The first thing you need to decide when planning to start a business, is to decide the type of ownership you’ll be opting for. From among the several different kinds of business organization methods, sole Proprietorship and partnership are the two most common ones across the globe. The difference in both these options comes from the necessity of individuality and whether or not should the financial, economic, and operational burden be shared with another person.
Primarily, General Partnership appears to be more credible than Sole Proprietorship. It involves less burden, both financially and effort wise, and more heads to make the business efficient, efficacious, and acknowledged. However, sole proprietorship can be favorable in a number of conditions too.
Thus, to understand this better before coming to a final decision, let’s take a look at the positives and setbacks of each below.
What is Sole Proprietorship?
When we talk about sole proprietorship, or individual entrepreneurship, it refers to a business led and owned by one single person (or a married couple). The entity is linked directly to the identity of the owner meaning the owner is fully and solely liable for it. The enterprise or the set-up is not legally separated from the owner, rather they pool with each other.
Pros & Cons
- Though, considered as a less reliable form of business sole proprietorship comes with specific advantages. As a matter of fact, it is marked as the simplest form of a legal business.
- In terms of expenses, this kind of ownership is the easiest to manage and rather inexpensive. Moreover, although the legal structure for every business is likely to differ depending on location and time, sole proprietorship requires minimal start-up effort (fees or paperwork) regardless.
- Less paperwork contributes to having fewer governmental regulations. The expenditure of time and resources is saved due to this.
- The greatest protection that comes with this system is the income tax. The entity is not bound to pay income taxes and the owner pays their own personal income tax on the revenue. The owner of the Sole Proprietorship is taxed only once.
- No incorporation is required for it. The owner has the freedom to make decisions and operate fully by themselves. Operation lies under the control of one member only (the owner) so does the liability. The owner is entitled to all the profits made by the business entity.
- Even though the establishment comes with more operational freedom and holds on profits, it teems with adverse circumstances.
- Dangers entail unlimited liability on the owner. The owner alone faces and deals with the debts and if the financial cornerstone isn’t met, the acceptors might seek repayment from the owner.
- The options to raise capital are reduced. Loans also demand a receipt of the owner’s credit history.
What is a Partnership?
Partnership, unlike sole proprietorship, takes a collaborative approach. The business parties work together, sharing the profit of the business and losses along with coinciding to achieve their mutual goals. The liability can be limited for all business partners or it can be equal; each partner bears the same liability for profits.
Pros & Cons
- A general partnership doesn’t have a limit when it comes to members and partners. This benefits the business as more heads, with varied perception and creativity give their input on new projects.
- The process of brainstorming is relaxed and competent. More dynamic ideas are born putting the business on the top of the ladder. A new influence is seen on projects as different skills, interests, and ideas are channeled towards one goal.
- The capital is increased as a lot of hands are offering monetary contributions. This increases opportunities for loans and funding.
- A business with partners is not taxed; individual members are taxed on their own profits. Each partner is taxed separately.
- Incorporation is voluntary. Decisions made have to be approved by each and every partner of the business. Differences in opinion can result in a loss. Every partner has a share in the liability.
- If a partner leaves, there is secondary support available which isn’t present in the case of Sole Proprietorship.
- A general partnership can cause problems due to liabilities. The business is responsible collectively for every decision. A decision is made by one partner; the consequences are dealt with by all the partners.
- It also results in loss of autonomy. A step is taken when every partner has approved it or in some cases built off of it. Lack of agreement can lead to conflicts and cause one emotional burden. Profits made are equally divided amongst the partners.
Nonetheless, whichever form of business ownership you choose for your start-up, it is likely to impact the risk factors, profitability, and overall value of the company in the long run. It is therefore vital to do a thorough research and analysis of market trends to select the wisest option. It is also notable how sole proprietorship and partnership differ in terms of the degree of liability and control of the business owners as well as how the revenue will be divided amongst them.