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There is a saying that goes, “Two minds are better than one.”
However, does this sentiment apply to the world of business and entrepreneurship?
To answer this question, we’ve decided to assess both sole proprietorships and partnerships to determine which comes with more advantages, depending on your specific business circumstances.
So, if you’re interested in learning about sole proprietorships and partnerships, the types of partnerships offered, the pros and cons of both structures (and more), be sure to stick around!
By the end of this article, you’ll be well-versed in both business structures.
CorpNet is the smartest way to start a business, register for payroll taxes, and maintain business compliance across the United States.
Key Takeaways
- A sole proprietorship is a business structure where an individual operates and owns a business.
- A partnership is a business structure that accommodates two or more partners that operate and own a business together.
- There are several partnership types that provide an array of benefits to your business, such as general partnerships, limited partnerships, and limited liability partnerships.
- Sole proprietorships and partnerships are similar in their simplicity but have some key differences in their hierarchies and overall liability.
- Sole proprietorships and partnerships are both advantageous, but these advantages depend on your business goals and desires for operation.
Sole Proprietorship
A sole proprietorship is a business structure where an individual operates and owns a business.
This individual is responsible for the business activities, debts, and liabilities.
Therefore, it can be said that there is no legal difference between a sole proprietor and the business entity that they own.
This form of business ownership is the simplest among other structures.
Although sole proprietorships offer complete control over business decisions, it comes with the responsibility of full ownership – irrespective of how the business is doing financially or legally.
Partnership
A partnership is a business structure that accommodates two or more partners that operate and own a business together.
The partners are responsible for business activities, debts, and liabilities. Therefore, it can be said that there is no legal difference between partners and the business entity that they own.
This form of business ownership is quite simple, but provides fewer legal and financial protections to partners.
If partners are like-minded and can make business decisions in unity, a partnership can be advantageous.
However, if both partners are at odds with each other, this business structure can become more difficult to manage.
Additionally, taxation in this structure is very simple. For example, the profits and losses of the business pass through the owners onto their personal tax return.
Types of Partnerships
There are several partnership types that provide an array of benefits to your business such as general partnerships, limited partnerships, and limited liability partnerships.
Take a look at the list below for more details:
General partnership
General partnerships involve two or more individuals that share the management responsibilities and profits, while also overseeing debts and taking on full liability.
This partnership may serve owners who do not want to create distinct company roles and want to maintain the power to make decisions for the business.
Limited partnership
Limited partnerships involve two or more individuals that are split into general partners and limited partners.
General partners are responsible for managing business activities, while limited partners invest capital, but remain uninvolved in decision-making.
Limited liability partnership
Limited liability partnerships (LLPs) involve two or more individuals who are offered limited liability coverage from the business, as well as the decisions of their partner(s).
LLPs are often chosen by licensed professionals, such as accountants or lawyers.
What are the differences between sole proprietorship and partnership?
Sole proprietorships and partnerships are similar in their simplicity but have some key differences in their hierarchies and overall liability.
Check the chart below:
| Sole Proprietorship | Partnership |
|---|---|
| Single owner | Shared ownership |
| Full decision control | Shared responsibility/liability |
| Simple structure | Shared decision-making |
Pros & Cons
As a next step to investigate sole proprietorships and partnerships further, let’s explore a pro and con list for each business structure.
Sole proprietorships and partnerships are both advantageous, but these advantages depend on your business goals and desires for operation.
Sole Proprietorship
Sole decision-making
Simple structure/ownership
Basic tax format
Full liability
No collaboration
Less credibility
Partnership
Collaborative business model
Shared liability
Limited partners provide capital
Personality conflicts
General decision-making and formation is slower
How to choose between a sole proprietorship and partnership
Sole proprietorships and partnerships both offer benefits and drawbacks.
If you are certain of the way that you want to operate your business and you’re looking for a simpler structure, a sole proprietorship may be the perfect fit for you.
However, if you are interested in a more collaborative business environment where you have the choice of investing time or money, a partnership may provide you with a great business foundation.
Additionally, there are different types of partnerships, so there are more options for exact partnership structure.
Sole Proprietorship vs. Partnership: Which is the better choice?
It’s time to conclude this article on comparing sole proprietorships vs. partnerships.
Both of these structures offer more flexibility than other corporate structures, such as a C-corporation.
Also, the tax protocols for both structures are quite basic to follow. Overall, choose a sole proprietorship if you work best alone and want to execute business decisions quickly.
Conversely, choose a partnership if you have found people that you’d like to partner with and would benefit from the expertise of multiple partners.
Wishing you the best in all of your future business endeavors.
FAQs
Are partnerships taxed the same as sole proprietorships?
Partnerships are not taxed in the same way as sole proprietors. The profits and losses pass through the partners and are reported on their personal tax returns.
In a sole proprietorship, there is no separate business entity, but taxes are still recorded on the personal tax return.
Can a partnership be considered a sole proprietorship?
No, partnerships cannot be considered a sole proprietorship. In a partnership, there are two or more individuals who share ownership.
In a sole proprietorship, one individual is the owner.
Recommended reading:
CorpNet is the smartest way to start a business, register for payroll taxes, and maintain business compliance across the United States.