When you start a business, one of the essential questions you have to consider is what form it should take. The most popular option for entrepreneurs is a Sole Proprietorship. However, a Sole Proprietorship works best when the business has one owner; sometimes it is necessary or desirable to include another person. In this case, a Partnership structure may be right for your business. So, let’s discuss the differences between Sole Proprietorship and Partnership Businesses.
There are various forms of business organization in which the business entity can be organized, managed and operated. Sole Proprietorship is one of the oldest and easiest forms, which is still prevalent in the world. In this type of business, only one person owns, manages and controls the business activities. The individual who runs the business is known as a sole proprietor or sole trader.
On the other hand, Partnership is that form of business organization two or more individuals come together and agree to share profit and losses of the business, which is carried on by them. The individuals who run the business are called partners.
In a Sole Proprietorship, the owner is entitled to all profits of the business but is also personally liable for all obligations. Whereas in case of Partnership, each partner is jointly and severally liable for all obligations of the partnership.
Sole Proprietorship vs Partnership
|1.||An individual doing his own business||Two or more people doing business for profit|
|2.||The duration is Uncertain in Sole Properitorship.||The duration in Partnership depends on the desire and capacity of the partners.|
|3.||Management is inefficient due to limited supply of skills.||Collective skill of partners leads to efficient management.|
|4.||Sole Proprietorship can be started by minimum of only One member.||The minimum members requirement is Two in Partnership.|
|5.||There is not any specific act for governing Sole Proprietorship.||Partnership Business is governed under Indian Partnership Act, 1932|
|6.||Scope of raising capital is limited in Sole Proprietorship.||Scope of raising capital is comparatively High.|
|7.||Owner can make all the decisions regarding the operation of the enterprises without having seek the approval of others.||Infighting and differing opinions may prevent the business from moving forward and could jeopardize its existence if the partners cannot resolve their differences. |
|8.||Proprietor is solely responsible for the profits & losses in Sole Proprietorship.||In Partnership, Profits & Losses are shared in an agreed ratio.|
|9.||Business secrets are not open to any person except the proprietor.||Business secrets are open to each and every partner.|
A sole proprietor, also known as the sole trader, is the person who owns and runs the business. The fewer people you have running a business, typically, the easier it is to run. It is by far the simplest and most convenient form of business. Another perk is that you have complete control over the entire business. The best part is there are no legal requirements when setting up a sole proprietorship. It just starts up automatically with your first business transaction. The biggest disadvantage is that no legal distinction exists between the business and the individual. Therefore, the individual is personally liable for any obligations or debts incurred by the business because there is no protection or limitation when it comes to your personal assets. In summary, a sole proprietorship is very simple, the record keeping is minimal, and it doesn’t subject itself to legal formalities. It also is eligible for tax benefits since the income from the business becomes the owner’s personal income. One disadvantage is if the business owner dies or is not able to run the business, the business and business owner’s livelihood also comes to an end.
A Partnership is a business operated by two or more partners. There is no federal regulation that governs how Partnerships are formed; each state has its own rules on the matter. The exact nature of the Partnership will depend on the Partnership agreement, which should be drafted with the help of an attorney and should comprehensively regulate business matters to avoid misunderstandings down the line. Partnerships can be very similar to Sole Proprietorships in the sense that the business is not necessarily an independent entity; in the simplest form of Partnership, all partners contribute capital and all are fully liable for business debts. Each partner will pay taxes separately, although information about income and expenses is filed for the Partnership as a whole. The Partnership Agreement is merely a way to share Sole Proprietorship. However, other variants of Partnerships may differ in how liability or capital contributions are structured.
Sole Proprietorship or Partnership—which is better? The answer depends primarily on how you plan to structure your business. If you plan to be the sole owner, Sole Proprietorship is the option to choose. If you want to set up a business together with someone else, you will have to set up a Partnership.