Advantages of a Partnership Firm
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When two or more people join forces to start a business, it is referred to as a partnership firm. This structure has both merits and demerits, just like most other business structures. An important decision when starting a business is the structure of your company. Is a partnership firm right for you? Is a limited liability partnership or other entity the best choice for you? In today’s article, we will discuss the advantages and disadvantages of partnership firms in order to help you make an informed decision.
For your quick reference, here are some partnership firm advantages:
- Making quick decisions
One of the fastest ways to make decisions is through a sole proprietorship. In contrast, partnership firms are able to make decisions more quickly than other business entities. The Board does not have to approve resolutions or seek approval. It is usual for partners to be the ones who make decisions on behalf of the firm in most firms.
- An easy way to get started
One of the easiest ways to start a business is by forming a partnership. The process of starting a partnership firm can usually be completed within a day.
- A greater sense of accountability
A partnership is formed when two individuals believe in the idea of starting a business together. As a result, they have a high sense of responsibility when starting a partnership firm. As a result, the business is headed by a dedicated core team.
- Raising funds is easy
In comparison to a sole proprietorship, a partnership can raise funds much easier than the latter. They are viewed favorably by banks and financial institutions.
- Dissolves easily
A partnership can be dissolved more easily than a company. There is no complex legal process or documentation involved.
Disadvantages of Partnership Firms
Here are some disadvantages of partnership registration firms for your quick reference after reading about their advantages:
- Unlimited Liability
There is no legal distinction between a partnership firm and its partners. Each partner is personally responsible for the firm’s losses. All partners are liable for the loss, even if one partner causes it.
- Restriction on the maximum number of partners
A partnership cannot have more than 50 partners, according to Rule 10 of the Companies (Miscellaneous) Rules, 2014.
- Lack of leadership
The business of the firm is handled equally by all partners, so there is no single leader. Lack of leadership can result in differences of opinion unless the partners choose one among themselves.
- Lack of perpetual existence
Businesses that are separate legal entities survive even when their directors retire or die. Although the partners of a partnership firm are separate legal entities, the partnership itself is not. In such a case, the firm usually dissolves when one or both partners die, retire, or become incapable of fulfilling their duties.
- Lack of public faith
A partnership firm has the advantage of being able to get started quickly since registration is not required. It is important to note, however, that this advantage also has a downside. An unregistered business lacks trust from the general public.
Several business goals are shared by a partnership firm. However, if the partners have an unresolved dispute during the course of business, the business can suffer.
In a nutshell
It is therefore recommended that a partnership firm registers and establishes a clear chain of command before beginning business. In addition, since 2008, many partnerships have converted to LLPs in order to benefit from limited liability. It is our hope that this article was helpful in clarifying aspects of partnership firms that might be confusing. Please contact us if you are interested in registering a partnership firm.