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A partnership is an arrangement where parties, known as partners, agree advance their mutual interests.

It is a business restricting its members not less than two, who contributes money or money's worth to a common stock and is known as partner's capital. The essential elements of the partnership could be laid down as follows:

  • A partnership is the outcome of a valid agreement between or among partners.
  • The agreement must indicate about the sharing of profits and losses of the firm.
  • The business of the firm must be carried on by all or any of the partner acting for all partners.

Advantages of Partnership Firm

  1. Easy Formation : Registration is not compulsory in the case of Partnership firm. It formed without any legal formality and expenses. Thus they are simple and economical to form and operate.

  2. Larger Resources: Due the more number of members the partnership firm resources for the business operations as compared to sole proprietorship.

  3. Flexibility in operation: Due to the limited number of partners there is flexibility operations of business as the partners can amend any objectives or change any operations any time by mutual consent.

  4. Better Management: Business of a partnership firm is very well managed by partners as they take interest in the daily affairs of business because of the ownership,profit and control.

  5. Sharing of Risk: In partnership every partner bears the risks individually as it compared to sole proprietorship.

  6. In a partnership firm interest of every partner is protected against any fraud.

Disadvantages of partnership Firm

  1. Instability: A partnership firm does not exist for an indefinite period of time.insolvency or lunacy of a partner may lead to dissolution of the partnership firm.

  2. Unlimited Liability: Liability of every partner in a partnership firm is unlimited as the partners may be called upon to pay all the debts even from its personal properties. A single wrong decision by one partner can lead other partners in heavy losses and liabilities.

  3. Lack of Harmony: According partnership agreement every partner has equal situations might occur in which one or the other partner will not agree on the same thing which will cause difference of opinion resulting mistrust and disharmony among the partners.

  4. Limited Capital: Due to the restriction on the maximum number of members,amount of capital can be raised.

  5. No legal status : A partnership firm does not have a legal status like a Company.

  6. In a partnership firm it is not easy to transfer ownership. Consent of every partner is required in order to transfer ownership.