You have much to think about and many questions to answer when starting a business. One of the most fundamental considerations is what type of business structure is right for you. Often, brand new small businesses choose to operate as a sole proprietorship or general partnership. Would either be a good fit for you? You might be wondering, sole proprietorship vs. partnership—what’s the difference? Show
In this article, I’ll share information about the similarities and differences between the two business structures and some thoughts about other business entity types to consider. This information should help you settle the sole proprietorship vs. partnership debate, so you select the best entity for your new business. An Overview of Sole Proprietorships vs. Partnerships
How Do They Compare?Let’s take a look at some of the key areas where sole proprietorships and partnerships have similarities and differences. Ownership
Liability
Taxes
Read More About Payroll: What is Payroll? How to Start a Sole Proprietorship or PartnershipStarting a sole proprietorship or partnership comes with less formality than forming registered entities with the state. Still, requirements vary depending on the type of business and where it’s located. Below I’ve listed the basic considerations involved in the process. It’s wise to talk with an attorney and accountant (or tax advisor) for expert guidance. Also, research what’s required by the state and local government agencies that handle matters related to starting and running a business in your area. 1. Business Formation PaperworkSole Proprietorship FormationStarting a sole proprietorship requires no legal paperwork to register the business with the state. If a business owner takes no steps to establish a formal business entity (such as a limited liability company or corporation), a business operated by an individual (or married couple) is automatically considered a sole proprietorship. Partnership FormationGenerally, no state registration paperwork is required to form a general partnership since it’s not considered a separate entity from its owners. However, states’ rules vary, so it’s critical to check with the state’s Secretary of State office to determine what’s needed. Whether the state requires it or not, a partnership agreement created with the assistance of an attorney is recommended to lay out all of the rights and responsibilities of business partners. A partnership agreement spells out the relationship between the partnership’s owners and how the business should be managed. The elements included will depend on the situation. Generally, a basic partnership agreement will address:
2. Business Name RegistrationSole Proprietorship Name RegistrationSole proprietors who do not want to use their legal personal name in their business name can use a fictitious name (trade name) if they file a DBA (Doing Business As). The DBA must be filed with the state or the county clerk—depending on the business’s location. For example, if Josephine Giardo wants to market her business by the name “Josephine’s Yoga Retreat” rather than “Josephine Giardo Yoga Studio,” she would need to file a DBA for the name that doesn’t include her full first and last name. Many states also require that businesses have their fictitious name published in one or more approved newspapers or other publications in the county where it was filed. Fictitious names may need to be renewed, so it’s important to verify the county and state requirements. Partnership Name RegistrationWhen a partnership’s owners do not want to include the last names of all of the partners in the business name, then the business must file a DBA. As I mentioned above, registering a fictitious name will be required at the county or state level. Before filing a DBA, consider doing a corporate name search to make sure the name is available. A sole proprietorship or partnership (unincorporated entities) may be granted permission to use a fictitious name that’s being used as the business name of an LLC or corporation in the state. However, if the sole proprietor or partners decide to form an LLC or incorporate the business, the state may deny their request to use the name because another registered entity has already claimed it. Keep in mind that registering a DBA does not provide any legal protection of the company name. Its purpose is to disclose to the public the individual, people, or entity operating the company under the assumed name. This helps protect potential customers, vendors, and others from doing business with unscrupulous owners attempting to hide their real identity. If a sole proprietorship or general partnership wants to obtain exclusive rights to use its DBA, it must register it as a trademark through the USPTO (U.S. Patent and Trademark Office). 3. Business Licenses and PermitsDepending on the type of business and location, there may be licenses and permits required at the federal, state, or local level to operate the business legally. Through CorpNet’s Business License Service Packages, sole proprietors and partnerships can have us identify the specific requirements, help prepare the applications, or even obtain all of the required licenses and permits for them. 4. Employer Identification NumberIf a sole proprietorship or partnership hires employees, it must obtain an Employer Identification (EIN). An EIN is a nine-digit federal tax ID number issued by the IRS. Businesses that hire employees (or that become an LLC or corporation) must have an EIN. Often, banks will also require an EIN before opening a business bank account. (Note that sole proprietorships and partnerships that hire employees will have other formalities and reporting requirements to fulfill.) 5. Ongoing Business ComplianceBoth the sole proprietorship and partnership business structures have minimal oversight and formalities. Unlike other business entity types, they do not risk losing personal liability protection because they never had it to begin with. However, to operate their businesses legally, they must renew licenses and permits and DBAs as required by law. They must also report and pay taxes. And they must follow any other rules and regulations set forth by the local, state, and federal authorities for engaging in their particular business activities. It can be challenging to track everything, so it’s helpful to speak with an attorney and accountant or tax advisor for insight. CorpNet’s Compliance Portal also provides a way to monitor many compliance requirements and due dates. Other Business Entity Types to ConsiderWhile sole proprietorships and general partnerships are the least complicated and inexpensive business structures to establish, they also provide the least amount of liability protection and flexibility. Often, businesses that start as sole props and partnerships eventually either form limited liability companies (LLC), limited partnerships (LP), or corporations (S Corporation or C Corporation). These structures deliver (to varying degrees) personal liability protection for business owners, tax flexibility, management flexibility, and other potential advantages. I encourage you to talk with legal and accounting professionals for guidance when choosing a business entity type. CorpNet’s Business Structure Wizard can serve as a good starting point for exploring your options. Set Up Your Business for Success With CorpNet’s Help!Whether you choose to move forward as a sole proprietorship or partnership or decide to form an LLC, LP, or corporation, you can count on CorpNet to help you through the process. Our filing experts have helped tens of thousands of business owners form LLCs, file DBAs, apply for EINs, register trademarks, apply for business licenses and permits; and submit their state compliance filings accurately and on time. Contact us today to get started! What are the similarities between a sole proprietorship and a partnership?Licensing the Name
A partnership is required to file for a business license along with the exact terms or articles of the partnership, while a sole proprietor often — but not always — does business as an individual. The business name filing for either entity is similar. The partnership must register a business name.
What is the difference between sole proprietorship partnership and company?A sole proprietor is self-employed, performs all business operations and assumes all liabilities. A partnership company is operated by two or more parties. In a general partnership, partners are responsible for all aspects of the business, including the debts of the partnership.
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