Sole Proprietorship vs. Partnership vs. Corporation: Pros and Cons

Establishing a small business means you have to decide on your product, service, marketing initiatives, and legal structure. 

This guide will help you choose the appropriate business structure for your startup. Discover the pros and cons of different legal entities, specifically sole proprietorships, partnerships, and corporations. 

Sole Proprietorship

A sole proprietorship is a type of business structure where only one owner profits and pays income tax from the company. Some sole proprietors name their businesses after themselves because they are not separate from them. 

Pros

• You are your own boss in this business, which means you can keep all the profits and manage your finances however you want. 
• Your startup costs are low because of the lack of requirements. 
• You have complete control over how you want to run the business.
• Creditors can extend credit when needed because of your unlimited liability. 

Cons

• Financing strategies are limited because of the need for more credibility from banks and other financial institutions.
• You are liable for all the debts of your business. 
• Creditors might go after your personal assets and properties if your business assets still need to be improved. 
• Raising capital in the long run can be more challenging because there is only one person.

Partnership

A partnership is a business legal structure where more than one person owns the business. They may have equal or unequal responsibilities and incomes in the company. 

Pros

• You have someone who can help you juggle the many challenges of running and owning a business. 
• Partnerships mean you have less financial burden because you share the obligation of paying for retail space, equipment, and inventory with another person. 
• You learn from your partner about different aspects of your business. For example, they may be knowledgeable in product development, while you’re better at marketing. 
• There are fewer tax forms. 

Cons

• The decisions are not up to you. You have to decide with your partner, which may lead to conflicts. 
• Your business is not a separate entity. You will be affected if you face legal problems, even if your partner causes them. 
• Splitting profits is another issue. This depends on how many partners you have. 

Corporation

A corporation is a type of business where the owner is separate from it. As a single entity, it is recognized in law and governed by people elected by shareholders. 

Pros

• A corporation allows you to protect your personal assets. So if your corporation is sued, you are not responsible for the legal obligations or debts. 
• Corporations offer flexibility because their ownership is based on stock ownership. It’s easy to raise funds by selling shares. 

Cons

• It can be challenging to save on taxes. Filing taxes can also be time-consuming because of the formalities and protocols. 
• The application process for forming a corporation is time-consuming and expensive. You’re likely to deal with a lot of paperwork. 
• The structure, protocols, and formalities are strict. For example, you should have a board of directors with yearly meetings.