Why is partnership considered by some to be a relatively unpopular form of business ownership?

Partnership is considered by some to be relatively unpopular form of business ownership because: 

1. Uncertainty of duration: A partnership suffers from a possible limited span of life. Legally, a partnership firm must be dissolved on the retirement, death, bankruptcy, or lunacy of any partner or demanded by any partner. The probability of any one of these events occurring when the number of partners is much greater than in the case of a sole proprietor. 

2. Risks of additional liability: It is true that like the sole proprietor, each partner has unlimited liability. But his liability may arise not only from his own acts but also from the acts and mistakes of co-partners over whom he has no control. 

3. Lack of harmony: The old saying that “too many cooks spoil the broth” can be apt for a business partnership. Harmony may be difficult to achieve, especially when there are many partners. Lack of centralized authority and conflicts in policy can disrupt the organization. 

4. Difficulty in withdrawing investment: Investment in a partnership can be simple, but its withdrawal may be difficult or costly when this aspect is considered from the point of view of individual partners. This is so because no partner can withdraw his interest from the firm without the consent of all partners. 

5. Lack of public confidence: A partnership may suffer from lack of public confidence 

6. Lack of public confidence: A partnership may suffer from lack of public confidence because, like that of a company there is no legal mechanism to enforce the registration of a partnership firm and the disclosure of its affairs. 

7. Limited resources: A partnership is good as it can be started with limited capital. However, it becomes a handicap in the growth and expansion phases of the business. There is a limit beyond which it is almost impossible for partners to collect capital. This limit is generally up to the personal properties of the partners.

8. Unlimited liability: Unlimited liability discourages partners to undertake risky ventures, and therefore, their risk-taking initiative is very risky.

Merits of Partnership

• It is easy to set up. 
• It has more capital, which can be brought into the business. 
• Partners brings new skills and ideas to a business. 
• Decision-making can be much easier with more brains to think about a problem. 
• Partners share responsibilities and duties of the business. 
• Division of labour is possible as partners may have different skills.

Limitations of Partnership 

• There is an unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell off their personal belongings. 
• Disagreement among the partners can lead to problems for the business. 
• There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit. 
• There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt

The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all.” Some people consider partnership to be relatively unpopular because the inherent features of partnership such as Joint risk bearing and profit sharing, collective decision making, unlimited liability of partners, etc.

Sometimes lead to conflicts among partners and undue burden on some of the partners. Besides, public confidence in partnership firm is low. But partnership as a form of business organization actually has both merits and limitations as discussed below Merits of Partnership:

(i) Ease of Formation and Closure A partnership firm can be formed with minimum legal formalities by an agreement between the prospective partners whereby they agree to carry out the business of the firm and share risks. Registration of the firm is also not compulsory. Closure of the ‘ firm can be done easily too. 

(ii) Varied Expertise and Effective Decisions The partners can look after different functions according to their .areas of expertise. This reduces the burden of work on individual partners and leads to more effective decisions. 

(iii) More Capital In partnership, the capital is contributed by many partners. Thus, larger amount of funds are available as compared to a sole proprietor to undertake additional operations when needed.

(iv) Risk Sharing All the partners share the risks involved in running a partnership firm. This reduces . the anxiety, burden and stress on individual partners. 

(v) Secrecy A partnership firm is not legally required to publish its accounts and submit reports. Hence, it can maintain confidentiality of information relating to its operations. Limitations of Partnership

(i) Unlimited Liability The partners of a firm have unlimited liability. Personal assets may be used for repaying debts if the business assets are insufficient. Further, the partners are Jointly and individually liable for payment of debts. Hence, if some partners are unable to pay the debt proportionate to their share, the others will have to repay the entire debt causing excessive burden on them.

(ii) Limited Resources Partnership firms usually do not operate on a large scale as there is a restriction on the number of partners and hence, contribution in terms of capital investment remains insufficient for business expansion beyond a point.

(iii) Conflicts: Decision making authority in a partnership is shared by all the partners. Difference in opinion may thus lead to conflicts between partners. Decisions of one partner are binding on other partners and a wrong decision by one may result in financial problem for all others. If a partner decides to leave the firm due to conflicts, this can result in termination of partnership as there is a restriction on transfer of ownership.

(iv) Lack of Continuity Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity if the remaining partners do no enter into a ‘ fresh agreement to continue the business.

(v) Low Public Confidence Due to lack of transparency in the business of a partnership firm, the confidence of the public in partnership firms is generally low. It is difficult for the public to ascertain . the true financial status of a partnership firm as it is not legally required to publish its financial reports or make other related information public.