Difference Between a Sole Proprietorship and Partnership

The difference between sole proprietorship and partnership is the number of people who own and operate the business.

What Is Sole Proprietorship?

As one of the oldest forms of businesses, sole proprietorship is an easy one to create, and it's widely prevalent. One owner operates a sole proprietorship. This single owner is in sole charge of making business decisions. The person who owns and runs the business is known as the sole trader or sole proprietor.

Sole tradership is another name for this type of business. The proprietor uses his or her own finances, experience, skills, expertise, and knowledge to operate the business on his or her own. The sole proprietor is in full control over all business activities. Legally, the owner and the company are inseparable.

What Makes a Partnership?

When two or more individuals share responsibility for running a business, this is known as a partnership. A partnership is a business organization owned by two or more individuals.

Partners include all individuals who run the business. These individuals have an agreement to share the company's profits and losses. Collectively, a partnership is called a firm. The ratio in which profits and losses are shared is decided by an agreement between the partners. A partnership is a legally binding relationship between partners. This is an unseen relationship.

The firm name is the business name the company operates under. The physical form of the partnership is the firm. Each partner operates as the other partner's principal and agent, and the mutual agency is considered the essence of the partnership. A partnership can't exist if this clause isn't in place.

Types of partnerships include:

  • Particular

  • General

  • Partnership-at-will

  • Limited Liability Partnership

The different types of partners that can be part of a partnership include:

  • Active

  • Nominal

  • Sleeping

  • Incoming

  • Outgoing

  • Sub

Anyone who's considered a partner is an agent of the partnership and is therefore allowed to manage the firm.

Similarities Between the Two

Both of these types of businesses are considered relatively easy to form. You don't need formation paperwork to start operation of either of these types of companies. In both partnerships and sole proprietorships, these businesses do not exist as entities separate from the business owners.

Details on Decision-Making

A sole proprietor acts as the single decision-maker of the business. This includes maintaining complete control over the finances and operations of the company. A sole proprietor doesn't have to consult with another person when he or she makes decisions related to the business.

Because there's a single owner in a sole proprietorship, decisions can be made quickly. This differs from a partnership, where partners will have to consult with one another before making decisions related to the business.

Each partner in a partnership has input on all important business decisions, including how to use company resources.

In partnerships, each partner can contribute his or her unique viewpoint when making business decisions. Having input from more than one person may result in advantageous business decisions.

About Liability Differences

Whether it's a sole proprietor or individual partners in a partnership, both have unlimited liability for:

  • Lawsuits affecting the business

  • Business obligations

  • Company liabilities

If a company's assets are not sufficient to cover the business's debts, sole proprietors, as well as partners, can lose personal assets including their homes and cars.

A partner can be held liable for the negligent behavior of another partner in that partnership company. If business assets are deemed insufficient to meet existing obligations of the partnership, any of the partners of the company could lose personal assets. Creditors can sue a proprietor who owes debts.

How Each Deals with Conflicts

Because a sole proprietor makes decisions for the business alone, he or she doesn't have business conflicts when it's time to make company decisions. It's not considered good practice to operate a partnership without having a detailed agreement in place first.

Having a partnership agreement can help the partners run the business without unnecessary conflicts and disputes. Because each partner may have differing ideas on business decisions, even with a partnership agreement in place, disputes may arise. When partners don't feel that other partners are doing their share of the company work or if there's a lot of disagreement between partners, the company may suffer.

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