What is a Partnership

It is a type of business entity in which partners or the owners of the firm share the profits or losses of the business. It is often favored over corporations for taxation purposes. Partnership structure doesn’t incur a tax on profits before it is distributed to the partners which exist in case of corporation in the form of dividend tax. Depending on the partnership structure, the owners of the firm may be exposed to greater personal liability which is a major disadvantage in the case of partnership.

Advantages of Partnership

Following are the major advantages of partnership structure:

• They are easy to set up
• More capital can be brought into the business as and when desired depending on the business requirement
• New skills and ideas are brought into the business by the partners
• Decision making becomes easier as it involves more brains to think about a problem
• Responsibilities and duties are shared by the partners of the business
• Division of labor is possible depending upon the skills and core competencies of the partners.

Disadvantages of Partnership

Following are the major disadvantages in case of partnership structure of a firm:

• Possibility of unlimited liability – As all the partners of the firm are responsible for the entire debt of the firm, so in case of the bankruptcy the partners are liable to clear the debts irrespective of the fact that they might need to sell their personal belongings
• Disagreement among the partners can lead to problems for the business thus hampering the functioning of the firm
• Limit to the amount of capital which can be invested- A maximum of 20 members are allowed in case of partnership thus the total amount of capital which can be invested in case of partnership is limited to the sum total of the individual amount invested by each partners
• No continuity of existence – This is one of the major drawback in case of the partnership firm. If one of the partner dies or resigns or becomes bankrupt, the partnership structure is dissolved

Some of the examples of partnership structure are as follows: