Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

• Partnership is a relation between two or more persons who have agreed to coem together to do business and share the profits of the business carried on by all or any one of them acting for all.
• Partnership solves many disadvantages of a sole proprietor firm.
• The factors responsible for choosing this type of organization is as below:-

• Division of Work
  • When work has to be divided among partners according to their aptitude and experience.
• Motivation
  
  • Profits of a partnership business are shared by its partners in a predetermined ratio.
  • Hence, it provides direct motivation to partners to increase the profits of the firm.
• Economy of costs
  • When the entrepreneur wants to reduce the costs of business, they go for partnership as the partners cannot claim remuneration for the work done by them for the business.
  • This results in greater savings in expenses on salaries etc.
• Reduced risk
  • When the business men do not want to bear higher risk individually, they opt for partnership.

Merits of Partnership

• Easy Formation
  • Formation of partnership is easier and no legal formalities are to be observed to establish it.
• Division of Risk
  • In partnership, the risks are to be shared by all the partners.
  • Thus, degree of risk becomes reduced in partnership.
• Business Secrecy
  • The annual accounts and reports of a partnership firm do not require circulation and publicity and, therefore secrecy can be maintained about the business.
• Encouragement of Mutual Trust and Interdependence
  • Each partner is an agent for the others.
  • Therefore, all the partners act with utmost mutual trust.
  • They also develop a sense of interdependence and team spirit.
  • At the same time each partner develops his individuality through his responsibility for others and the firm as a whole.

Limitations of Partnership

• Unlimited Liability
  • The partners, may be personally held liable for the debts of the firm. 
  • Their private property also remains at stake.
  • Due to the dangers associated with unlimited liability, partners are overcautious and play safe.
  • This restricts the growth of the business.
• Instability
  • A partnership firm suffers from the uncertainty of duration because it can be dissolved at the time of death or insolvency of a partner.
  • Sometimes petty quarrels among the partners may also bring the partnership to an end.
  • The discontinuity of the business is not only inconvenient to the consumers and workers but it also a social loss.
• Lack of Public Confidence
  • Since there is no publicity of the working of a partnership through its published periodical accounts and there is absence of legal control over it.
  • The general public may not have full confidence in them.
• Risk of Implied Authority
  • A partner is an agent of the
  • firm. The co-partners can make deals and contracts that would be binding on other partners.
  • Therefore when a partner is negligent or commits a wrong or is doing of fraud, within the scope of his authority other partners are equally liable financially without any limit.
  • Thus the honest and efficient partners may have to pay the penalty for follies of other partners.
• Non-transferability of interest
  • No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners.
  • This makes investment in a partnership firm non-liquid.