Difference Between Sole Proprietorship and Partnership: Meaning, Example
Before starting a new business, every businessperson wonders if he should do it alone or if he can share the cost and the profit with others.
If the idea was conceived by an individual and he is the only one in charge, it makes sense to form a sole ownership. A partnership is formed when a group of people develops the idea together.
What is sole proprietorship?
The sole proprietorship is the oldest form of business that puts an individual in charge of the business. The sole proprietor will be responsible for both the profits and losses of the business. In a sole proprietorship, there is no difference between the assets and liabilities of the business and those of its owner.
This is a popular business type to start, as it requires minimal documentation and is easy to form. This helps avoid double taxation. A sole proprietor is an individual who owns and operates a business.
What is Partnership?
A partnership is an organization that is created by two or more people. In such an enterprise, members agree to share the losses and profits. Profits are shared among the members. Losses are distributed to the members.
Individually, the members of the Partnership are called partners or agents. Collectively, they are called a firm. A partner of the firm is responsible for the actions of other members.
The Partnership Deed binds the members of the company and no partner can make a decision alone without consulting with the others.
The table below will highlight some of the key differences between sole proprietorships and partnerships.
Differences Between Sole Proprietorship and Partnership
| Aspect | Sole Proprietorship | Partnership |
|---|---|---|
| Definition | A business model where the owner is also the operator. | A business model where two or more people agree to run a business together and share profits and losses. |
| Business Act | Not governed by any specific act. | Governed by the Indian Partnership Act of 1932. |
| Owner Referred to As | Sole Proprietor. | Partners, collectively forming a firm. |
| Incorporation Required | No mandatory incorporation required. | Incorporation is voluntary. |
| Minimum Members | Only one member required. | Minimum of two members required. |
| Maximum Members | Only one member allowed. | Up to 100 members allowed. |
| Freedom of Operation | Full operational freedom, as the owner makes all decisions. | Decisions require the consensus of all partners; differences in opinion can impact the business. |
| Liability | The owner bears all liabilities. | Liabilities are shared among the partners. |
| Finance | Limited scope for raising capital. | Greater scope for raising capital due to multiple partners. |
This comparison helps students and aspiring entrepreneurs understand the key differences between Sole Proprietorship and Partnership, providing them with a clear foundation to choose the right business structure for their needs.