Difference Between Sole Proprietorship and Partnership: Meaning, Example

The one question that crosses the mind of every businessperson before starting a business is whether he should it do it alone or share the burden and profit with other members.

It makes sense to open a sole proprietorship if the idea originated in an individual’s mind, and he wants to be the one who is in charge of all the decision-making. On the contrary, a partnership can be formed if a group of individuals jointly develop the idea.

Meaning of Sole Proprietorship

A sole proprietorship is one of the oldest forms of business establishment that places an individual at the command of business. He will bear the profits as well as be accountable for the losses arising from the business. There is no distinction between assets and liabilities of a business and that of its owner in a sole proprietorship.

It is one of the popular types of business to set up, with minimum documentation and ease of formation. It also helps to avoid double taxation. An individual owns a sole proprietorship, and he is known as a sole proprietor.

Also Check: TS Grewal Solution for Financial Statements of Sole Proprietorship

What is Partnership

A partnership is a type of business that is formed by a group of two or more individuals. In such a business, the members mutually agree to bear the profits and losses. The profit of the business is shared between the members. Consequently, the losses are also distributed among the members.

The members involved in the Partnership are known individually as partners or agents of the firm, while they are collectively known as a firm. A partner in the firm will be liable for the actions of the other members of the firm.

The members of the firm are bound by the Partnership Deed, and no member can take a sole decision without consulting the other partners.

The following table will highlight the most critical points of difference between the types of business entities, namely, sole proprietorship and partnership.

Basis of Comparison 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.

This article serves as a guide to the students of Commerce by helping them develop a clear understanding of the significant differences between a Sole Proprietorship and Partnership. Stay tuned to BYJU’s for many such exciting topics.