Sole Proprietorship vs. Partnership

The comparison of the advantages and disadvantages of both.

Advantages of a Sole Proprietorship

  • A sole proprietor has complete control and decision-making power over the business.
  • Sale or transfer can take place at the discretion of the sole proprietor.
  • No corporate tax payments
  • Minimal legal costs to forming a sole proprietorship
  • Few formal business requirements

Disadvantages of a Sole Proprietorship

  • The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors won't usually invest in sole proprietorships.

Advantages of a Partnerships

  • Businesses as partnerships do not have to pay income tax; each partner files the profits or losses of the business on his or her own personal income tax return. This way the business does not get taxed separately.
  • Easy to establish.
  • There is an increased ability to raise funds when there is more than one owner
  • Wider pool of knowledge, skills, and contacts.
  • Improved management with more than one owner.

Disadvantages of a Partnership

  • Partners are jointly and severally liable for the actions of other partnership obligations including contracts, torts, and breaches of trust. Joint and several liability means that if a third party were to sue the partners, the third party can sue any one of the partners without suing all of them. If a partner has been sued but cannot pay the third party the full amount, the third party may collect the money from the remaining partners.
  • Each partner is individually liable for the debts and obligations of the business; if the business does not have enough assets to pay back business debts, creditors can take the personal assets of the partners.
  • Partnerships can potentially be unstable because of the danger of dissolution if one partner wants to withdrawal from the business or dies.