Long answer type questions. Define partnership firm. Explain its merits and demerits.


A partnership firm is a form of organisation wherein two or more persons work together, pool funds and share the profits earned (or bear the losses incurred).
Merits of a partnership:

i. Easy formation and closure: It involves an agreement (oral or written) between two or more partners. The registration of a partnership firm is not compulsory; this eases its formation. Also, a partnership firm can be shut down at any time with the mutual consent of all partners.

ii. Balanced decision making: In a partnership firm, business decisions are taken collectively by all partners. This makes the decision-making process comparatively more balanced than that in other ownership models.

iii. Sharing of risks: The risks in a partnership firm are shared jointly by all partners. This reduces the burden on each partner.

Demerits of a partnership:
i. Unlimited liability: In a partnership firm, all partners have unlimited liability. This means that if the firm’s assets are insufficient to pay off the firm’s debts, then personal assets of the partners can be used.

ii. Limited resources: A partnership firm faces limited availability of finance because of the restrictions imposed on the maximum number of partners allowed in a partnership firm. As a result, a partnership firm faces financial constraints, which, in turn, impede its growth prospects.

iii. Possibility of conflicts: In a partnership firm, the decision-making power is shared by the partners. This power depends on their respective levels of skills, capabilities and foresightedness. The difference in these qualities may possibly lead to conflicts among the partners.