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A Brief Sole Proprietorship Vs. Partnership Comparison

Sole Proprietorship Vs. Partnership
Aspiring entrepreneurs can either form a partnership to start a business venture or choose to start it all by themselves. Here, we will take a look at the feasibility of sole proprietorship as compared to that of a partnership.
BusinessZeal Staff
Last Updated: Dec 03, 2018
Businesswoman shaking job applicant's hand
While starting a business, it is important that you choose a legal structure for it. It not only helps in legalizing your business, but is also necessary for taxation and licensing purposes.
Depending on the nature of the business venture and number of people involved, an entity can be registered as a sole proprietorship, partnership, limited liability company, or corporations.
Sole Proprietorship
According to the Internal Revenue Service (IRS), A sole proprietor is someone who owns an unincorporated business by himself or herself. Sole proprietorship is a business that is owned by an individual, who is solely responsible for all the profits and debts associated with a business.
It is one of the least expensive forms of registration and provides an individual the absolute power to carry out the affairs of the organization. It has been estimated that more than 75% of all the businesses are registered as sole proprietorship.
Registering your business as a sole propriety is simple and this is done by obtaining the necessary licenses and tax identification numbers. You are taxed individually and the profit or loss that your firm registers is put up on your personal tax form.
Advantages
Boss meeting with employee
► One of the biggest advantage of a sole proprietorship is the amount of time and capital that goes into registering your firm is relatively lesser. Unlike corporations, it does not demand huge capital and manual labor.
► In sole proprietorship, the owner is in total control of the profits and losses, and can easily draw out a strategy in which the business would be conducted. As there is no legal binding with any party, the owner can make changes to his business immediately, without waiting for someone's approval.
► The legalities involved in the business like the tax declaration and the licensing is a smooth affair, and one can easily file his taxes under the required rules. The income is declared on the personal income tax forms, thus preventing the tedious process of maintaining numerous records as in case of corporations.
► In case one wants to dissolve the business, the process is relatively simpler.
Disadvantages
Businessman taking loan
► Sole proprietors are responsible for any debts that are incurred and his personal property like house, car etc. can be used to recover the debts.
► The owner has to raise all the capital involved in starting the business on his own. Apart from the initial start-up costs, it is also a bit difficult to keep the inflow of cash for expansion purposes.
► Sole proprietorship demands complete control from the owner, and if the structure of the company is not properly maintained, it can result into inaccurate financial statements which can prove fatal for the business.
Business people with headsets using computers in office
► Sole proprietor has to work in tremendous pressure as he is the one who gets all the accolades and brickbats. He has to take the decision on his own, and if it does not work out, the blame lies squarely on him.
Partnership
Partnership
The IRS defines partnership as A Partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
Businessman shaking hands with his team during a meeting
A business venture which is owned by two or more than two people is called a partnership.
It is similar to sole proprietorship in its formation, except that the profits and losses are shared by the owners of the business. There are several advantages and disadvantages of partnership, let us take a look at some of them.
Advantages
Businessman sharing money
► The initial startup cost is shared by the co-owners, which makes it easy for each person to raise the capital.
For example, if a business venture requires $10,000 as the startup cost, and is owned by four individuals, then each one of them is responsible to raise only $2500. In times, when the business requires an inflow of capital, the avenues for raising capital are better.
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► Although, a partnership has lesser flexibility on decision-making as more than one person is involved, the occurrences of ambiguity are lesser as compared to corporations.
► The onus of decision-making does not lie on any one individual, and in case a project fails to take off, one particular person is not blamed. Having more members can also bring in multiple solutions to a problem. Partnership also helps in better organization as work can be divided by the skills each member possesses.
Disadvantages
Disagreement between businessman
► One of the biggest drawbacks of a partnership is that it can create disagreement on a lot of issues between the members.
There are times when you may not agree to a particular solution or may feel that there is a better way of dealing with a situation, but you may have to go with what the majority of your partners decide. This can make you liable for the actions and decisions of others as legally, you also are a part of the decision.
► The profits are shared equally, which can sometimes create friction among the partners. This means that individuals who are not putting in the required effort get the same benefits as someone who has worked really hard.
► Partnership has a limited life, and due to any reason if some partners decide to disassociate themselves from the business, uncertainty and unsuitability can mar the venture.
This was some information on sole proprietorship and partnership. As you can see that both these forms of businesses have their own advantages and disadvantages, so deciding which one is better or more beneficial is essentially an individualistic choice.