Sole Proprietorship vs Partnership

Many small business owners face tough decisions when starting a business. Will they start the business independently, or will they seek others to help in their venture? It 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 Act governs the Partnership firm, and any specific statutory body does not govern a Sole Proprietorship.

In a Sole Proprietorship, the owner is entitled to all business profits but is also personally liable for all obligations. Whereas in the case of Partnership, each partner is jointly and severally liable for all partnership obligations.

There is dependably vulnerability concerning the term of the sole proprietorship as it can wind up whenever the proprietor retires or Dies or on the off chance that he ends up awkward to maintain a business. Then again, the Partnership can be broken up whenever, if one of the two Partners resigns or dies or ends up indebted, yet if there are more than two Partners, it can proceed at the tact of the rest of the Partners.

Here we provide you with the top 9 differences between Sole Proprietorship and Partnership.

The key difference between Sole Proprietorship and Partnership are as follows –

1. Both sole proprietorships and partnerships are unincorporated entities, so individual owners are not considered separate from their business operations. They report profits and losses from their business on their tax returns and are personally liable for the debts of their enterprises. With a partnership, all the partners may be held liable for the business's debts, regardless of whether one partner incurred the debt without the knowledge or approval of the others.
2. Tax advantages to the owner would enjoy slab benefit unlike partnership and can also claim some deductions under the income tax act.
3. Bankruptcy laws apply differently depending on whether a business is a sole proprietorship or a partnership. Sole proprietorships must file as there is no legal separation between the owner and the business.
4. Unlike a partnership, a sole proprietorship is not separate from its owner. In the case of bankruptcy, the sole proprietor is personally liable for any business debt or liability. Therefore, creditors can go after the proprietor's assets, including 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.
5. One of the worst parts of a partnership is that you can 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 when one partner wants to dissolve the business, and the others don’t.
6. 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 capital. While the sole proprietor can choose to add a partner if they need the capital, they may have to give up their role as the lone decision-maker.
7. A sole proprietor has limited skills and may be unable to control all parts of the business.
8. 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. It can make the sole proprietorship a more agile 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 jeopardize its existence if the partners cannot resolve their differences.
9. 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 a partnership from the business.
10. In a sole proprietorship, lower taxes because the earnings in a proprietorship are considered personal incomes. They may be subject to lower taxes than those imposed on other forms of business ownership.

Let’s now look at the head-to-head difference between Sole Proprietorship and Partnership.

When entrepreneurs establish a business, they must decide on business ownership. The chosen form can affect the profitability, risk, and value of the firm. The business ownership decision determines how the business's earnings 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 businesses.