Sole Proprietorship vs. Partnership: What's the Difference?
Edited by Aimie Carlson || By Janet White || Updated on November 16, 2023
Sole Proprietorship is a business owned by one person, whereas Partnership involves two or more individuals sharing ownership and responsibilities.
Key Differences
In a Sole Proprietorship, a single individual runs and owns the business. They enjoy all the profits and bear all the risks. Conversely, a Partnership is an arrangement where two or more individuals pool their resources to run a business. Partners share both profits and liabilities.
Sole Proprietorship offers simplicity in its formation and operations. The owner has full control and decision-making power. In contrast, Partnership requires mutual agreement among partners. Decisions are often made jointly, requiring collaboration and communication.
Liability in a Sole Proprietorship rests solely on the owner. Any debts or legal issues the business faces are the personal responsibility of the proprietor. In a Partnership, however, liabilities and debts are generally shared among the partners, based on their agreement.
Tax implications differ between a Sole Proprietorship and Partnership. The former merges personal and business taxes, with income or losses reported on the owner's personal tax return. On the other hand, a Partnership must file an annual information return to report income, deductions, gains, and losses, but usually doesn't pay income tax.
Sole Proprietorships, being reliant on a single individual, may face challenges in scaling or expanding the business. Partnerships, with shared resources and expertise, might find it easier to expand but can also face conflicts due to differing opinions or visions.
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Comparison Chart
Ownership
Single individual
Two or more individuals
Liability
Personal liability for all debts
Shared liability among partners
Decision Making
Sole decision maker
Decisions often made jointly
Tax Implications
Personal and business taxes merged
Separate tax filing required
Scalability and Expansion
May face challenges scaling
Easier scalability, potential conflicts
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Sole Proprietorship and Partnership Definitions
Sole Proprietorship
It's the simplest form of business with minimal legal formalities.
Lisa chose a Sole Proprietorship for her craft store due to its straightforward setup.
Partnership
Partnerships can vary in form, including general, limited, and limited liability partnerships.
The investors chose a limited partnership to minimize their personal liability.
Sole Proprietorship
Sole Proprietorship is a business entity owned and run by one individual.
Jane's bakery operates as a Sole Proprietorship; she manages all aspects and reaps all profits.
Partnership
Partnership is a business structure where two or more people share ownership and responsibilities.
Ben and Jerry entered into a Partnership to run their ice cream store.
Sole Proprietorship
The business ceases to exist when the owner decides to end it or passes away.
Since it's a Sole Proprietorship, the cafe closed after its owner's sudden demise
Partnership
Partners are jointly and severally liable for business obligations.
In their Partnership agreement, both partners agreed to share any potential business debt.
Sole Proprietorship
It represents a singular ownership where the business is not legally separate from its owner.
In a Sole Proprietorship, the owner's personal assets could be used to settle business debts.
Partnership
It involves pooling resources, skills, and assets for mutual benefits.
The design firm flourished as a Partnership due to the combined expertise of its founders.
Sole Proprietorship
In this model, the owner assumes all the risks and benefits of the business.
As a Sole Proprietorship, Mark's losses or gains from his bookshop affect him directly.
Partnership
It necessitates an agreement that outlines roles, profit-sharing, and decision-making.
Before starting their Partnership, they crafted a clear agreement to avoid future conflicts.
Partnership
The state of being a partner.
Partnership
A business entity in which two or more co-owners contribute resources, share in profits and losses, and are individually liable for the entity's actions.
Partnership
The persons participating in such a business entity.
Partnership
A relationship between individuals or groups that is characterized by mutual cooperation and responsibility, as for the achievement of a specified goal
Neighborhood groups formed a partnership to fight crime.
Partnership
The state of being associated with a partner.
Partnership
An association of two or more people to conduct a business
Forge a partnership
Partnership
(cricket) The period when two specific batsmen are batting, from the fall of one wicket until the fall of the next; the number of runs scored during this period,
Partnership
The state or condition of being a partner; as, to be in partnership with another; to have partnership in the fortunes of a family or a state.
Partnership
A division or sharing among partners; joint possession or interest.
Rome, that ne'er knew three lordly heads before,First fell by fatal partnership of power.
He does possession keep,And is too wise to hazard partnership.
Partnership
An alliance or association of persons for the prosecution of an undertaking or a business on joint account; a company; a firm; a house; as, to form a partnership.
Partnership
A contract between two or more competent persons for joining together their money, goods, labor, and skill, or any or all of them, under an understanding that there shall be a communion of profit between them, and for the purpose of carrying on a legal trade, business, or adventure.
Partnership
The members of a business venture created by contract
Partnership
A contract between two or more persons who agree to pool talent and money and share profits or losses
FAQs
Who is liable in a Sole Proprietorship?
The sole proprietor is personally liable for all business debts and obligations.
How does a Partnership differ from a Sole Proprietorship?
Partnership involves two or more individuals sharing ownership, while a Sole Proprietorship is owned by one person.
How is decision-making handled in a Partnership?
Decision-making in a Partnership is typically shared among the partners, often based on an agreement.
Can a Sole Proprietorship have employees?
Yes, a Sole Proprietorship can hire employees, but the owner remains solely responsible for the business.
How are taxes handled in a Partnership?
Partnerships file an annual information return but don't pay income tax. Partners report their share of income or losses.
What is a Sole Proprietorship?
A Sole Proprietorship is a business owned and operated by a single individual.
Is it easy to transfer ownership in a Sole Proprietorship?
In a Sole Proprietorship, ownership transfer is not as straightforward since the business is intrinsically linked to the owner.
What happens if a partner wants to leave the Partnership?
Departure terms are usually outlined in the Partnership agreement, which might involve buying out the partner's share.
How is profit shared in a Sole Proprietorship?
In a Sole Proprietorship, the owner retains all the profits.
Is it mandatory for a Partnership to have an agreement?
While not always legally mandatory, it's highly recommended to avoid disputes.
Does a Sole Proprietorship have a separate legal identity?
No, a Sole Proprietorship does not have a separate legal identity from its owner.
What are the types of Partnerships?
Partnerships can be general, limited, or limited liability partnerships, among others.
Do all partners have equal rights in a Partnership?
Not necessarily; rights are often determined by the Partnership agreement.
What's the key advantage of a Sole Proprietorship?
Simplicity in formation and full control are key advantages of a Sole Proprietorship.
What's a significant challenge of a Partnership?
A key challenge can be resolving disagreements or conflicts among partners.
Can a Partnership have a written agreement?
Yes, it's advisable to have a written agreement in a Partnership to outline roles, responsibilities, and profit-sharing.
Who handles the finances in a Sole Proprietorship?
The sole proprietor typically manages the finances unless they hire someone for that role.
Can a Sole Proprietorship transition into a Partnership?
Yes, a sole proprietor can form a Partnership by entering into an agreement with other individuals.
How does a Sole Proprietorship end?
It ends when the owner decides to cease operations or upon their death.
How are disputes resolved in a Partnership?
Disputes are ideally addressed as per the Partnership agreement, or through mediation or legal intervention.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
