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Class : 11
Unit : Business

State the demerits/disadvantages of partnership firm.

Ans : The demerits of partnership firm are presented below: i) Limited Capital:- As the partnership business is established and managed by few partners, it has less chance of accumulating a large amount of capital. In comparison to sole trading concern, it has sufficient capital but in comparison to joint stock Company, it has less capital. ii) Unlimited liabilities:- Partnership firm is unlimited liabilities in nature. The liabilities of the partners may be more than their capital investment. Thus, if the partners become inadequate to pay it’s all debts, partners have to sale their personal properties for the payment of debts. iii) Difficult to transfer ownership:- The share of the partnership is only transferable after the agreement of own partners. The transfer of share to their party without consent of existing partners may create the problem of dissolution of the. So, it has difficult in share. iv) Uncertain existence:- A partnership business may face dissolution in case of death, insolvency or mental or physical illness of active partners. The partnership of business could be shut down by the partner after making the agreement between them. Therefore, it has uncertain existence. v) Lack of public faith:- Since, the partnership business has limited sizes, non-existence in the eye of the law, it has less public faith. Public don’t believe in partnership business as much the joint stock company because it has difficulty in both expansion and growth. vi) Problem of dispute:- Even though partnership business firm is firmed by the agreement of partners, the partners may not agree all the time. The partners may disagree regarding dispute of profit or use of authority. This dispute between partners may create problems in existence of business. vii) Lack of prompt decision:- The partners are required to build consequences before making any decision in the partnership business. For this, all the partners must be together to discuss the matter of business. It takes a long time and brings delay in decision making. viii) Risk of implied authority:- In partnership business, active partners authorized to make a decision on behalf of business than other partners. There is no certain that active partners will make a decision for the betterment of the business. There is a risk that active partners may take a decision on personal benefits. Therefore, a partnership has the risk of implied authority. 5. Explain the types of partners. Ans:- A partnership firm can have various kinds of partners with dissimilar roles and liabilities. These are described below:- i) Active Partners:- An active partner is the person who contributes capital; participate in day to day business operation of the management of the firm. As partner, they invest capital, share profit, bear losses, and responsible for payment of liabilities. The successful functioning of partnership firm totally depends on activities of active partners. ii) Sleeping Partners:- A sleeping partner does not take active part in day to day business operation of the firm. As sleeping partner, they invest capital, share profit, bear losses and responsible for payment of liabilities. The liability of sleeping partner may also be unlimited. iii) Nominal Partners:- A nominal partner neither invest capital nor shares profit or loss but takes responsibility of the firm. He only gives his name and credit to the firm for the benefits. iv) Secret Partners:- A secret partner is an internal partner. As a partner, he invest capital, share profit or bear loss and also takes active part in management of the firm but in secret manner. On the basis of agreement, such partners may involve in partnership business. v) Limited Partners:- The liability of such partner is limited up to his capital investment. As a partner, he invests capital, shares profits, bear losses and takes liability of the firm but only up to his capital investment. A partnership firm is not dissolved in the event of retirement, death of a limited partner. vi) Minor Partners:- A person’s who has not attained the age of majority i.e. 16 years is minor partners. He can be a partner of the firm but on the guardianship of a major partner. As a partner, he invest capital, shares profit, bears loss but his liability is limited up to his capital investment. vii) Quasi Partners:- A partner who has retired from the partnership but his investment still remained in the firm is known as quasi partner. For his invested amount he receives certain rate of interest from the firm. viii) Sub-partners:- Sub-Partners is really not a formal partner of the partnership but he is the internal partner of a partner of the firm.
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