimited Liability: The liability of partners is unlimited. There is no difference between business property and personal property of partners. If business assets are not enough to meet business expenses, Personal property can be used.
10. Problem of Secrecy: Partnership firms lack complete business secrecy as some secrets may be disclosed by some partners to the competitor for personal benefit.