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
Question1: What are the benefits of a partnership business in comparison to the sole trader?
Answer: The partnership business has several benefits over the sole proprietorship. The first and foremost benefit is that it brings together a distinct group of talented people who equally share the responsibility for running the business. Second, it makes financing easier for the business. The business can make use of the financial resources of several individuals. The partners not merely contribute funds to the business but are also eligible to use personal resources to secure bank loans. Finally, business continuity is not an issue because partners can acknowledge legally to enable the partnership to survive if one or more partners die.
Question2: Can two owners run a sole trading business?
Answer: The sole trader or proprietor can employ a manager to operate a business, but the risk and reward of the business remain with the proprietor itself. In the case of a partnership, it is completely possible for two or more people to own and manage a business.
Question3: What are the rights of general partners in partnership business?
Answer: Each general partner in partnership business has a right to:
- Participate in business management. The issue of control can be acknowledged with the partnership agreement.
- Each general partner has the right to participate in the profit or loss of the business.
