Sole Proprietorship vs PartnershipDifferences You Need to Know Between the Two!

Denise Elizabeth P
Senior Financial Editor & Contributor

One of the first decisions a business owner needs to make when forming their business is deciding on a business structure. 

Business owners are faced with a difficult decision of going solo with their business and reaping all rewards as well as the challenges of running a business, or maybe consider getting a partner to share both the income and losses with. 

In this article we are going to compare and contrast sole proprietorships and partnerships so that you can decide which is a better fit for your business.

Let’s get started!

Differences

Sole Proprietorship

LLC vs Sole Proprietorship

A sole proprietorship is a business structure where only one person owns the business and is a common ownership structure of businesses in the US.

This is the cheapest type of business to form and is also the easiest to form. 

In a sole proprietorship, the owner reaps all the profits from the business but will also be personally liable for the liabilities.

Should the owner of the company die, the business may end up winding up the business. 

Partnership

limited partnership vs limited liability company

A partnership refers to the business structure where two or more people own the company and are jointly liable for the liabilities of the business.

The law does not require a formal agreement to be signed by both parties when starting a business as a partnership, although it could be helpful if there is an agreement signed. 

With companies that have a partnership ownership structure, the company does not dissolve when one of the owners leaves or dies but may be broken up due to the event.

Should there be more than two partners in a partnership company, the rest of the partners can decide on how the business can proceed to operate. 

In a snapshot, the differences between a Sole Proprietorship and a Partnership is seen as:

Sole Proprietorship Partnership
Ownership Structure 1 person 2 or more people
Formal Agreement not required optional
Liability owner is personally liable joint and several, shared by partners
Ownership Duration completely depends on the sole proprietor depends on the desire of the partners
Management managed by the skills of only 1 person managed with the skills of 2 or more people
Capital Contribution limited to the capital contribution from a single owner more possibility of raising a higher capital
Decision Making the sole proprietor makes all business decisions partners need to agree on decisions concerning the business

Key Differences

Liability

With Sole Proprietorships and Partnerships, the owners of the company are not considered as separate entities from their businesses, this is only true in a limited liability company.

This means that creditors of the company can go after their personal assets.

The difference is that with a Sole Proprietorship, only one person takes the bulk of all the debts of the company while in Partnerships, all of the partners share the liability. 

The downside with Partnerships though is that a partner can still be liable even if he has no knowledge of the debt incurred by the business. 

Taxes

A Sole proprietor reports the profit and loss of the company in his or her personal tax return under Schedule C while a partner owner submits two returns: reporting a share in the profit or loss in their personal tax return and Form 1065, which is an informational tax return. 

Bankruptcy Laws

When filing for bankruptcy, sole proprietors file personally because he or she is not a separate entity from the business, which is not the case for partnerships.

When a business files for bankruptcy, creditors can go after all the assets of the sole proprietor unlike a partnership where partners share in the liability of the company. 

Capital

In financing the operating capital of the business, a sole proprietor will only have to rely on his or her own capacity to come up with the needed capital for the business and might have to approach banks and other financial institutions to apply for financing.

With partnerships, several partners have the capacity to pool their assets in order to come up with the needed capital. 

Management Skills

When running the business, a sole proprietor may only possess limited management skills since he or she is running the business on his own.

As compared to partnerships, the business can tap into the combined management skills of all the partners. 

Decision Making

A Sole Proprietor takes advantage of making decisions for the business on his own making him able to make quick decisions when needed.

In partnerships, all the partners need to agree before making a decision in operating the business.

Differing opinions and disagreements have the tendency to slow down business operations – and each delay has a corresponding cost to the business. 

Risks

Undoubtedly, a sole proprietor carries more risk for the business as compared with a partnership since all partners share in the risk of running the business. 

 

collateral for business

Final Thoughts

Setting up a business requires important decisions to be made and one of them is the ownership structure.

Deciding whether to go for a Sole Proprietorship or a Partnership determines the profitability, value and risk that the firm undertakes.

It also dictates how the business is going to be managed and the level of capital with which the business will be formed.

In addition to that, the level of liability, percentage of ownership and other risks are determined when a business is formed as a Sole Proprietorship or a Partnership. 

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  1. Cornell Law School "Sole proprietorship" Page 1 . January 24, 2022

  2. Cornell Law School "Partnership" Page 1 . January 24, 2022

  3. Ohio University "Types of Companies and Business Structures" Page 1 . January 24, 2022