Difference between SOLE PROPRIETORSHIP and PARTNERSHIP

Difference Between Sole proprietorship and Partnership

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In general scenario, If we had an idea to start a business, several questions crossed our minds: Can you make enough money on your own? Which is it? You may need someone’s assistance to achieve your business objectives.

You can start a sole proprietorship or partnership firm by considering their differences and briefly knowing the basics of sole proprietorship and partnership.

in this article, you will know the similarities and differences between sole proprietorship and partnership.

What is a sole proprietorship?

The sole proprietor is an individual who owns and manages a business. The individual brings his own or borrowed capital, manages the business himself, bears all the risks alone, enjoys all profits, suffers all losses. This form of concern is also known as single entrepreneurship.

Characteristics of the sole proprietorship:

  • Ownership is solely managed.
  • Management and decision making is in the hands of the proprietor.
  • No sharing of risks.
  • Profits and losses are solely borne by the proprietor.

Advantages and disadvantages:

Advantages:

  • It can be easily formed
  • As the proprietor is the supreme judge he/she can take quick decisions and prompt actions.
  • Secrecy can be highly maintained as proprietor is accountable to him/herself
  • More flexibility.
  • Lower cost of management. 
  • It helps for earning livelihood independently.

Disadvantages:

  • It has limited capital as borrowing capacity of one person is bound to be limited.
  • It has limited organizing ability and managerial skill
  • Unlimited liability as there is no difference between sole trader and proprietor.
  • Absence of legal status.
  • No economies of large scale and specialization.

What is a partnership?

Meaning: 

A partnership is a relation between two or persons to run a firm by all, or any of them acting for all, with a mutual agreement to share profit and losses among them.

Characteristics of a partnership firm:

  1. Presence of Business:

Individuals come together to start or run a certain business, whether it is in industry or commerce or to practice a certain profession. A firm’s main purpose is to conduct business. In addition, the business must be profit-oriented and legally compliant.

  1. Agreement:

Agreement between partners must be an oral or written agreement to form a partnership.

  1. The object of starting a partnership firm must be sharing of profits.
  2. Partners must be faithful to one another.
  3. Liability of the partnership firm is unlimited.

Kinds of partners:

There are different kinds of partners as follows:

  1. Active partner:

The partner takes an active part in the affairs of the firm and enjoys a full voice in its management.

  1.  Sleeping partner:

This partner is also known as a dormant partner. This partner is reversed to the active partner and voluntarily surrenders the right to participate in the firm’s affairs and has no voice in its management. To the third party, the partner is not known, but liability is unlimited.

  1. Nominal partner:

The partner lends the firm his/her name and credit but does not actually do any work. The firm may be able to attract additional business and capital based on the reputation and goodwill of nominal partners. However, he never actively participates in the management of the business, regardless of whether he receives a share of the profits. Unknown to outsiders as a partner of the firm, such a partner nevertheless owes third parties money.

  1. Minor partner:

According to the partnership Act 1932, a minor can enter into a partnership, but the liability is limited by his share in the partnership capital. If he wants to continue after attaining majority, such partner will be regarded as a full-fledged partner with unlimited liability.

  1. Holding out partner:

A person may represent himself or may knowingly permit himself to be represented as a firm. Such a person directly or indirectly holding himself out as a partner shall be liable as a partner for the obligation created on the misrepresentation. He will, of course, not be entitled to any rights of partnership.

  1. Partner by estoppel:

If a person by oral or written or with an activity if he creates a belief to the outsiders that he is a partner in a certain firm and with that belief if outsiders give loan to that firm or sell goods on credit, in such case, he can not say that he is not a partner. Such a person is called a partner by estoppel. This type of partner does not pay capital and interfere in the affairs of the firm.

Apart from that, there are Secret Partner, Partner in profits, Outgoing Partner, Incoming Partner.

Difference Between Sole proprietorship and Partnership:

Sole proprietorship Partnership
1. Meaning
A sole proprietorship is a business carried by a single individual and bears loss and profit by himself; it is called sole proprietorship. A partnership is a firm carried out by two or more persons to run business by all, or any of them acting for all, with a mutual agreement to share profit and losses.
2. Governed
It is not governed by any law. It is governed by the Partnership Act,1932.
3. No. of persons.
There is only a single individual. Minimum 2 and maximum 50 persons.
4. Capital of the business
Capital is brought by the owner. In partnership, capital is brought as per the partnership deed.
5. Formation
A sole proprietorship can be formed easily by any person lawfully. A partnership is a firm that can form with an oral and written agreement.
6. Liability
The liability of the sole proprietorship is unlimited. For partnership is also unlimited liability.
7. Profit and loss
Proprietor himself bears both the profit and loss. Profit and loss are shared among the partners as per the partnership deed.
8. Registration
There is no provision to register the firm. As per Partnership Act, registration can be done; but it is not compulsory.
9. Decision making
Decision-making of a sole proprietorship is easy and quick as he solely takes decisions. Decision-making in partnership is a bit delayed when compared to sole proprietorship as more persons are involved.
10. Secrecy
Secrecy is maintained Maintenance of secrecy is less.

Bottomline:

So, when we compare sole proprietorship and partnership right from the formation, secrecy, capital formation, registration, etc;  there are many differences between them and also with some similarities like a liability. 

Further related reading:

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