Everything you need to know about the key differences between sole proprietorship and partnership.
Difference between Sole Proprietorship and Partnership
Difference – Sole Proprietorship:
i. Members- It is owned by one man.
ii. Agreement- In sole proprietary form of organization, there is no need of any agreement, as the ownership is in the hands of only one person.
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iii. Coordination- Since there is only one person or owner, there is no problem of coordination or consultation.
iv. Profits- The sole proprietor gets all the profits himself.
v. Registration- There are no legal formalities involved in the establishment of a sole proprietorship concern.
vi. Financial resources- The financial resources are pooled by one man only.
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vii. Nature- The sole proprietor is the owner, manager and controller of his business unit.
viii. Risks- All the risks and losses are borne by the sole proprietor.
ix. Continuity of business- The continuity of business is uncertain. In case of death of owner or for any other reason the business is bound to be closed down.
x. Secrecy- There is complete secrecy in the business because the owner does not share the secrets with anybody else.
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Difference – Partnership:
i. Members- It is owned by a number of partners (minimum number of partners is 2; maximum number of partners is 10 for a banking business and 20 in other than banking business).
ii. Agreement- In a partnership concern, there is a need for an agreement (which is mostly registered under the law).
iii. Coordination- As there are several members or partners, there is a need for coordination and consultation among them.
iv. Profits- In a partnership concern, the profits are divided among all the partners equally or at pre-settled terms.
v. Registration- The partnership firm may be registered under the Partnership Act.
vi. Financial resources- The financial resources are pooled by all the partners.
vii. Nature- The ownership, managerial work and the control of business is divided among all the partners, subject to the agreement.
viii. Risks- Because of unlimited liability, the risks or losses are borne jointly as well as severally.
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ix. Continuity of business- The life of partnership business is more than that of sole-trade business. The change in partners does not necessarily close down the business.
x. Secrecy- The secrets of the business are in the knowledge of all the partners; so there is a fear of secrets being leaked out.
What is the Difference between Sole Proprietorship and Partnership
Difference – Sole Proprietorship:
i. Governing Body – There is no separate Act, which governs sole proprietorship.
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ii. Registration – There is no need for registration.
iii. Number of members – It is owned and managed by one person.
iv. Agreement – No agreement is required.
v. Capital contribution – Owner contributes the entire capital.
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vi. Sharing of profits/losses – The owner earns all the profits and bears all the losses.
vii. Risk Bearing – The owner bears all the risks himself.
viii. Secrecy – There is complete secrecy as it is a one man show.
ix. Management – Full control of management in the hands of the owner as he is the sole judge of his business.
Difference – Partnership:
i. Governing Body – It is governed by Indian Partnership Act, 1932.
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ii. Registration – It is optional but it is desirable that a partnership firm should be registered.
iii. Number of members – Minimum-2; Maximum-50.
iv. Agreement – Express or implied agreement among the partners is essential.
v. Capital contribution – Capital is contributed by the partners.
vi. Sharing of profits/losses – Profits and losses are shared by the partners in an agreed ratio.
vii. Risk Bearing – The risks are borne by the partners jointly and individually.
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viii. Secrecy – It is difficult to maintain full secrecy as business secrets are known to all partners.
ix. Management – Every partner can take active part in the management of business.
Difference between Sole Proprietorship and Partnership – 10 Key Differences
Understanding the difference between a partnership and sole proprietorship form of business is useful for an aspiring entrepreneur to select the right form of business.
1. Membership:
Partnership is owned by two or more persons subject to the limit of ten in banking business and fifty in case of other business. Sole proprietorship is owned by one and only one person.
2. Formation:
Partnership is formed through an agreement which may be oral or in writing. A legal partnership business is governed by rules or regulations indicated under the Companies Act 2013. Conversely, sole proprietorship can be formed easily as it is the outcome of a single person’s decision without any legal administrative approval.
3. Registration:
Registration is required by law in case of partnership unlike sole- proprietorship, which needs no registration except some compliance.
4. Regulating Law:
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Partnership is governed by the rules contained under the Indian Partnership Act, 1932. There is no specific statutory law to govern the functioning of sole proprietor business.
5. Capital:
There is more scope for raising a larger amount of capital in partnership as there is more than one person. Sole-proprietorship has a limited financial capability, and hence, the scope for raising capital is naturally minimal.
6. Management:
Every partner has the right to take active part in managing the affairs of the business. Each partner also enjoys the authority to bind the firm and other partners for his acts in the ordinary course of business. Alternatively, the sole proprietorship is self-managed, one and few employees may support him. However, the decision of the proprietor is final and binding.
7. Risk:
The risk connected with the partnership business is comparatively less as it is shared by all the partners. The risk of the sole proprietor is greater than that of partnership form business.
8. Duration:
Duration of partnership continues as long as the partners’ desire. Even though legally it comes to an end on the death, insolvency or retirement of any of the partners, the business shall continue with the remaining partners. Conversely, the sole- proprietorship business comes to an end with the death, insolvency incapacity of the proprietor. Thus, there is uncertainty of duration of sole-proprietorship.
9. Quickness in Decision-Making:
Decision-making in partnership is corporately delayed as the partners arrive at decision after the consultation with one another; while the decision of the sole-proprietor is prompt as he need not consult anyone.
10. Secrecy of Affairs:
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Maintenance of absolute secrecy is not possible in a partnership as business secrets are accessible to more than one partner. Conversely, a sole-proprietor need not share his business secrets with anybody.
Difference between Sole Proprietorship and Partnership – Explained!
Sole Proprietorship:
1. Flexibility – This is as flexible as you can get. You are the sole person in charge.
2. Capital risk – Very high, as the proprietor bears all the risk. The returns, too, are all his.
3. Liability – Unlimited, extending to personal assets of the sole proprietor.
4. Formation – Simplest. No legal requirements.
5. Exit option – On death of sole proprietor, or if he decides to close down the business.
6. Inheritance – Depends on the will of the sole proprietor.
7. Goodwill – May or may not be mentioned in the books of accounts.
Partnership:
1. Flexibility – Less flexible than proprietorship, as the areas of responsibility are some-what defined. But there may be some heads wearing more than one hat.
2. Capital risk – Lower than sole proprietorship, as the capital is shared by the partners.
3. Liability – Unlimited, extending to the personal assets of the partners.
4. Formation – Through a partnership deed, though not compulsory. If there is no deed, the partnership is governed by the Indian Partnership Act, 1932.
5. Exit Option – As per the Indian Partnership Act, or through a deed of dissolution which has to be accepted by all partners.
6. Inheritance – The partnership deed can specify whether the business will carry on in the event of the death of a partner, and who will be entitled to his share of profits, or whether a new deed will be drawn up, or the partnership will stand dissolved.
7. Goodwill – Has to be mentioned in the books of accounts. Method of calculation is subjective and open to debate.
Difference between Sole Proprietorship and Partnership
Sole Proprietorship:
1. Number of members – It is a one man show
2. Agreement – No agreement
3. Registration – No need for registration
4. Formation – Formed the moment the proprietor thinks about it
5. Capital – Limited by capacity of the proprietor
6. Speed of Decision making – Quick decisions can be taken by sole owner
7. Quality of Decision making – Quick decisions can be taken by sole owner
8. Specialization – Owner needs to do everything. He gradually becomes a generalist
9. Liability – Unlimited liability arising from all his actions
10. Governance – No specific act governing sole proprietary business
11. Economies of Scale – Limited.
12. Scope for expansion – Limited.
13. Business Continuity – Can come to an end with death, insanity, and insolvency of the proprietor.
14. Business Secrecy – Secrets remain with the proprietor
15. Points of Authority – Centralization of Authority
16. Systems – Is more flexible. There is a lack of well laid systems.
17. Management – Business is controlled by one person. He is the final authority
18. Operations – Routine operations also get stopped if proprietor is not available
19. Profit Sharing – All profits and losses belong to proprietor
20. Profit without capital – Not possible
21. Risk – Owner bears all the risks, and
22. Suitability – More suitable for small scale business.
Partnership:
1. Number of members – It needs atleast 2 members and a maximum of 20
2. Agreement – Contractual relationship between who are bound by the terms of agreement.
3. Registration – Not compulsory, but desirable
4. Formation – Partnership deed must be drafted. Partners need to agree on terms of operating the business
5. Capital – Combined capacity of all partners likely to be higher
6. Speed of Decision making – Most decisions are taken after discussion amongst partners
7. Quality of Decision making – Decisions are well thought out and informed.
8. Specialization – Each partner can take specific responsibilities. He gains expertise and becomes specialist in the area.
9. Liability – Unlimited liability not only for actions of self, but also actions of partners
10. Governance – Governed by provisions of Partnership Act 1932
11. Economies of Scale – Greater
12. Scope for expansion – Greater
13. Business Continuity – Partnership can continue inspite of such adverse events if there is an agreement to that effect
14. Business Secrecy – Partnership also assures secrecy but it may be lost if any partner retires or dies.
15. Points of Authority – Multiple power centres
16. Systems – Is relatively better organised with well-defined roles and responsibilities.
17. Management – All partners have equal rights. They can participate in management of business and act on behalf of the firm
18. Operations – Business operations are smooth, even if one of the partners is not attending office for some period.
19. Profit Sharing – Profits and losses shared as per agreed ratio
20. Profit without capital – Partner can be included without contribution to capital and enjoy a share in profit
21. Risk – Risks are shared by all partners, and
22. Suitability – More suitable for medium scale business.
Difference between Sole Proprietorship and Partnership
Sole Proprietorship:
1. Members – One man show—Single ownership.
2. Formation – Minimum legal formalities, easiest formation.
3. Control and Management – Owner takes all decisions, quick decision making.
4. Capital Contribution – Limited finance.
5. Liability of Member – Unlimited, full risk.
6. Continuity – Unstable, because business and the owner regarded as one.
7. Sharing of Profits – The owner gets all the profits.
8. Business Secrecy – Perfect secrecy, no reports.
9. Suitability – Suitable for small business.
Partnership:
1. Members – Minimum-2, maximum not exceeding 50 members.
2. Formation – Registration is optional, easy formation.
3. Control and Management – Partners take decisions, consent of all partners is needed.
4. Capital Contribution – Limited but more can be raised in case of requirement.
5. Liability of Member – Unlimited and joint, and several.
6. Continuity – Stable but depends on partners.
7. Sharing of Profits – As per the agreement.
8. Business Secrecy – Secrets limited to partners, no reports required.
9. Suitability – Suitable for medium size business.
Difference between Sole Proprietorship and Partnership
Difference – Sole Proprietorship:
1. Specific Act – In India there is no separate Act for this type of business organisation.
2. Number of members – There is only one owner of the business, called the sole proprietor.
3. Agreement – The question of signing on agreement does not arise.
4. Maintaining secrecy – Business (trade) secrecy is maintained.
5. Financial-cum-technical base – It has weak financial-cum-technical base. The sole trader has limited ability to provide capital and necessary skills.
6. Chance of survival – Its chances of survival are weak. It suddenly comes to a halt with the death of the owner.
7. Time taken for decision-making – Decision-making does not take much time as the proprietor makes his own independent judgement.
Difference – Partnership:
1. Specific Act – A partnership firm is governed (i.e., controlled and regulated) by Indian Partnership Act, (1932).
2. Number of members – In partnership, the minimum number of members is 2 and the maximum 20 in non- banking businesses and 10 in case of banking business.
3. Agreement – A partnership business can be set up only after signing an agreement.
4. Maintaining secrecy – Business affairs are made known to every partner.
5. Financial-cum-technical base – It has a strong foundation due to adequate capital and highly specialised skills of different partners.
6. Chance of survival – Its chances of survival are quite strong since it may continue to exist and carry on business even after the death of a partner.
7. Time taken for decision-making – Decision-making may be delayed as all the partners have to reach a consensus on important matters and key issues.
Difference between Sole Proprietorship and Partnership
Difference – Sole Proprietorship:
1. Membership – Only one member
2. Functioning – A sole trader manages his business at his free will.
3. Formation – Easy and can be formed at any time the owner decides.
4. Secrecy – Business secrets are not open to anyone other than the proprietor
5. Finance – Scope for raising capital is limited
6. Continuity of business – Comes to an end with the death of the sole trader.
7. Decision Makings – Owner alone takes decision.
8. Liability – Unlimited and the burden is heavy.
Difference – Partnership:
1. Membership – Minimum membership is two, maximum membership is ten in case of banking business and twenty in other business.
2. Functioning – May be managed by all partners or any one on behalf of all others.
3. Formation – An agreement is required between the partners to start a business.
4. Secrecy – Business secrets are open to every partner.
5. Finance – Scope for raising capital is relatively more.
5. Continuity of business – The business of a firm does not come to an end if a partner leaves the firm.
6. Decision Makings – All partners is to agree to important decisions and so decision making may take time.
7. Liability – Unlimited but less burdensome as it is shared by partners.
Difference between Sole Proprietorship and Partnership
The important points of difference between sole proprietorship and partnership are as follows:
Difference – Sole Proprietorship:
1. Meaning – Sole proprietorship means that he has unlimited liability and even his personal property is always at the stake for the payment of business.
2. Objective – The main objective of sole proprietorship is to earn the profits by an individual
3. Number of Members – There is no maximum and minimum. Only 1 person is available who runs the business.
4. Capital – A sole trader contributes the capital.
5. Contract – Under this form, there is no requirement of contract because there is single person.
6. Operating Areas – The operating areas of this form is relatively limited.
7. Agency – There is no agency made because this form has only 1 person.
8. Registration – Registration of sole proprietorship is not compulsory.
9. Liability – It is same as the partnership.
10. Transfer of interest – There is no restriction for transferring the interest to any other person.
11. Risk – Single owner has to bear the risk.
12. Management – The sole individual owns, manages and controls the organisation.
13. Secrecy – There is no chance of losing the secrets to outsiders because only 1 person manages the business.
14. Division of Profit & Loss -There is no chance of division of profit and loss because there is only single person.
Difference – Partnership:
1. Meaning – Partnership is an agreement between two or more persons to carry a legal business with profit motive carried on by all or any one of them acting for all.
2. Objective – The main objective of partnership is to carry a legal business to earn and share the profits.
3. Number of Members – Maximum Number – Specified; Minimum Numbers – 2
4. Capital – All the partners contribute capital in an agreed ratio.
5. Contract – Under this form, the contract is done between two or more persons.
6. Operating Areas – The operating areas of this form is relatively wide.
7. Agency – There is an agency relationship between partners.
8. Registration – Registration of partnership is compulsory.
9. Liability – The liability of partnership is unlimited.
10. Transfer of interest – A partner cannot transfer his interest in business to any other partner.
11. Risk – All the partners has to bear the risk jointly and together.
12. Management – All the partners should be responsible for management of organisation.
13. Secrecy – There is greater possibility of leakage of secrets to outside the company.
14. Division of Profit & Loss – Profit and Loss is distributed among the partners equally.