Sole Proprietorship: A Choice for Solo Entrepreneurs
When you want to run a business on your own, the Sole Proprietorship is by far the most convenient option. You don't have to do any legal work to set up your business as a Sole Proprietorship—it happens automatically when you start to do business, if you don't take action to establish a different kind of business. In a Sole Proprietorship, you are the sole owner of the entire business, and you have total control over it. No formalities are required (unless you hire employees or set up a retirement plan, which triggers some recordkeeping and tax filing requirements), and dealing with taxes is fairly simple. The main disadvantage of this form of business is that there is no legal distinction between you and the business, leaving you personally liable for any debts or obligations the business may incur, with no limitations and no protection for your personal assets.
Partnership: An Enterprise for Two (or More)
A Partnership is a business operated by two or more partners. There is no federal regulation that governs how Partnerships are formed; each state has its own rules on the matter. The exact nature of the Partnership will depend on the Partnership agreement, which should be drafted with the help of an attorney and should comprehensively regulate business matters to avoid misunderstandings down the line.
Partnerships can be very similar to Sole Proprietorships in the sense that the business is not necessarily an independent entity; in the simplest form of Partnership, all partners contribute capital and all are fully liable for business debts. Each partner will pay taxes separately, although information about income and expenses is filed for the Partnership as a whole. The Partnership Agreement is merely a way to share Sole Proprietorship. However, other variants of Partnerships may differ in how liability or capital contributions are structured.
Sole Proprietorship vs. Partnership
Sole Proprietorship or Partnership—which is better? The answer depends primarily on how you plan to structure your business. If you plan to be the sole owner, Sole Proprietorship is the option to choose. If you want to set up a business together with someone else, you will have to set up a Partnership.
Options with More Liability Protection
LLC and S-Corps are also popular with small business owners. While they take a little more effort to set up and maintain, they provide liability protection, so you don't end up putting your car or house on the line if your business can't pay its debts. Learn more about incorporating.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.