A business needs a reliable structure to thrive. You may be considering setting up your business as either a sole proprietorship or a partnership. At Padgett, we provide a wide range of tax, accounting, and business advisory services to small businesses. In this article, our small business tax advisor provides an overview of the key things to know about sole proprietorships, partnerships, and the pros and cons of these two business structures.
The Internal Revenue Service (IRS) defines a sole proprietorship as “someone who owns an unincorporated business by himself or herself.” In other words, a person who operates their own business without any specific form is a sole proprietor. If the business formed an LLC, then a sole proprietorship is one that has only one member, which has not elected to be treated as an S-Corp, or a C-Corp. There are benefits and drawbacks to operating a business as a sole proprietorship, including:
As explained by Investopedia, “a partnership is a formal arrangement by two or more parties to manage and operate a business and share its profits.” An LLC with more than one member is taxed as a partnership, unless it has elected to be taxed as a C-Corp or S-Corp. Depending on your circumstances it may or may not be the right structure for your business. Here are some of the pros and cons of forming a partnership for your business:
There are some important similarities between sole proprietorships and partnerships. Both types of businesses are pass-through entities for tax purposes, and both offer little to no liability protection unless they are also an LLC. At the same time, there are also key differences between sole proprietorships and partnerships, including:
Yes, there are actually several different types of business partnerships. Most states recognize the following types of business partnerships:
Some jurisdictions also recognize other types of business partnerships as well, with the most common being the limited liability limited partnership (LLLP).
At Padgett, we are proud to be the leaders in tax guidance for small businesses, including sole proprietors and partnerships. Our firm has more than five decades of successful experience. If you have any questions about forming a sole proprietorship or a partnership, we are ready to help. Contact us today to set up a confidential initial appointment with a top small business tax advisor. We provide nationwide tax services to sole proprietors and partnerships.