Differences between a sole proprietorship and a partnership

Last Updated on December 8, 2022

Differences between a sole proprietorship and a partnership

One question every entrepreneur asks before starting a business is: should it be done alone, or should the burden and benefits be shared with others? Starting a sole proprietorship makes sense when an idea is born in an individual’s head and they want to be the ones who make all the decisions. On the contrary, partnerships can develop when groups of individuals come up with ideas together. These two business modules are quite distinctive, and to help new entrepreneurs decide which path they want to take, this article will address the differences between a sole proprietorship and a partnership:

Before addressing the differences between a sole proprietorship and a partnership, we need to understand what they are.

What Is a Sole Proprietorship?

A sole proprietorship is one of the oldest forms of business that puts individuals at the forefront of the business. He bears both the profits and losses arising from the business. A sole proprietor does not distinguish between the assets and liabilities of a company and those of its owner.

This is one of the most common types of businesses because it requires little paperwork and is simple to set up. It also helps avoid double taxation. An individual is a sole proprietorship and is referred to as such.

A sole proprietorship, also known as a “sole proprietorship,” is an unincorporated business with one owner who pays personal income tax on the profits made from the business. Many sole proprietors do business under their own name because they do not need to create a separate business name.

If you want to set up a sole proprietorship, the easiest and fastest way is to go through a sole proprietorship. A sole proprietorship begins with the start of business activities. It’s an ideal way for the self-employed to get started, as it doesn’t require filing any federal or state forms and carries a little regulatory burden.

A sole proprietorship differs significantly from a corporation, limited liability company (LLC), or limited liability partnership (LLP) in that it does not form a separate legal entity. As a result, the sole proprietorship business owner is not relieved of the company’s liability.

For example, a sole proprietorship liability is also an owner’s liability. However, sole proprietorship profits are also those of the owner, as all profits go directly to the entrepreneur.

What is Partnership?

A partnership is a type of company formed by a group of two or more people. In such transactions, the members agree to mutually bear the profits and losses. Company profits are divided among the members. As a result, losses are also distributed among the members.

Members involved in a partnership are individually referred to as partners or agents of the firm but collectively are referred to as the firm. Company partners are responsible for the actions of other members of the company.

Members of the firm are bound by the Partnership Charter, and members cannot make decisions independently without consulting other partners.

In a broader sense, partnership means any undertaking jointly undertaken by two or more parties. Parties may be governments, non-profit organizations, businesses, or individuals. Partnership goals are also very different.

In the strict sense of a commercial enterprise carried out by two or more people, he has three main categories of partnerships.
There are partnership companies, joint-stock companies, and joint-stock companies.

In a general partnership, all parties share equal legal and financial responsibilities. Individuals are personally responsible for any debts incurred by the partnership. Profits are also distributed equally. Profit-sharing details will almost certainly be set out in writing in the partnership agreement.

Types of partnerships

Below are a number of the most common types of partnerships, being practiced in the business world

1. General partnership

A general partnership is an ideal company formation when there are two partners who agree to share equally all of the company’s profits, assets, financial obligations, and legal liabilities. Partners must address common liability issues, as common partnerships do not offer liability protection to entrepreneurs. For example, if there are legal obligations to settle, each partner may be personally liable and have to contribute personal property to settle the matter.

2. Joint Venture

A joint venture is a type of general partnership that either has a specific end date or dissolves after a specific period of time. Unlike a standard partnership, a joint venture is a business agreement between two companies rather than two individuals. Like in any partnership, in a joint venture all partners are equally responsible for the operation of the business, along with any profits, losses, or liabilities.

3. Limited partnership

A limited partnership consists of at least two of her partners, one of who is a general partner and two of whom have limited influence. All partners have some responsibility. General partners have unlimited liability, and limited partners have liability up to their initial investment in the company. They are similar to silent investors and are not responsible for the day-to-day management of the company.

4. Limited liability partnership

A limited liability partnership is usually a good business option when the partnership involves two or more people. When multiple business owners work together, they can create their own issues, such as disagreements about how the business should be run. In a limited liability company, each owner’s liability is limited. No one is solely responsible for the company’s debts. The actions of each owner are distinct from those of the other owners. All partners can also run the business, as opposed to a limited partnership.

Types Of Sole proprietorships

There are basically three ways for a sole proprietorship to operate, depending on the services they provide and their relationship with the business or individual they do business with. There are three types of sole proprietorships:

1. Self-employed

An individual may operate a business, providing goods and services to clients and customers. For example, the owner of this business can market on social media to a list of clients or provide landscaping services to a group of clients. In any case, it is an independent person.

2. Freelancer or Independent Contractor

Regulations vary by state, but you may not need to submit formal business formation documents to be considered a sole proprietorship. A sole proprietorship is a freelancer or independent contractor who works for a company on projects and/or contracts but is not a full-time employee of the company. If you register for this type of work, you’ll probably put your social security number on a form to include your income on your annual tax return so the company can deduct wages paid to you.

3. Franchise

A franchise is another type of sole proprietorship. In a franchise, a business owner, also known as a franchisee, acquires the rights to a company’s brand. In return, the franchisee receives marketing materials and assistance with business operations. They also agree to operate under the same model the company has developed for the franchise.

Five Key Differences Between a Sole Proprietorship and a Partnership

  • Decision making: Sole proprietorships can take advantage of being in control of their business decisions to make quick decisions when needed. In a partnership, all partners must agree before making decisions about how the company operates. Disagreements tend to slow down business operations, and delays cost the company money.
  • Structure: A partnership involves two or more people, while a sole proprietorship means that he or she runs the business alone. The partnership may enter into agreements outlining terms of service and other business matters to resolve any future disagreements. 
  • Liabilities: In a partnership, the levels of responsibility may be unequal, but the business owners share responsibility. In a sole proprietorship, the entrepreneur bears all responsibilities related to running the business, including business liabilities.
  • Ownership: Sole proprietorships manage all business operations, while all partnership members have general responsibility for business operations. General partnerships are an exception because the individual responsible partner controls the business and the limited partners are only shareholders of the capital investment.
  • Leadership skills: When running a business, a sole proprietor may have limited management skills as they operate the business alone. Unlike partnerships, companies can utilize the combined management skills of all partners.

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