Similarities Between Sole Proprietorships and Partnerships

By Christine Funk, J.D.

Similarities Between Sole Proprietorships and Partnerships

By Christine Funk, J.D.

While their names suggest very different business models, sole proprietorships and partnerships actually have quite a bit in common.

Two smiling businessmen

Easy to Create

The law considers corporations to be entirely separate from the people who operate them, but sole proprietorships and partnerships do not involve this kind of separation. Instead, the individuals behind sole proprietorships and partnerships and the business entities themselves are legally one and the same. As soon as an individual starts doing business, a sole proprietorship forms. As soon as two or more people start doing business in concert, they form a partnership. These entities require no additional paperwork or filing for formation. Automatic formation, of course, is much easier than writing and filing articles of organization or incorporation, creating an operating agreement, and designating a registered agent.

Easy to Dissolve

Because a sole proprietorship or partnership is really the person or people behind the business, dissolving them is simple. If the partners decide to form an LLC or the sole proprietor decides to go out of business, no additional paperwork is necessary. Rather than documenting the decision, the sole proprietor or partners simply cease doing business as they once did. If a sole proprietor dies, for instance, the sole proprietorship ceases to exist.

Simple Taxes

In either a sole proprietorship or a partnership, the owners claim their business losses and income on their personal tax returns rather than filing a separate tax return for the business. As pass-through entities, these businesses pass their profits and losses through to their owners.

Simple Business Names

In most jurisdictions, sole proprietorships and partnerships operate under the names of their owners. (Remember, sole proprietors and partnerships report their business income and losses on their personal income tax returns.) However, a business can register a DBA, or a name they are "doing business as." Some jurisdictions refer to these as fictitious business names or assumed names.

No Liability Protection

The owners of sole proprietorships and partnerships are liable for any lawsuits filed against their businesses. They are also liable for business debts. Being personally liable means that any damages awarded in a lawsuit or debts owed can come directly from the owner's personal assets; an owner of a sole proprietorship or partnership can lose their house, cars, jewelry, art, or any other valuable possession if their business runs into trouble.

Limited Shelf Lives

Because sole proprietorships and partnerships operate through the individual, they have limited shelf lives. A partnership or sole proprietorship does not live beyond the life of the owner of the business. Of course, if an owner of a sole proprietorship or partnership wishes to sell their business, it requires little effort, as they already own everything in their own name.

As you consider setting up a sole proprietorship or partnership, be aware that there are some issues you may want to ponder. Each type of business entity has its own advantages and disadvantages, but a well-informed business owner makes better choices than one who hasn't done their homework. As you think about forming your own company, you can do research on your own, consult an attorney, or request the aid of an online service provider.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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