When starting a business, you’ll be faced with countless decisions. There’s no shortage of research, and various questions will arise when starting your own company. One of the first questions that will pop up is whether you want to operate alone or pursue a general partnership.
In this article, we’ll go over:
So, a sole proprietorship or partnership- which is better?
Many might ask, “what’s the difference between a sole proprietorship and a partnership?” They can each offer their own advantages and disadvantages.
Let’s dive into what sets them apart.
What Is A Proprietorship?
A sole proprietorship is where you’re the single owner of the company. Setting up a business with a proprietorship is often easier than a partnership since no legal work is required when you set your business up as a sole proprietorship. It instantly happens when you begin a business. With a sole proprietorship, you’ll have total control over the company and be the sole owner.
What Is A Partnership?
A partnership (or general partnership) is where two or more people own the business together. The exact conditions and restrictions of the partnership depend on the contract, which is signed by all parties, which you’ll want to ensure has been thoroughly looked over by your lawyer before signing.
If you choose a partnership, you should be warned that they are more apt to fail. Statistically, 50 percent of all businesses close by their fifth year of operation. This statistic could be expected because it can be difficult to get a start-up on its feet.
Conflict With Owners
One major difference between a sole proprietorship and a partnership is conflict. When making a big company decision as a sole proprietor, conflict is minimal. Since the company is yours, you’ll always have the final say in what happens with it. On the other hand, partnerships are more likely to experience issues based solely on the fact that compromise will be necessary.
Decisions on how the company is run can lead to disagreements. If partners in the company have difficulty communicating, don’t see eye to eye, or don’t take their responsibilities seriously, you’ll be surprised at the harm it can cause to your business.
When you’re in a partnership, you share everything with your partners. From the profits to the burdens, you’re in it together. It’s important that before signing contracts for a partnership, you’ve already decided what will be done with the profit. Will you reinvest them in the company? Take them out and split it amongst the partners? In fact, having a long discussion about success, failure, adaptation, etc., is crucial for every aspect of your business.
If you’re the sole proprietor, you won’t have to worry about this; you’ll have complete control of your finances and all decisions.
Change of Owners
If a sole proprietor decides to sell the company or dies, the sole proprietorship ends automatically. On the other hand, a partnership may continue to exist after one of the partners has withdrawn or died. A partnership agreement will show how the partnership continues after a partner withdraws from the company, retires, or dies.
Business Licensing & Names
Sole proprietorships and partnerships have the same responsibilities regarding business licenses and name registrations. You won’t file state formation paperwork for a sole proprietorship or a partnership. However, you’ll have to research other business licenses or naming laws, such as DBAs, for your specific state. Some towns and counties require you to have a local license or permit. Depending on your products or services, you may need certain licenses from government agencies. These would include a food handler’s permit or a retail cannabis license.
Suppose you want to name your business something other than yours or your partner’s legal name. In that case, you must file a Doing Business As (DBA) or a Fictitious Business Name registration. Check with your Secretary of State for additional information.
Who’s Held Liable?
It’s important to remember that someone will have to be held liable for loans and lawsuits. All partners will be held liable if you’re in a partnership. Partners all sign on for the debt, lawsuits, and other problems that may occur when you run a company. If one partner makes an error, it’s on everyone to correct that error. Partners always share the financial burden.
However, if you own the company on your own, then those same situations are your sole responsibility. Any loans you take out, or if the company goes under, will be all on you. So, while you may have the ease of making each decision without compromising with a group, you’ll also be solely dealing with the company’s financial burden.
Range Of Skills
With a partnership, a range of skills will be available to draw from. Different positions in the company may suit different people. Your partners can take on and excel at these roles while you work in your own.
When you run the company independently, you may need to bring in other people or hire contractors as your business needs grow, and you may have to hand over some of the bigger roles in the company when you get stretched too thin.
When investigating sole proprietorship vs. partnership taxes, you’ll see a few differences. A sole proprietor reports the profit and loss of the company in their personal tax return under Schedule C. A partner owner submits two returns: a filing that shows their share in the profit or loss in their personal tax return and Form #1065, which is an informational tax return.
When filing for bankruptcy, sole proprietors file personally. Their businesses are not separate entities, which is not the case when you’re in a partnership.
When a company files for bankruptcy, creditors can go after all the sole proprietor’s assets, unlike a partnership where partners will share the liability equally.
In regards to the operating capital of the business, a sole proprietor must rely on their exclusive capacity to come up with the required funds for the business and may need to approach banks and other financial institutions for financing more often and sooner than a partnership.
With partnerships, several partners can pool their assets and raise the necessary capital and may be able to delay reaching out to a bank for a loan. They may even stand a better chance of getting a loan as well.
When running a business, a sole proprietor handles every aspect of management. This feature may cause a skill deficit since only one person is responsible for leading the company. In partnerships, businesses can tap into two or more people’s combined management skills.
A sole proprietor can make decisions on their own, as discussed. This feature can make them quicker with important decisions as well. In partnerships, everyone involved must agree before pursuing a course of action. Differing opinions and conflicts can slow down operations, which can have a financial cost to the business because of those delays.
Undoubtedly, a sole proprietor can see greater risk than a partnership because when there are several people involved, they all share the risks of running the business. However, personality clashes can also increase the risks associated with delayed business, decision-making, and cohesion in a partnership. Either option is not without its risks.
There are many pros and cons to operating a business as a sole proprietorship or in a partnership. The decision is ultimately up to you. However, we hope this list can help you determine which option suits your unique needs. Not every person or every business is the same. Use your best judgment and weigh the advantages and drawbacks associated with each to help you choose which route you should take. Another important thing to remember, if you start as a sole proprietorship, you can always bring in partners later.