Difference Between Sole Proprietorship vs Partnership
A successful commercial organization has a compliance obligation to meet two registration requirements in all nations. The First one would be the Business Registration, while the second one is the Tax Registration. There are several types of business registrations a commercial organization would be compiled to acquire under the various statutory framework in their respective nations. Out of which the popular registrations are Sole Proprietorship, Company, Partnership, and Limited Liability Partnership and so on. The Tax registration is taken post attaining the Business Registration, but mandatorily before the commencement of operation.
- Sole Proprietorship – This is a Business form in where one person would retain the complete ownership, managerial control and operational dynamics of the particular Business. The concerned person who runs such business is legally termed as Sole Proprietor or Sole Trader.
- Partnership – Any business where two or more individuals would converge and agree on a specific agreement (legally called as Partnership Deed), that specifies the nature of the business, contribution and role of partner, and sharing or profit and loses are called as Partnership. Members of a partnership business are called Partners, usually, there are two types of partners – Active (Active role in management/operations) and Passive (Only profit sharing) partners. The collective of such Partners forming a business is called as a Firm.
Sole Proprietorship and Partnership Infographics
Below is the top 6 difference between Sole Proprietorship vs Partnership
Key differences between Sole Proprietorship and Partnership
Both Sole Proprietorships and Partnership are popular choices in the market; let us discuss some of the major points
1. Fundamental Concept
The basic premise of a Sole Proprietorship is a one-man owned, controlled, and directed entity with lesser regulatory burden and ease of operation. Whereas in Partnership there is a Contract between interested Partners (two or more) called Partnership Deed \ Treaty who shares Ownership, Profit, and Control.
2. Incentive Model
Sole proprietor has the ultimate and undivided claim on the profit generated by the business, moreover, it creates more sense of satisfaction and accomplishment for being one’s own boss. In Partnership, the profits of the business are shared as per the Deed between the partners and provide more security to them as the risks are also shared by them rather than completely owned by a single person.
3. Operational Aspect
The sole proprietorship is easier to operate and offers quick flexibility in decisions, but if the proprietor is sick, out of station or otherwise not available, the entire business will be detrimentally impacted. While the Partnership goes by mutual consensus of decisions which makes it difficult to make complicated decisions when the numbers of partners are high (like 35 or 50). However, the absence of one partner would not detrimentally affect the usual business as other partners will be available to support the operations.
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4. Confidentiality Edge
Sole proprietorship will offer maximum confidentiality, as there is no regulatory requirement to furnish the financials, hence the Competitor would be less likely to attain your details likewise in Companies. There is no safer person to trust than self, hence there is no room for ambiguity in this entity. Whereas in Partnership the financials are mandatorily shared with the Partners, and Trust factor amongst them plays a crucial role in the future of the business. In Firms (Partnership Businesses), where there are 15 or 30 partner’s mutual faith and integrity they demonstrate plays an impeccable role as, one partner may also be a partner to a Competitive Firm who may leak them confidential details.
5. Liability Clause
A proprietor has unlimited liability to his business which means, in the event of a default by his business, his personal assets can be attached to repay his obligations. While in Partnership the partners are individually and collectively obligated to address the default made by the business (in some cases, if the liabilities are not fully met by the partners, the assets of the Partner which possesses additional properties would be also liquidated).
The Sole Proprietor is expected to possess all the relevant skills, knowledge, capital, connections, technology and managerial talent to spearhead his business. This works well if the size of the business is small. But Partnership is a solution to all of the aforesaid flaws of the Single Proprietorship since the Firm can admit any Fresh talent, high net worth individuals with connections and capital the scope of growth is high in Partnership than Proprietorship.
7. Free Entry and Exit
The Sole Proprietorship is the easiest form of business, as it has less legal formalities and less obligatory discussions with other partners\stakeholders. In the event of an opportunity or adverse consequence, any can quickly start or close this business. But in Partnership, since each of these significant decisions (opening and closing) needs everyone’s concurrence, it has a lower degree of easiness for Entry and Exit when compared to Proprietorship.
Head To Head Comparison Between Sole Proprietorship vs Partnership
Below is the topmost comparison between Sole Proprietorship vs Partnership
The basis of Comparison between Sole Proprietorship and Partnership
|Concept||A type of business model, where one person is the owner, management, administrator, and single subscriber to the entire profit and losses of the entity.||A business entity where two or more like-minded people forms a legal contract (Partnership Deed) to contribute capital and share profits and losses.|
|Compliance Aspect||The registration of Sole Proprietorship is done mostly under the local or state governments (not under central governments).||Partnerships would mostly be registered under a pan-nation Partnership Act, with the exception of few nations like US (State Partnership Acts)|
|Business Decisions||Since there is only a single decision head, this entity can tap into any sudden business opportunity rivaling other competitors, and can also make the flexible changes in the decisions to fast-changing circumstances easily.||The partnership involves a Treaty / Deed that may require a legal concurrence of all partners in business decisions. This increases the decision and time, and are sometimes less flexible than the Sole Proprietorship.|
|Internal Confidentiality||This entity is not legally bound to furnish its Financial information like companies, and ensures maximum secrecy as only one person is materially involved here.||They are also not legally bound to disclose their Financials but are lesser secretive as they are legally bound to share it with other partners (minimum 2 to maximum 50-100 depending on countries), who might also have other business interests.|
|Applicability||This is applicable to only small business, as the degree of skills, capital, managerial efforts, and compliance are lesser and could be managed by a single person.||Its applicability is to the Medium and Large businesses, which need more capital, higher sophisticated skills (1st partner Technology expert, 2nd Legal expert, 3rd Marketing expert etc.), and more managerial support.|
|Business Lifeline||Will cease to exist in the event of the death, insolvency, lunacy, or voluntary closure of the business by the Proprietor.||May continue even after the death, insolvency, lunacy, or voluntary withdrawal of any partner if it’s Deed permit.|
We have seen that always a preferred mode of business registrations for people who want to have a less regulatory hurdle and wants to keep their confidentiality avoiding compulsory disclosures. However, e entrepreneur needs to make a careful assessment of the external and internal factors before choosing either of these models.
A small business which is comparatively riskier and is more vulnerable to some external factor (such as foreign exchange etc) can choose the Sole Proprietorship model. The is recommended because in this model the entry and exit from the business are very easy and quicker (in the event of unavailability) as the proprietor can assume any unilateral decision about his business devoid of any concurrence with anyone. However, in case of a partnership, any significant decision with respect to the business (especially its closure, withdrawal of any partner) needs to be accepted by all partners, and this consensus becomes even more difficult when the number of partners is more. Often conflicts arise between partners when there are differences in the future course of the business or pivotal decisions.
But the Partnership can maximize the success chance of the business because there are several entrepreneurial talents exerting a unidirectional convergence of their efforts, and their technological, managerial, and networking skills. If the business is expected to have a Medium or Large size growth, it is always prudent to have a partnership form of a model, because of its obvious sophistication. This should be the reason why if we take out of the lists of renowned successful business houses your chances of finding a Partnership is higher than that of a Sole Proprietorship (example Ernst & Young, KPMG and so on..)
This has been a guide to the top difference between Sole Proprietorship vs Partnership. Here we also discuss the key differences with infographics and comparison table. You may also have a look at the following articles to learn more.