Business is any activity including the buying or selling of commodities or services for making a monetary profit. Business can be conducted on a smaller as well as larger scale. There are different types of business based on size, membership, and so on. Sole Proprietorship and Partnership are two types of businesses based on ownership.
Sole Proprietorship vs Partnership
The main difference between Sole Proprietorship and Partnership is that in a sole proprietorship, there is only one member. Whereas, in Partnership, there can be multiple partners between two or 100. There are many other differences between the two in terms of their business act, ownership, liabilities, finance, and freedom of operation.
Sole proprietorship refers to the type of business in which there is only one member, called the Sole proprietor or owner. The sole proprietor is the owner and runs the business and also the one who enjoys the profits of the business. He is also the one who suffers from its losses.
Partnership refers to the type of business in which there are more than 2 people. The partners are the owners of the business. They run the business together. They enjoy or suffer the profits or losses equally or in the pre-decided ratio. There are furthermore different types of partners.
Comparison Table Between Sole Proprietorship and Partnership
| Parameters of Comparison | Sole Proprietorship | Partnership |
| Business act | There is no specific act governing its business activities. | The activities of the business are governed by the Indian Partnership Act, 1932. |
| Owner | The sole Proprietor is the only owner. | The individual members called partners are the owners. |
| Members | The minimum number of members required is one. The maximum number of members required is one. | The minimum number of members required is two. The maximum number of members required is one hundred. |
| Freedom to operate | There is full complete freedom of operation. | As decisions are taken mutually, the freedom of operation is restricted. |
| Liability | Liabilities are the responsibility of the proprietor. | Liabilities are shared by partners. |
| Finance | There is limited scope for financing. | There is more scope for financing. |
What is Sole Proprietorship?
A sole proprietorship is a business that is run by only one individual. Here, the individual is the investor, manager, and profit maker. There is no act governing this particular business, and registration is also not required. The Sole Proprietor carries out all the activities of the business and enjoys all the profit that has been made. The proprietor need not discuss the business problem or seek permission before taking a decision.
Even if the decision or step is taken can be big or small. The proprietor has the complete right to make decisions on his own without anyone’s approval. The proprietor also need not share his profit with anyone. However, there is a downside. Here, the risk is completely taken by the proprietor. Therefore, in case of any kind of loss. The loss needs to be taken care of by the sole proprietor.
Example: If there is a shop which is owned by Mr. X, then all the decisions of the shop will be made by Mr. X. If he wants to extend the franchise, he can do it. The money and efforts invested will also be his. And if the shop makes profit or loss, it will also be entirely his.
What is Partnership?
A partnership is a business that requires at least two members. Here the business is run by the partners, and the profits and losses are divided equally among themselves. There are different types of partners such as Active Partner, Sleeping partner, Partner by holding out, junior partner, and so on. The active partners are the ones who run all the business activities.
The ratio of profit or loss is decided at the time of the partnership agreement. This ratio typically depends on the ratio of investment. The partnership is governed by the Indian Partnership Act 1932. The registration for this is optional. However, it is recommended to have a partnership agreement so that there are no feuds in the future. Here the profits are enjoyed by everyone. Also, everyone suffers from the effects of loss. All the decisions that are taken need to be taken unanimously. The value of the vote also typically depends on the investment made by each partner.
Example: A, B, and C own a shop equally in a partnership. Then the profits and losses of the shop will be shared by everyone. Also, while making any decision, everybody’s vote needs to be taken into account.
Main Differences Between Sole Proprietorship and Partnership
- There is no specific act governing its business activities of Sole Proprietorship. The activities of the Partnership business are governed by the Indian Partnership Act, 1932.
- Sole Proprietor is the only owner in Sole Proprietorship. The individual members called partners are the owners.
- In Sole Proprietorship, the minimum number of members required is one, and the maximum number of members required is one. In Partnership, the minimum number of members required is two, and the maximum number of members required is one hundred.
- In Sole Proprietorship, there is full complete freedom of operation. In a Partnership, as decisions are taken mutually, the freedom of operation is restricted.
- In Sole Proprietorship, liabilities are the responsibility of the proprietor. In a Partnership, liabilities are shared by partners.
- In Sole Proprietorship, there is limited scope for financing. In Partnership, there is more scope for financing.
Conclusion
Sole Proprietorship and Partnership are the two types of businesses based on ownership. They are both very different from each other. The only similarity is that the registration is optional in both cases. The sole proprietorship has only one member, and the partnership has multiple. A sole proprietor is the only owner, whereas partners equally own the business. Unlike a partnership, there is complete freedom of operation in Sole proprietorship. The sole proprietor is responsible for all profits and losses alone. On the contrary, everything is shared by the partners.
References
- https://kb.osu.edu/bitstream/handle/1811/70222/1/CFAES_ESS_535.pdf
- http://www.scirj.org/papers-0618/scirj-P0618533.pdf