Partnership vs Sole Proprietorship: Understanding The Key Differences

When beginning a small business, one of the earliest and perhaps the most significant decisions you will encounter is deciding the appropriate type of ownership. Partnerships vs sole proprietorships are two of the more usual types of ownerships. They both have their characteristics, advantages, and drawbacks.

In this article, we will discuss the major differences between the two setups so that you can make the best decision for your business journey.

Understanding The Partnership

Partnership is a business owned by two or more partners who come together to operate a company collectively. They typically divide duties, profits and losses, and other business activities. Terms of how the business operates are typically dictated in a partnership agreement. Such an agreement stipulates how partners will divide money, deal with decisions, and resolve problems.

Partnerships are wonderful for individuals who like to share their money, skills, and ideas. However, they do have mutual risks and liabilities.

Types of Partnership

There are several kinds of partnerships. Each offers different levels of responsibility and liability protection.

General Partnership

A general partnership is the most basic form. In this setup, each partner takes part in running the business and shares equal responsibility. That includes business debts/obligations. All partners have joint and several liability, meaning they can be held responsible together or separately for what the business owes.

Joint Venture

A joint venture is like a temporary partnership. Two or more parties come together for a specific project or goal. Once the job is done, the partnership usually ends.

Limited Partnership (LP)

LP includes at least one general and one limited partner. The general partner manages day-to-day business and is exposed to unlimited personal liability. The limited partner provides money and doesn’t get involved in business decisions and enjoys limited liability.

Limited Liability Partnership (LLP)

An LLP provides increased protection of liabilities. It provides a degree of autonomy to all the partners in the running of the company without being personally responsible for the actions of the others. This provides a safer choice for professionals such as accountants or solicitors…

Advantages and Drawbacks of Partnerships

Pros of Partnerships

• Ease of formation/setup with lower formation costs
• Shared decision-making authority and workload
• Ability to combine talents and ideas
• More ways to get funding/financing
• Tax advantages/deductions through pass-through taxation

In pass-through taxation, the business itself doesn’t pay taxes. Instead, profits go to each partner, who pays personal income tax on their share.

Cons of Partnerships

• Shared control can lead to disagreements
• Joint and several liability exposes all partners to legal and money risks
• Requires clear partnership agreements to avoid future issues
• Each partner’s actions can affect the whole business

Understanding The Sole Proprietorship

Sole proprietorship is the most basic type of business structure. It’s owned and operated by one person — the single owner of the business. This one individual makes decisions and receives all of the profits. It’s a popular choice of business structure for small businesses due to the ease of starting up and running it.

There is no legal distinction between the business and owner. This implies the owner is personally liable for all business obligations/debts.