Sole Proprietorship vs Partnership: What’s the Difference

It can be a difficult decision to choose between a sole proprietorship vs partnership. Here’s what you need to know.

Deciding between the different types of business entities is often one of the first things that you will do. But how should you know if a sole proprietorship, partnership or limited liability company is the best form of business ownership? There are pros and cons to each type of business structure, but it all really depends on the type of business you’re going to start. 

If you want to go into business by yourself or with someone else, there are some things that you can consider to help decide. If you’re going to need things like liability protection or if you are going to handle all business transactions, one might work better for you. Let’s take a look at how both a sole proprietorship and partnership work to help you decide which business structure is best for your business type.

Here’s What We’ll Cover:

How Does a Sole Proprietorship Work?

Different Types of Sole Proprietorships 

What Are the Advantages or Disadvantages?

How Does a Partnership Work?

Different Types of Partnerships 

What Are the Advantages or Disadvantages?

Key Takeaways 

How Does a Sole Proprietorship Work?

When you structure your business as a sole proprietorship it means that you are a legal entity and you are responsible for the entire business. This can have some significant advantages, but since you are the single owner you have personal liability if anything happens.

You become responsible for all of the business debts and any legal issues. So it’s important to consider the type of business you are starting and any risks that could be involved. But, sole proprietorships can benefit from the profits that they make. This is because there’s no separation between you and the business that you operate. 

Different Types of Sole Proprietorships 

There are a few different types of sole proprietorships depending on the product or service that you offer. 

They can include: 

• Being self-employed and providing your product or service to customers
• Being a freelancer or contractor and getting hired to provide a service to a company or client
• Being a franchise and selling your product or service in more than one place

What Are the Advantages or Disadvantages?

One of the biggest advantages of a sole proprietorship is that there isn’t a lot of capital needed to start your business. There aren’t any fees or filing requirements unless you register your business operations. Plus you have the benefit of running your company the way that you want to.

Since you are the sole owner of the company, you get to make all of the big decisions. It can also be easier for taxes. As a sole proprietor, when you declare your taxes you include any business income on your tax form. This means you don’t have to file any separate tax forms.

However, some risks come with operating your own business and different business activities. If anything happens, you are held responsible for any debts or liabilities. So if for some reason your business fails or you get sued, the business assets that you own could get seized. That includes any personal assets as well, which would get used to settle any debts or liability.

How Does a Partnership Work?

You might have guessed that if a sole proprietorship has a single owner, then a partnership has two. And while that is a very common form of partnership, they can sometimes include more than two people. There is no limit to how many people can be part of a partnership type of business ownership, it just depends on the partnership agreement.

But it can get trickier the more people that are involved in the partnership. Each owner of the company has the right to make certain decisions about the company. They can include financial and operational decisions or decisions about company debts or shares. 

Different Types of Partnerships 

The type of partnership that you want to set up depends on how you are going to structure your business and any operating agreement. If it’s just you and one other business partner or if it’s you and ten others, it could play a role in the type of partnership you establish. 

They can include:

• A general partnership if there are only two owners and they can agree to share equally in the legal liabilities, profits and assets
• A joint venture for when a project or business has a limited amount of time to function
• A limited partnership with a minimum of two partners, who all share some level of liability 
• A limited liability partnership with more than two partners where no one is solely responsible for debts and liabilities

What Are the Advantages or Disadvantages?

A partnership ownership structure can bring several benefits. If you’re going into business with someone, chances are you know them pretty well. Having a good working relationship can have a very positive impact on the overall operations of your business. 

Plus having a broad range of expertise can lead to improved business decisions. If you have more than one person that has input into the company, you can identify more opportunities to grow revenue. 

However, partnerships are like sole proprietorships since each owner handles any liabilities. And depending on which type of partnership you structured as, you could share liability with other partners. 

Key Takeaways 

Take the time to figure out exactly the type of business you want to operate and what it will need. If you consider your options carefully you can make the best decision for your company and its future. It’s not always going to be an easy decision, but weighing your options will help.

How you decide to set up your company will set the path towards success or failure. Find out if there are any implications for the industry you’re in, your location or the number of partners you have. Doing this due diligence will help you decide what’s best for your company. 

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