Small businesses often take the form of sole proprietorships or partnerships. The major differences between the two lie in the number of individuals who own and operate the enterprise as well as how profits and losses are distributed. While sole proprietorships and partnerships share some similar characteristics, each structure offers some specific advantages as well as disadvantages.
In a sole proprietorship, one individual owns and operates the business. Common examples include a one-person repair shop, a self-employed plumbing contractor or an Internet entrepreneur. A partnership consists of two or more individuals who share the responsibilities of ownership and operation. Some partnerships may include limited partners who invest in the business but are not involved in the day-to-day operations. Partners typically draw up a partnership agreement at the start of their venture, which spells out items such as how profits are to be divided.
Not a Separate Entity
Both sole proprietorships and partnerships are unincorporated entities, so the individual owners are not considered as separate from their business operation. They report profits and losses from their business on their personal tax returns and are personally liable for the debts of their enterprises. With a partnership, all the partners may be held liable for the debts of the business, regardless of whether the debt was incurred by one partner without the knowledge or approval of the others.
One characteristic of a sole proprietorship is that the owner can make all the decisions regarding the operation of the enterprise without having to seek the approval of others. This can make the sole proprietorship a more nimble operating structure, where decisions and changes can be made quickly if necessary. With partnerships, infighting and differing opinions may prevent the business from moving forward and could jeopardize its existence if the partners cannot resolve their differences.
Access to Working Capital
Partnerships may enjoy the advantage of having more access to operating capital. While the sole proprietor may need to rely on financing, such as bank loans, to start and sustain the operation, partners may be able to pool their resources to come up with needed funds. They can also consider adding another partner who infuses additional investment capital. While the sole proprietor can choose to add a partner if she needs the capital, she may have to give up her role as the lone decision-maker to do so.