Although there are several merits or advantages of partnership type of business organization, there are some demerits or disadvantages such as high chance of conflict, unlimited liability, slow decisions, limited size, uncertainty etc.
Partners are jointly and personally liable for debts of partnership firm. Their liability is unlimited. A partner's private assets can be used to pay business debts. Failure of business can ruin partners financially.
Disagreements among partners can create conflicts. Interference in each other's responsibilities can create misunderstandings. Lack of trust can also create conflicts. Conflicts can badly affect partnership firm.
Management decisions are made collectively in partnership firm. Disagreement can delay decisions. Delayed decisions can lead to loss of business opportunities. So, slow decision making process is a major disadvantage of partnership firm.
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Partnership firm is limited in size. This limits the availability of capital and credit. Business expansion becomes difficult. borrowing capacity of partners is also limited. Hence, large scale operation may not be possible.
5. Uncertain life
Partnership firm has uncertain life. If one partner retires, dies or becomes insolvent, the partnership firm comes to an end. The provisions in agreement can also end the life of the firm.
A partner cannot transfer his share of ownership in the partnership firm. It requires consent of all the partners. Retirement from partnership is also not easy.
Partnership firm suffers from low public confidence. It is subject to minimum government regulations. It is not required to audit or publish its accounts. There is secrecy in its affairs. Therefore, it lacks public accountability.
Abuse of authority is another disadvantage of partnership. The actions of one partner bind all other partners. A dishonest partner may abuse his authority. Other partners may suffer loss from such abuse of authority.Negligence by one partner can cause loss to other partners.
Some notable drawbacks or disadvantages of partnership firm are as follows:
1. Unlimited liability
Partners are jointly and personally liable for debts of partnership firm. Their liability is unlimited. A partner's private assets can be used to pay business debts. Failure of business can ruin partners financially.
2. Conflicts
Disagreements among partners can create conflicts. Interference in each other's responsibilities can create misunderstandings. Lack of trust can also create conflicts. Conflicts can badly affect partnership firm.
3. Delayed decisions
Management decisions are made collectively in partnership firm. Disagreement can delay decisions. Delayed decisions can lead to loss of business opportunities. So, slow decision making process is a major disadvantage of partnership firm.
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4. Limited size
Partnership firm is limited in size. This limits the availability of capital and credit. Business expansion becomes difficult. borrowing capacity of partners is also limited. Hence, large scale operation may not be possible.
5. Uncertain life
Partnership firm has uncertain life. If one partner retires, dies or becomes insolvent, the partnership firm comes to an end. The provisions in agreement can also end the life of the firm.
6. Non-transferable ownership
A partner cannot transfer his share of ownership in the partnership firm. It requires consent of all the partners. Retirement from partnership is also not easy.
7. Low public confidence
Partnership firm suffers from low public confidence. It is subject to minimum government regulations. It is not required to audit or publish its accounts. There is secrecy in its affairs. Therefore, it lacks public accountability.
8. Abuse of authority
Abuse of authority is another disadvantage of partnership. The actions of one partner bind all other partners. A dishonest partner may abuse his authority. Other partners may suffer loss from such abuse of authority.Negligence by one partner can cause loss to other partners.
