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.
Sole ProprietorshipPartnershipDefinitionIt 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 actComes under no specific actGoverned by the Indian Partnership Act, 1932Owner called asSole ProprietorIndividual members known as partners and collectively known as a firm.Incorporation RequiredNot requiredVoluntaryMinimum MembersOneTwoMaximum MembersOnly One100Freedom to operateDecision-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.LiabilityRests with the proprietor onlyShared by partners of the firmFinanceScope 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.
Whether you’re thinking about starting a side hustle for extra income or making the leap to becoming your own boss, there’s a lot to consider when starting a small business. One of the first decisions to make is the type of business structure you need. In Canada, your business can operate as a sole proprietorship, a partnership, or a corporation.
There are pros and cons to each option, but important differences in terms of startup costs, liability, tax rates, and estate planning should be considered before making a decision. Understanding the key differences between proprietorship, partnership, and incorporation can help ensure your small business starts off on the right foot.
Sole proprietorship
In a sole proprietorship, one person operates a business without forming a partnership or corporation. Any income earned from the business is considered self-employment income and is taxed at personal income tax rates on the business owner’s personal income tax return.
Benefits of a sole proprietorship:
- Simple, inexpensive registration process
- Fairly minimal reporting requirements include:
- Annual personal tax return
- Payroll remittances and filings for any employees
- Can deduct losses from your personal income
- Can deduct expenses including prorated amounts for office and vehicle costs
- Proprietor controls all decision making and receives all profits
Disadvantages of a sole proprietorship
- As sole proprietor, you are personally liable for all debts and any other business liabilities — creditors may make claims against any business or personal assets to pay off debts
- Fewer funding opportunities and may be more challenging to raise capital to help build and grow the business
- Not easily transferable or inheritable in the event of the proprietor’s death
Similar to a proprietorship, a partnership is unincorporated but two or more entities are partners in the business, and business decisions are agreed upon together. A partnership agreement will outline the terms of the partnership and how any disagreements or dissolution will be resolved. In the absence of such an agreement, provincial or territorial laws will determine the terms of the partnership.
Benefits of a partnership
- Partnerships enjoy many of the same advantages as a sole proprietorship including relatively low setup costs, expense deductions, minimal reporting requirements, and ability to deduct losses from personal income
- A more experienced business partner can provide valuable guidance and mentorship to a less experienced business owner
- Startup costs are shared among partners
Disadvantages of a partnership
- Consensus is required for all business decisions
- Like a proprietorship, partnerships are subject to unlimited liability — all personal and business assets can be targeted by creditors
- A partner’s liability does not end even after death or retirement for debts and obligations of the partnership that were incurred prior to the death or retirement
Unlike a proprietorship or partnership, a corporation is a legal entity that is separate from its shareholders. As such, a corporation pays corporate income tax, which is calculated separately from the shareholders’ personal income tax.
Benefits of a corporation
- Shareholders are not personally liable for debts or obligations of the corporation
- More government funding options to help build and grow your business
- Can write off certain business expenses and may also benefit from additional tax advantages
- A corporation exists in perpetuity and ownership is transferable
Disadvantages of a corporation
- Higher startup fees which may include legal fees for articles of incorporation, federal and provincial incorporation fees
- Higher accounting fees for filing an annual corporate income tax return and any additional bookkeeping or tax planning consultancy
- Additional reporting requirements include:
- Corporate records which must be held for six years
- An annual corporate income tax return including detailed financial statements
- Payroll remittances and filings for any employees
No matter which type of business structure you choose, some common rules apply. Firstly, there’s no escaping the Canada Revenue Agency. Whether you end up paying personal tax rates or corporate tax rates, tax happens! Also, if your revenue exceeds $30,000, you will need to register for GST/HST and track all sales tax paid and collected.
Each business situation is unique and choosing between a sole proprietorship or a corporation can be a difficult decision. While tax savings, limited liability, and greater capital-raising opportunities make incorporating an appealing option, higher administrative costs, additional compliance burden, and more complex reporting requirements might lean in the favour of sole proprietorship particularly if your small business has a relatively low operating risk and a net income under $50,000.
Consulting with an accountant and/or lawyer before launching your business is a wise choice and can save you money and frustration in the long haul. A good corporate lawyer and a professional accountant that specializes in tax planning services can be valuable members of your small business team.
Sources:
//canadabusiness.ca/starting/before-starting-your-business/corporation-partnership-or-sole-proprietorship/