If you are interested in sending a message that you are willing to take personal responsibility for the success and failure of your company, you may pursue either a sole proprietorship or a partnership. Both business entities are appropriate for those interested in smaller, non-corporate business structures with fewer regulations. Compared to corporations, partnerships and sole proprietorships are relatively easy to form and are not responsible for corporate income tax.
One similarity, and potential drawback, that both sole proprietorships and general partnerships share is personal liability. With both structures, the owners are personally liable for the debts and obligations of the business, including liabilities brought on by employees or other partners in the course of working for the partnership. When a sole proprietorship or a partnership is sued, the personal assets of the owners, such as bank accounts and houses, may be subject to the plaintiff's claims.
The owners of sole proprietorships and partnerships pay only personal income tax, not business income tax. Business income is reported on the owners' personal tax returns. While a partnership is responsible for filing an annual partnership return with the Internal Revenue Service, the partnership itself does not pay taxes. Instead, profits and losses are "passed through" to the owners, just as sole proprietorships pass income through to the owners. Neither entity is subject to "double taxation," which occurs when a corporation must pay business income tax and the same income is taxed a second time on personal tax returns.
Both sole proprietorships and partnerships are relatively common business entities because they are simple to set up and generally do not require registration with the state business registrar. A sole proprietorship is formed as soon as an individual begins doing business, just as a partnership is formed as soon as two individuals begin doing business together. Generally, either business may be set up without paying state filing fees that are associated with other business types, such as corporations.
In most states, in order to avoid any additional registration, sole proprietorships and partnerships must operate under the names of its owners. The legal business name, used on tax filings and paperwork, defaults to the names of the owners with both business structures. However, states allow partnerships and sole proprietorships to register fictitious business names, also known as an assumed names or Doing Business As (DBA) names.
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."