Sole proprietorship, partnership, and corporation: What’s the difference?
A sole proprietorship is a business owned by a single individual. This person collects all the profit from the business and is liable for its debt.
A sole proprietorship is the simplest and least expensive business to start and operate. Because the owner and the business are one and the same, all of the income and expenses go straight to the owner. The owner then reports those on their personal income tax forms.
In a sole proprietorship, there’s legally no difference between the business and the owner. Therefore, all of the owner’s private possessions are at risk if they are needed to pay the business’s debts.
A partnership is a business wherein two or more individuals share the management, profit and liability for the company’s debts.
Like a sole proprietorship, a partnership is simple to set up and run.
Just like a sole proprietorship, the partners assume all liability for the debts incurred by the partnership. In addition, the partners may become deadlocked and unable to cooperate in the running of the business.
A corporation is a legally defined type of business in which the business itself is considered a “person” under the law. The corporation itself is liable for the business’s debts. This relieves the corporations owners of much of their own personal liability.
Owners of the corporation, called shareholders, have a limited liability. They risk only the money they have invested in the corporation. Shareholders can also sell their shares to someone else. In this way, they can end their ownership of the business.
The primary disadvantage of corporations is the difficulty and expense involved in starting them. To a lesser degree, they are also difficult and expensive to operate. Corporations are governed under state laws. They must therefore follow specific rules and procedures for record-keeping and reporting.
In addition, in some kinds of corporations, called subchapter C corporations, the corporation pays taxes on the money it earns. The shareholders pay tax on the dividends the corporation pays out.
Subchapter S corporations and limited liability companies are other kinds of corporations. They are more complex than sole proprietorships and partnerships. However, they are generally less onerous than other corporations to start and operate. They both offer more limits on liabilities than sole proprietorships and partnerships.
You don’t have to incorporate to start a business. Sole proprietorships are the simplest and fastest way for an individual to get into business. In some locales, you don’t need to do much more than to just start offering your products and services for sale. However, a sole proprietorship offers no liability protection. If your widget pollutes the neighborhood, you’re liable, so be careful! Additionally, be sure to check with your local governing agencies for the appropriate regulations in your area.