Sole Proprietorship and Partnership: What’s The Difference?
Many small business owners while starting a business face a resolute alternative. Should they start the business on their own or they should seek other help to help in their ventures. This eventually determines whether they want to continue their business as a sole proprietorship or partnership. In this article, we will discuss the distinguish between proprietorship and partnership business.
Sole Proprietorship V/S Partnership
A sole proprietorship is an unincorporated business entity that cannot run without the sole trader. A partnership is two or more people agreeing to operate a business with a motive to earn profit.
The partnership firm is governed by the Partnership Act whereas a Sole Proprietorship is not governed by any specific statutory body.
In a sole proprietorship, the owner is entitled to enjoy all the profits of the business and at the same time also liable for personal obligations. Whereas in the case of a partnership, all partners are jointly and severally liable for all the profits and obligations of the business.
There is a dependable passivity concerning the term of the sole proprietorship as it can wind up the business whenever if the proprietor dies, retires, or is willing to wind up as unable to maintain a business. On other hand, the partnership can be split up whenever one of the partners dies or resigns, or ends up indebted, yet if there are more than two partners, it can proceed with the skills of the remaining partners.
Proprietorship V/S Partnership: Tabular Form
Following are some important points on the difference between proprietorship and partnership business.
Points of Difference | Sole Proprietorship | Partnership |
Number of Members | It is a one manpower | It needs a minimum 2 members and a maximum 20. |
Agreement | No Agreement | Contractual relations between those who are bound by the agreement. |
Registration | No requirement for registration | Not compulsory, but desirable |
Formation | Formed the moment sole trader thinks about it | Partnership deeds must be outlined. Partners need to agree on the terms of operating the business |
Capital | Limited by the proprietor’s capacity | The combined capacity of all the partners is likely to be higher. |
Speed of Decision Making | Decisions are taken by sole trader speedily | Decisions are taken after discussion among all the partners. |
Specialization | The owner needs to maintain everything. He deliberately became a generalist. | Each partner is authorized to take specific responsibility. He gains experience and becomes specialized in the area. |
Economies of Scale | Limited | Greater |
Scale of Operation | Limited | Greater |
Business Continuity | Can come to an end with death, insolvency, and insanity of the proprietor. | Partnership businesses can continue in spite of such adverse events if there is an agreement to that effect. |
Management | Business is managed by one person. He has complete authority. | All partners have equal rights. They can participate in the management of the business and act on the behalf of the firm. |
Secrets | Secrets remain with the owner | The partnership also assures secrecy but it can be ended if the partner resigns or dies |
Authority | Centralization of Authority | Multiple Power Centre |
Distribution of Profit or Loss | All profit and loss belongs to the proprietor | Profit and loss are shared as per the agreed ratio. |
Not Possible | A partnership can be continued without the contribution of capital and enjoy a profit share. | |
Risk | The business owner bear all the risk | Risk are shared by all the partners |
Suitability | More suitable for small scale business | More suitable for large scale business |
Business System | It is more flexible. There is a lack of an expert system. | Partnership business is relatively better organized with well-defined roles and responsibilities. |
Business Operations | The routine business operation gets stopped if the proprietor is not available | Business operations are smooth even if one of the partners is not attending the office for some period. |
Business Liability | Limited Liability | Unlimited liability emerging from all of his sections |
Goodwill | The goodwill in case of sole proprietorship May or may not be mentioned in the books of accounts | Partners have to compulsory mention goodwill in the books of account. The method of calculating is subjective and open to debate. |
Difference Between Sole Trader and Partnership
Let us learn the three important differences between sole trader and partnership:
Ownership: A sole trader is a person who entirely owns a business by himself. Both the business and person are one, meaning both the company’s profit and liability belong to one individual. The benefit of operating a sole trading business is that the sole trader is authorized to make all the business decisions.
A partnership is a business entity comprising two or more individuals. Often partnership is limited, meaning that one partner is only investing in the business while the other partner is operating the business. This business entity should record all their terms of partnership in the contract.
Liability: The business risk is borne by the individual who operated the business. It is a responsibility of a sole trader to become personally liable for paying all the debts of the company. The partners in the partnership business can also be exposed to personal liability.
In partnership business, personal liability is shared meaning that all the partners will be liable to cover all the company debts. Whereas, if the partners form limited partnerships, only the partner who operates the business is liable, not just the partner who invested in the business. Hence, forming the right form of partnership business can help avoid personal liability which cannot be avoided in the case of sole trading business.
Taxes: Both sole trader and partnership firms are liable to pay quarterly tax payments each year to IFRS. This tax-filing process is quite simple, and IFRS calls both entities “pass-through entities”. The income of these entities forwarded it to the owners who report the profit or loss on their individual; tax return. Both entities should maintain accurate records to receive the most deduction possible that will cover the low tax liability.
A sole trader is authorized to file the individual tax form 1040, making sure that schedule C ( Profit or Loss of Business) of the form is completed. Whereas, the partnership will file form 1065, U.S Return of Partnership Income along with individual 1040 tax return form.
FAQs on Difference Between Sole Proprietorship and Partnership
1. What is the main difference between a sole proprietorship and a partnership?
The main difference lies in ownership and liability. A sole proprietorship is owned, managed, and controlled by a single individual who bears all the risks and enjoys all the profits. A partnership is an association of two or more individuals who agree to co-own and manage a business, sharing profits and losses as per their agreement. Consequently, a sole proprietorship has a single decision-maker, while a partnership involves joint decision-making.
2. How does the liability of owners differ in a sole proprietorship versus a partnership?
This is a crucial distinction. In a sole proprietorship, the owner has unlimited liability, meaning their personal assets can be used to pay off business debts. In a general partnership, all partners also have unlimited liability. Furthermore, their liability is often joint and several, which means any single partner can be held responsible for the entire debt of the firm, regardless of their individual capital contribution.
3. Can a sole proprietorship have two owners?
No, a sole proprietorship cannot have two owners. The term "sole" itself means "only one." This business structure is defined by its single ownership. If a business is owned and operated by two or more individuals who share the profits, it legally becomes a partnership, not a sole proprietorship. The proprietor can, however, hire employees or managers to help run the business.
4. What are some real-world examples of each business type?
You can find examples of both business types all around you:
Sole Proprietorship Examples: A local grocery (kirana) store, a freelance writer or designer, a small boutique owned and run by one person, or a single-person tutoring service.
Partnership Examples: Many law firms and chartered accountancy firms, a restaurant started by two or more friends, or a real estate agency run by multiple partners.
5. Are a proprietor and a partner the same thing?
No, they are fundamentally different roles. A proprietor is the exclusive owner of a sole proprietorship, with complete control and entitlement to all business profits. A partner, on the other hand, is a co-owner in a partnership and shares control, profits, and liabilities with other partners as outlined in the partnership deed. The scope of authority and risk is individual for a proprietor and shared for a partner.
6. Why might someone choose a partnership over a sole proprietorship, despite the shared control?
Entrepreneurs often choose a partnership for several strategic advantages, even though it means sharing control. Key reasons include:
Larger Capital: More partners mean a larger pool of financial resources to start and grow the business.
Shared Risk: Business losses and liabilities are distributed among partners, reducing the burden on a single individual.
Diverse Skills: Partners can bring a mix of different skills, experiences, and expertise, leading to more balanced and effective decision-making.
Better Continuity: A partnership can continue even after the death or exit of one partner if provided for in the agreement, offering more stability than a sole proprietorship.
7. How are these two business forms legally governed in India?
The legal governance is a major point of difference. A sole proprietorship does not have a separate, specific law governing its formation or operation; it is the simplest to set up with minimal legal formalities. A partnership, however, is governed by the Indian Partnership Act, 1932. This act details the rights, duties, and liabilities of partners and provides a legal framework for the firm's operation and dissolution.
8. What happens to the business's existence if the owner or a partner dies?
The continuity of the business is handled very differently. In a sole proprietorship, the business and the owner are considered the same legal entity. Therefore, upon the death of the proprietor, the business technically ceases to exist. In a partnership, the death of a partner typically dissolves the firm. However, the remaining partners can form a new agreement to continue the business, providing a path for continuity that isn't available in a sole proprietorship.
