Difference Between Sole Proprietorship and Partnership

Sole Proprietorship vs Partnership

Sole proprietorship and partnership are both arrangements made in the formation of a business, depending on the scope of the business activities and requirements in terms of the variety of skills and additional funds needed. These two forms of business arrangements are very different to each other because of the number of people involved, the complexity of the arrangement, the extent of financial liability and the capital requirements. The article that follows will clearly show the reader the differences between these two forms of business arrangements and the pros and cons of both.

Sole Proprietorship

A sole proprietorship is formed by one individual who is the owner of the business, and who solely is responsible for the operation of the business and for carrying out the daily business activities. The formation of a sole proprietorship is very simple and can be done at any time as the individual pleases. Since the sole proprietor is the only owner of the business, he is wholly responsible for making decisions in the business and does not need to consult anyone else in making radical changes in the way the business is run. The advantages of being a sole proprietor are that it is inexpensive to start up, there is no distribution of profits, no conflicts over business decisions, allows the sole proprietor full control and can be closed down at any time. The disadvantages include the problems faced in obtaining capital, no division of labour and so no room for specialization and unlimited liability where the sole proprietor will be responsible for repaying any debt, even if he has to sell his own assets to do so.

Partnership

In a partnership, a number of individuals will get together under a business arrangement to conduct business. The decision making within a partnership is shared, and in order to make complex decisions all partners should be consulted. Trust and understanding may be the base for the formation of a partnership, even though such an arrangement may bring about higher levels of conflict, which could adversely affect business operations. The liability of a partnership may not be limited, unless it is a limited partnership, and in the case of a general partnership, just like the sole proprietor, partners will be personally responsible for losses made. The advantages of a partnership are that since there are more members more capital can be collected, a variety of skills will be pooled in a partnership which can improve their effectiveness and the division of labour may result in specialization.

What is the difference between Sole Proprietorship and Partnership?

Unless it is a limited partnership, both partnership and sole proprietorship face unlimited liability and may face personal losses. A sole proprietorship contains only one owner, whereas a partnership may be made up of a number of individuals. A sole proprietorship is individually responsible to run the business and make decisions, which is not the case for a partnership that may give rise to conflicts and misunderstandings. A sole proprietorship is less complicated in its formation in comparison to certain types of partnerships like limited partnerships, and a partnership has a wider pool of knowledge and skill than a proprietorship. A sole proprietor has limited access to capital, which may be a disadvantage for its growth, whereas a partnership will enjoy more access to funding.

In a nutshell:

Sole Proprietorship vs Partnership

• Sole proprietorship and general partnership both are faced with unlimited liability with greater burden on their personal funds and assets.

• A sole proprietor has sole decision making power; therefore, face fewer conflicts in contrast to a partnership where all partners must be consulted in decision-making.

• Partnership is not as simple in its formation and dissolution as in a sole proprietorship, but a partnership enjoys more access to capital and a bigger pool of knowledge and expertise in comparison to a sole proprietor.

• Both these forms of business have their pros and cons, and an individual must carefully analyse these before selecting either as a business arrangement.