Starting a business is overwhelming. You have to take care of not only the operational aspect of it but also financing, but most importantly, you have to decide what legal structure to choose for your business. When starting a business, you only have a few options to choose from. You can either be a sole proprietor or start a partnership. This is where the debate of sole proprietor vs. partnership comes in. The sole proprietor vs. partnership debate is old, but it’s still relevant, considering we should weigh our options before making a move.
Most are happy to start a sole proprietorship. However, we often see sole proprietor to partnership transitions, clearly indicating that the matter is not as clear as it seems to be. If you are too wondering about what’s better for you, you have come to the right place. In this article, we will be discussing what sole proprietorship and partnership are and how to choose the right model by contrasting the pros and cons of said models. So, without further ado, let’s begin by discussing what sole proprietor and partnership mean and entail.
What is a Sole Proprietorship?
As the name suggests, a business that is owned and operated by a single person is called a sole proprietorship. It is the simplest form of business structure that one can opt for. In this business structure, you don’t even have to register with your Secretary of State. A sole proprietorship is common for private contractors and service providers, where you require only one person is required for the entire job.
However, having a sole proprietorship means being liable for the entire business and its operations. Managing finance, accounts, bills, etc., are some of the responsibilities you have to handle on your own. Bookkeeping for sole proprietors can be an issue if you are not savvy with numbers. This is why sole proprietorship QuickBooks is becoming popular, where one can easily manage their business finances with QuickBooks software.
What is Partnership?
A partnership is a business structure in which two or more individual invest and own the business by signing an agreement. Contrary to sole proprietorship, all the owners are equally responsible and liable for the company in a partnership. This means that you don’t have the sole proprietor bookkeeping problem and all the problems related to a sole proprietorship. However, it is not as simple as it seems. A partnership is a complex business structure that may limit the operational freedom of an owner.
Let’s Weigh the Pros and Cons
Now that we are done with the definitions, it is time to really dig deep into the pros and cons of sole proprietorships and partnerships. Is sole proprietorship the one for you? Or is partnership a better business option for you? Let’s discuss.
Pros and Cons of Sole Proprietorship
Sole proprietorships have a number of benefits. Firstly, when you start a sole proprietorship, you don’t have to formally register your business with your Secretary of State. You are the complete owner and operator of the business, which means all the sales and profits go into your pocket. Moreover, you are exempted from corporate taxation, which can usually be a lot for small businesses. However, you will still be taxed with self-employment tax since you are the owner and employee of your business.
Starting a sole proprietorship may give rise to other problems, such as getting sole proprietorship loans. Banks and lenders are more prone to trust and lend funding to established businesses than sole proprietorships. Even if you manage to get the funds, you have to manage your sole proprietorship accounts. Now, this is where things get tricky. When you are the sole owner and operator of a business, sole proprietorship accounting becomes a problem, and as a result, your personal and business finances get mixed.
Pros and Cons of Partnership
A partnership has its own benefits, which is why we often see sole proprietorship partnershiptransitions. A partnership offers you to share company burdens and responsibilities and can be less stressful than sole proprietorships. Moreover, you don’t have to pay separate taxes for being self-employed as an owner. You can also benefit from each partner’s knowledge, expertise, and experience, which is beneficial in challenging times.
However, thesole proprietor vs. partnership debate is still on because this business structure comes with its own troubles. If you are thinking of transitioning from sole proprietorship to partnership, read this. Given the shared structure, you also share the consequences of others. In worst cases, the courts can seize the assets of all partners. Moreover, you may counter differences of opinion between partners, which may derail the operational aspects of a business.
How to Choose the Right Model? So, here comes the question. Which option to choose? How to make the right decision when starting a business? Is a sole proprietorship better than a partnership? In all honesty, each business structure has its own advantages and disadvantages, as discussed above. It is up to the business and its owner to decide which structure is suitable for their business. The world is filled with both sole proprietorships and partnerships. If your business is dependent mostly on you, start a sole proprietorship. If your business is scalable and will get more complex as time progresses, opt for a partnership.
