Difference Between Sole Trader and Partnership

There are three main business structures –  sole proprietorship or sole trader, partnership and corporation. In this article, we will touch the topic of a sole trader. Here, we will differentiate a sole trader and partnership.

Sole Trader

A sole trader is also known as a sole proprietor. Its most basic definition is a business structure that is owned and run by a single individual. This individual invests money, property, assets, skills and labor in order to run the business. He/she may employ workers for the business, but assets and liabilities belong to him/her alone. A sole trader carries the risk of the business as all business contracts will be made under their name. He/she will also undergo unlimited personal liability as debts that the business cannot pay off will be made liable to the individual.

Partnership

A partnership consists of two or more legal entities that contribute resources, skills and labor for the purpose of profit. Like a sole trader, there is no legal separation between a partnership and its partners. This means that partners will be liable for any debts, losses or legal issues that the partnership will face. A partnership may consist of individuals, corporations, or even other partnerships.

Comparison Board

Sole Trader
Partnership
Definition A business owned and run by a single individual A business structure where two or more partners contribute resources, skills and labor to earn profit
Number of owners 1 At least 2
Owners Sole trader/sole proprietor Partners
May consist of Sole trader, employees Partners, employees
Owners’ means of income Withdrawals from the business; net income from the business Profit sharing or salary, the latter sometimes preferred by industrial partners
Taxation No business tax; owner is taxed through individual income tax returns Partners are taxed based on the profit they earn
Separate entity? No No
Liability Unlimited Unlimited
Advantages Lack of conflict, single source of authority, owner keeps all the profits, simple structure Ease of startup, split costs, support from other partners, equality in ownership and management
Disadvantages Unlimited liability, no legal distinction, taxed as individual, stress from managing business alone Unlimited liability, shared accountability for debts, losses and legal matters, possibility of internal conflict

 

Venn Diagram