Decisions for Your Business: Selecting an appropriate business structure is essential when launching a new business. Due to their ease of use and flexibility, partnerships and sole proprietorships are two common business structures that small business owners favor. A thorough explanation of a sole proprietorship and the distinctions between it and a partnership firm are covered in this article.
How does a sole proprietorship work?
A company run and owned by one person is referred to as a sole proprietorship. It is the most basic kind of corporate structure. A sole proprietorship and its owner are not regarded as distinct legal entities.
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How Does a Sole Proprietor describe oneself?
1. Single Ownership: The concept of single ownership describes the situation in which a single person owns all of the company’s assets, including its real estate. As a result, all business-related risks are assumed by the sole proprietor.
2. Unlimited Liability: The liability of a sole proprietorship business is unrestricted. Your personal assets will be used to settle your debts in the event that your business fails.
3. One Man Controls: One man has total control because he is the only one who has to do all the work. As a result, the sole proprietor does all of the decision-making and assigns all of the work.
4. Fewer legal formalities: The formation, management, and dissolution of a single-owner business are essentially unregulated.
What Is a Partnership?
In a partnership firm, daily management and business operations are carried out by two or more people. A Partnership Deed outlining the goals and conditions of the partnership governs the business. Every partner makes a contribution to the company, whether it be financial, material, labor, or skill-related. They take part in the business’s gains and losses in return.
What features make up a partnership firm?
1. Unlimited Liability: The partnership’s members are subject to unrestricted liability. If the company’s assets are insufficient to pay off debts, creditors may seize each member’s personal assets to make up the difference.
2. Number of Partners: In a partnership firm, the business must be founded by at least two people, and there is normally a cap of 100 partners.
3. Mutual Understanding: Every partner, or any partner acting on behalf of all partners, is responsible for conducting business in the partnership. As a result, every partner has the dual roles of principal and agent.
4. Partners in Profit and Loss: Partially sharing the profits is a partnership’s main objective. In the absence of a written agreement, each partner shares in the company’s gains and losses.
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Difference between Sole Proprietorship and Partnership
| Sole Proprietorship | Partnership | |
| Definition | ||
| It is a business model where an individual is an owner as well as the operator of the business. | It is a business model where two or more persons agree to carry on business and share profits and losses mutually. | |
| Business act | ||
| Comes under no specific act | Governed by the Indian Partnership Act, 1932 | |
| Owner called as | ||
| Sole Proprietor | Individual members known as partners and collectively known as a firm. | |
| Incorporation Required | ||
| Not required | Voluntary | |
| Minimum Members | ||
| One | Two | |
| Maximum Members | ||
| Only One | 100 | |
| Freedom to operate | ||
| Decision-making rests with the proprietor only, hence full freedom to operate. | The decision needs to be mutually acceptable to all partners. A difference of opinion can arise and cause loss of business. | |
| Liability | ||
| Rests with the proprietor only | Shared by partners of the firm | |
| Finance | ||
| Scope of raising capital is limited. | Scope of raising capital is relatively high. | |
Considerations for Decision:
- Risk: Sole proprietors bear all business risks personally, while in a partnership, risks can be shared among partners.
- Control: Sole proprietors have full control, while partnerships require consensus among partners for major decisions.
- Legal Formalities: Sole proprietorships are simpler to set up and maintain, while partnerships may require a formal partnership agreement.
- Scalability: Partnerships may offer more resources and expertise for growth compared to sole proprietorships.
- Personal Liability: Sole proprietors face unlimited personal liability, while partnerships offer shared liability depending on the type.
Conclusion
There are numerous considerations when deciding between a partnership or sole proprietorship structure. These include how many people are involved, how much control you want to have over your company, and how much accountability and liability you’re willing to accept. There are advantages and disadvantages to each of these structures, and the choice usually boils down to what will work best for your company.
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