Partnership orgainzation emerged essentially because of the limitations and failures of sole proprietorship’s. Discuss.
Sole proprietorship ended because of the following limitations:
Limited resources: The sole trader has to depend on his own earnings or he can .borrow from relatives and friends. This is because a sole trader has got limited capital and resources.
Limited managerial capacity: To carry on a modem business, knowledge and skills regarding production, finance etc, are required. His decisions may not be balanced and it is impossible for a single person to possess expertise in all the areas mentioned above.
Less stability: The business continues and remains stable till the sole trader remains alive. If he dies, there is a chance of closure of business.
No check and control: No checks and controls are there on the proprietor. As he is the only proprietor of the business, one cannot question him on his acts and deals.
Not suitable for large scale operations: Due to the limited resources, it is appropriate for small business and not for carrying out large scale operations.
Less scope for scale economies: As the sole trader operates on small scale, he cannot enjoy benefits of large scale buying or selling.
These limitations brought sole proprietorship to an end and it gave birth to partnership organizations. Partnership is an association of two or more persons who have joined together to share the profits of business carried on by all or any of them acting for all. Partners are the persons who own the partnership business. All the persons are collectively called the firm or partnership firm. Because of the merits of partnership organization, it came into existence.
More capital available: In this, there are two or more partners and a partnership firm do not have to stick to a particular person for source of its funds. The combined financial strength of all the partners help in increasing the borrowing capacity of the firm.
Checks and controls over careless decisions: In this form of organization, there are fewer chances for hasty and reckless decisions. This is due to the reason that a firm is run on collective basis and all the partners take part in major decisions.
Diffusion of risk: In this, one doesn’t have to bear the whole amount of the loss. It is so because the losses of the firm are shared by all the partners.
Keen interest: As the partners are liable to losses and risks of a business, they take proper and keen interest in the business affairs.
More diverse skills and expertise: A good partnership. brings together those partners who complement one another and not those who have the same background and experience. One partner could be a specialist in finance, another in marketing and the third one could be in manufacturing. If all the partners give a combined judgment, the decisions would be better and balanced, and not hasty and reckless. More partners are there, that is why, partnership involves more people in. decision making.
Protection: The rights of all partners are fully protected. If a partner is not comfortable with the firm’s working, he can ask for the firm’s dissolution and withdraw himself from the business.
If more people come together they can not only pool their capital and skills but organize the business properly. A sole proprietor may not have both capital and skills to fulfill the requirements.