There were a record-breaking 21 million new business applications filed in the United States between 2021 and 2024, according to the Small Business Administration. Behind each one of those applications, an entrepreneur faced a crucial first decision: Go it alone? Or join forces with a partner?
While some daring founders embraced the autonomy of a sole proprietorship, others sought the shared expertise and resources of a partnership. This might seem like a fairly basic choice. However, the business structure you choose can have profound implications for every aspect of your operations—how you pay taxes, your personal liability, and, ultimately, your chances of success.
Explore what sole proprietorships and partnerships are, the various forms they come in, the businesses to which they’re best suited, and some of their core differences and similarities.
What is a sole proprietorship?
A sole proprietorship is one of the simplest and most common forms of business structure available to entrepreneurs in the US. It’s an entity owned and operated by a single individual who has complete control over all business decisions and keeps all of its profits. However, under a sole proprietorship, the owner is also personally responsible for all debts, losses, and legal obligations. A sole proprietorship isn’t legally separate from its owner—the owner’s personal and business assets are considered one and the same. As such, when talking about sole proprietorships, accountants will often say, “You are the business.”
Sole proprietors bear all liability when it comes to business operations. But they benefit from “pass-through” tax status—meaning profits are passed through directly to the owner, who then pays taxes at their personal income tax rate (including self-employment taxes). Sole proprietorships are not subject to corporate-level taxation.
To start a sole proprietorship, a business owner doesn’t need to file any special paperwork. It’s considered the default format for individuals conducting business in the US. Basically, if you start selling goods or services on your own, you’re automatically considered a sole proprietor unless you specifically register yourself as another type of business entity, such as a limited liability company (LLC).
However, there are still a few steps sole proprietors should take when launching a business under this entity type. These include assessing local, state, and federal tax obligations; researching what business licenses or permits you might need; opening a business bank account; and purchasing business insurance, for example. You may also want to obtain an employer identification number (EIN). This isn’t required for sole proprietorships, but it saves you from having to use your Social Security number on business paperwork and is often required when opening a business bank account or applying for funding.
Types of sole proprietorships
Sole proprietorships typically operate as one of three basic models:
Self-employment
A sole proprietor may operate as a one-person business operation—typically revolving around a specific trade, skill, or service the owner offers directly to customers. Think of a gardener who owns their own business or a wedding photographer working under their own name. These entrepreneurs handle everything from marketing and customer service to the actual work itself, often building a local client base and reputation over time.
Freelancer or independent contractor
Freelancers and independent contractors are among the most common kinds of sole proprietors. These are individuals who focus on offering specialized professional services, often to other businesses and usually on a project-by-project basis. A freelance graphic designer, copywriter, or website builder might work with multiple clients simultaneously, setting their own rates and schedules while maintaining the flexibility to choose what projects they take on.
Franchise
Franchise sole proprietorships are a unique hybrid where an individual owns and operates a business under an established brand’s umbrella. The franchise owner benefits from a proven business model, established brand recognition, and robust corporate and marketing support but still maintains the independence of a sole proprietorship.
While franchisees must follow the franchisor’s operational guidelines and pay franchise fees out of their earnings, they’re responsible for the day-to-day management, hiring, and financial success of their individual franchise. Believe it or not, you could even run a fast-food franchise as a sole proprietor—though this is less common than service-based franchises like cleaning services, tax preparation services, signage printers, and small-scale insurance agencies.
What is a partnership?
A partnership is a business structure wherein two or more owners share ownership, combining resources, skills, and capital to run an enterprise together. Each partner contributes to the business—sometimes through capital investment, labor, or expertise—and distributes profits and losses according to the terms of the partnership agreement. While partnerships are sometimes formed through verbal agreements, most are established through written contracts that detail each partner’s role, responsibilities, profit share, and decision-making authority.
Partnerships, like sole proprietorships, generally don’t provide personal liability protection to partners—meaning they are personally responsible for the company’s debts and legal obligations. However, some partnership structures (outlined below) offer a degree of legal protection to some partners. Shared responsibility can make it easier to raise money, diffuse risk, divide the workload, and bring diverse expertise into the venture. Also like sole proprietorships, partnerships are considered pass-through entities for tax purposes, meaning the business’s profits are passed directly to the owners, and are taxed on their personal tax returns.
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Types of partnerships
- General partnership
- Joint venture
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Limited liability limited partnership (LLLP)
The five kinds of partnerships available to business owners in the US are:
General partnership
A general partnership is the most basic kind of partnership available to US entrepreneurs. In it, there are two or more partners who all agree to share equally in profits, assets, financial obligations, and the business’s liabilities. General partnerships are pluralized sole proprietorships in that they don’t offer business owners any liability protection. For instance, if the general partnership is sued and forced to pay legal damages, each partner has personal liability and may have to use personal assets to cover such damages or subsequent losses.
Joint venture
A joint venture is like a partnership that exists for the completion of a specific project or business function. They can be between individual partners, or sometimes even partner businesses. In either context, a joint venture is typically limited both in scope and duration. For example, a local real estate developer might partner with an architectural design firm specifically to build and sell an apartment complex, or a tech company might collaborate with a manufacturing facility to produce a new device. Each party maintains its independent business identity while sharing resources, risks, and rewards of the joint venture.
A joint venture is governed by a joint-venture agreement, which will detail everything from profit shares to day-to-day project management. It will also include information about how the joint venture dissolves and what happens to the assets of the joint venture once the project’s objectives are met.
Limited partnership (LP)
A limited partnership includes two distinct types of partners: general partners, who are fully involved in business operations and maintain unlimited liability for the partnership’s debts and obligations; and limited partners, who act more as investors or so-called “silent partners.” Limited partners might contribute capital to the business but will have minimal involvement in day-to-day operations. A limited partner’s liability is limited to the amount they’ve invested in the business—basically their share. If the company fails or is sued, the limited partner won’t lose more than what they’ve invested.
Limited partnerships are a fairly popular choice of business structure in real estate ventures, investment funds, and family businesses where some family members want to invest without being actively involved in running things. General partners, meanwhile, get the benefit of investment without losing much control over how the business operates.
Limited liability partnership (LLP)
A limited liability partnership (LLP) offers partners a degree of liability protection while maintaining the tax benefits and management flexibility of a partnership structure. LLPs are popular among professional service providers; think lawyers, accountants, and architects. An LLP protects each partner from personal liability for the negligent acts or misconduct of other partners and even some employees—though partners remain personally liable for their own professional negligence, as well as the partnership’s debts.
Unlike a traditional general partnership, an LLP creates a partial liability shield while preserving the partnership's pass-through taxation status. Because of this advantageous hybridization, and the fact that LLPs often cover licensed services, they require state registration and adherence to specific record-keeping requirements. But it doesn’t necessitate the complex corporate formalities of incorporation, making the LLP an appealing middle ground for professionals who want to work together with some personal-asset protection, but without subjecting the business income to an added layer of corporate tax rates (so-called “double taxation”).
Limited liability limited partnership (LLLP)
The limited liability limited partnership (LLLP) is a relatively new kind of partnership structure available to business owners in the US. In them, general partners still actively manage the business but without exposing owners’ personal assets to unlimited liability—a key advantage over traditional limited partnerships. Limited partners in LLLPs still maintain their passive investor roles as well as their limited liability. This hybrid structure is particularly popular in real estate and other high-risk investment scenarios.
It’s important to note that LLLPs are not available in all 50 states. The structure is unavailable in California, Illinois, Michigan, Massachusetts, and New York, for example; but it is available in Texas, DC, Florida, Arizona, and Ohio.
Sole proprietorship vs. partnership: What’s the difference?
Sole proprietorships and partnerships are both considered basic business structures—for solo business owners, and those with two or more owners, respectively. There are indeed a number of similarities between the two in terms of structure and liabilities. But beyond the core difference in ownership stakes, both entity types differ in a few key ways:
Ownership
The clearest distinction between sole proprietorships and partnerships lies in how ownership works. Sole proprietorships, by definition, have a sole owner who wields complete control over all business decisions and retains all profits (and incurs all losses). Partnerships, however, involve shared ownership, shared profits, and shared losses.
Structure
Sole proprietorships and partnerships differ fundamentally in their organizational complexity. Whereas a sole proprietorship represents the simplest possible business structure available in the US, requiring no formal registration beyond required licenses and permits, and operating entirely through a single individual, partnerships typically demand more sophisticated organization. Because multiple people are involved, a partnership agreement of some sort is useful to outline specific management roles, profit-sharing arrangements, and decision-making protocols.
Taxation
Both structures share the commonality of being “pass-through” entities for tax purposes, meaning business income flows directly to the owners and is subject to self-employment and income taxes. The key difference in tax treatments lies in how earnings are distributed. Whereas a sole distributor is solely responsible for paying taxes on income earned through the business, partners are only responsible for paying taxes on their share of the income.
Liabilities
Both business structures expose owners to personal liability for business debts and legal obligations. However, the nature and scope of that exposure can vary. In a sole proprietorship, the owner bears complete, unlimited personal liability for everything—from business loans to damages resulting from customer lawsuits.
In general partnerships, partners are jointly and severally liable for the debts and damages of the company—meaning they can bear a portion of the liability or the entire amount. This means that if one partner is not able to cover the losses associated with a lawsuit, for example, a partner that is able to cover losses may be liable for the entire amount. More sophisticated partnership structures like LPs and LLPs can limit a partner’s liability to the extent of their investment, or solely to liabilities resulting from their own conduct.
Sole proprietorship vs. partnership FAQ
Are partnerships taxed the same as sole proprietorships?
Partnerships and sole proprietorships are both treated as “pass-through” entities for tax purposes. This means both legal entity types pass profits through to ownership, and owners pay taxes on those earnings at their personal income tax rates.
What are the five types of partnership?
The five categories of partnership available to entrepreneurs in the US are the general partnership, the joint venture, the limited partnership (LP), the limited liability partnership (LLP), and the limited liability limited partnership (LLLP).
What type of business is best for a sole proprietorship?
Service-based businesses with low startup costs and minimal liability risks are ideal for the sole proprietorship structure—think relatively fast-turnaround digital services like freelance copywriting or graphic design.
