Sole Proprietorship vs Partnership Differences
Many small business owners face a tough decision when starting a business. Will they start the business all on their own, or will they seek others to help in their venture? This ultimately comes down to whether they want to pursue a sole proprietorship or a partnership.
- A sole proprietorship is an unincorporated entity that does not exist apart from its sole owner. A partnership is two or more people agreeing to operate a business for profit.
- The Partnership firm is governed by the Partnership Act and a Sole Proprietorship is not governed by any specific statutory body.
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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.
There is dependably vulnerability with respect to the term of the sole proprietorship as it can wind up whenever if the proprietor retires or Dies or on the off chance that he ended up awkward to maintain a business. Then again, Partnership can be broken up whenever, in the event that one of the two Partners resigns or dies or ended up indebted, yet in the event that there are in excess of two Partners, it can proceed at the tact of the rest of the Partners.
Sole Proprietorship vs Partnership Infographics
Here we provide you with the top 9 difference between Sole Proprietorship and Partnership
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Sole Proprietorship vs Partnership Key Differences
The key difference between Sole Proprietorship and Partnership are as follows –
- Both sole proprietorships vs partnership are unincorporated entities, so the individual owners are not considered as separate from their business operationBusiness OperationBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation.read more. They report profits and losses from their business on their personal tax returns and are personally liable for the debts of their enterprises. With a partnership, all the partners may be held liable for the debts of the business, regardless of whether the debt was incurred by one partner without the knowledge or approval of the others.
- Tax advantages to the owner as it would enjoy slab benefit unlike partnership and can also claim some deductions under the income tax act.
- Bankruptcy laws apply differently depending on whether a business is a sole proprietorship or a partnership. Sole proprietorships must file personally as there is no legal separation between the owner and the business.
- Unlike a partnership, a sole proprietorship is not a separate entity from its owner. In the case of a bankruptcy, the sole proprietor is personally liable for any business debt or liability. Therefore, creditors can go after the proprietor’s personal assets, including any homes, cars, personal bank accounts, and other assets that can go toward unpaid debts. Even if the owner has personal liability insurance, the insurance cannot protect the owner against the creditors’ claims.
- One of the worst parts of a partnership is that you can possibly be held liable for something someone else has done. If someone sues a partner individually the other partner may not be brought in on the lawsuit, but if the sued partner cannot pay the full amount owed, the courts can take assets of the partner not involved in the lawsuit. There can also be some incredibly tricky situations that arise when one partner wants to dissolve the business and the others don’t.
- Partnerships may enjoy the advantage of having more access to operating capital. While the sole proprietor may need to rely on financing, such as bank loans, to start and sustain the operation, partners may be able to pool their resources to come up with needed funds. Sole Proprietorship vs Partnership can also consider adding another partner who infuses additional investment capitalInvestment CapitalCapital Investment refers to any investments made into the business with the objective of enhancing the operations. It could be long term acquisition by the business such as real estates, machinery, industries, etc.read more. While the sole proprietor can choose to add a partner if he/she needs the capital, he/she may have to give up his/her role as the lone decision-maker to do so.
- A sole proprietor has limited skills and may be unable to control all parts of the business.
- One characteristic of a sole proprietorship is that the owner can make all the decisions regarding the operation of the enterprise without having to seek the approval of others. This can make the sole proprietorship a more nimble operating structure, where decisions and changes can be made quickly if necessary. With partnerships, infighting and differing opinions may prevent the business from moving forward and could jeopardize its existence if the partners cannot resolve their differences.
- The risk connected with the business is comparatively less as it is shared with all the partners. The risk of the sole proprietor is greater than that of partnership form business.
- In sole proprietorship lower taxes because the earnings in a proprietorship are considered to be personal incomesPersonal IncomesPersonal income refers to the total earnings of the individuals and households of a nation through multiple sources such as salary, wages, business profits, bonus, investment returns, dividends, rental receipts, employer contribution in provident or pension funds, etc.read more, they may be subject to lower taxes than those imposed on some other forms of business ownership.
Sole Proprietorship vs Partnership Head to Head Differences
Let’s now look at the head to head difference between Sole Proprietorship and Partnership
| Basis of Comparison | Sole Proprietorship | Partnership |
|---|---|---|
| Structure | An individual doing his own business. | Two or more people doing business for profit. |
| Incorporation | Not required | Voluntary |
| Governing Act | No specific statue | Indian Partnership Act, 1932 |
| Minimum members | Only One | Two |
| Liability | Born by proprietor only. | Shared by partners. |
| Duration | Uncertain | Depends on the desire and capacity of the partners. |
| Management | Inefficient management due to the limited supply of skills. | The collective skill of partners leads to efficient management. |
| Finance | Scope of raising capital is limited. | Scope of raising capital is comparatively high. |
| Freedom | Owner can make all the decisions regarding the operation of the enterprise without having to 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. |
Sole Proprietorship vs Partnership – Final Thoughts
When entrepreneurs establish a business, they must decide on the form of business ownership. The form that is chosen can affect the profitability, risk, and value of the firm. The business ownership decision determines how the earnings of a business are distributed among the owners of the business, the degree of liability of each owner, the degree of control that each owner has in running the business, the potential return of the business, and the risk of the business. These types of decisions are necessary for all business.
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