Sole Proprietorship vs Corporation: Difference and Comparison

Business can be simply defined as the selling and buying of goods and services. There are several types of businesses. Some of them include sole proprietorship, partnership, corporation, LLC.

A sole proprietorship is a type of business handled entirely by one individual. On the other, a corporation is a type of business that is held by the shareholders of a particular company.

Key Takeaways

1. A sole Proprietorship is a business model in which an individual owns and operates the business, whereas a Corporation is a legal entity separate from its owners.
2. A sole Proprietorship has unlimited liability, meaning the owner is responsible for all business debts and obligations, while a Corporation limits liability for its owners.
3. A sole Proprietorship has simpler tax reporting and legal requirements, while Corporation requires more paperwork, regulations, and formalities.

Sole Proprietorship vs Corporation

A sole proprietorship is a type of business owned and operated by one person, where the business and the owner are considered the same legal entity. A corporation is a separate legal entity from its owners, which means that it can own property, enter into contracts, and sue or be sued.

A sole proprietorship is a business managed entirely by an individual. The owner is liable to pay the taxes and is entitled to receive the entire profits of the organization.

Also, the owner is entitled to bear all the losses of the organization. The decision-making authority is owned by the sole proprietor. There is no legal distinction between the owner and the business.

The corporation is a separate entity. Here, the owner and the business are separate. The board of directors manages the organization while the shareholders own the company.

Corporation has distinguished features. Some of them include going concerned, meaning, they continue to exist even after the owners passed away. They have the right to sue and can be sued.

Comparison Table

Parameters of Comparison	Sole Proprietorship	Corporation
Meaning	Sole Proprietorship is wholly managed by one individual.	Shareholders are the owners here.
Liability	Unlimited liability	Limited liability
Existence of business	A sole proprietorship is dissolved after the death of its owner.	The corporation continues to exist even after the death of the owners/shareholders.
Minimum members	Only one owner.	C corporation – Unlimited owners, S corporation – Not more than 100.
Scope of business	Less scope when compared to a corporation.	Wider scope of business.

What is Sole Proprietorship?

A sole proprietorship is a business that is managed wholly by an individual. He or she is responsible for the running of the business. Interestingly, there is no mandatory registration that needs to be performed by the sole proprietor.

The sole proprietor is responsible for bearing all the losses of the organization. Also, he or she is solely entitled to receive all the profits of the organization.

With regard to decision making, the sole proprietor need not have to ask anyone for taking decisions within the business organization. The decision-making authority is owned by the sole proprietor himself.

For instance, If A owns a sole proprietorship business and if he wants to introduce new products into his business, he is free to do so, as A need not consult anyone since he is the only owner.

Another advantage of being a sole proprietor is that is the owner has the freedom to control and operate the business organization.

The business and the owner are the same, so if the owner passed away, then the business is dissolved automatically. The capital is also introduced by the owner himself.

Here, there is no involvement of shareholders. In case if the funds are not sufficient for the owner, he may borrow money from his friends or relatives as per his/her wish.

Although, there is one advantage of being a sole proprietor. The sole proprietor is entitled to bear the entire risks of the organization.

What is Corporation?

A corporation refers to big businesses. They are owned by the shareholders of the company. Here, a board of directors is appointed to govern the business organization.

The corporation has limited liability. Unlike a sole proprietorship, the corporation is different from its owners. So, it is a separate legal entity. It has the right to sue and can be sued.

A corporation can enter into a contract. A corporation can acquire and own assets. It can even hire employees to work under the corporation.

Also, the corporation is a going concern, meaning it will continue to exist even after the death of the owners or the shareholders. Here, the scope of business is wider when compared with sole proprietorship and company.

Also, it is advisable to register the corporation under certain rules and regulations (The rules and regulations are varied from country to country).

In India, taxes are levied for the corporation as per the norms of the income tax Act. Unlike a sole proprietorship, the corporation can introduce capital easily. It is because the shareholders buy the shares of the corporation, which leads to capital formation.

Coming to disadvantages, it is difficult to maintain secrecy in a corporation. Also, the decision-making process is quite complicated in a corporation.

Main Differences Between Sole Proprietorship and Corporation

1. Sole Proprietorship is managed single-handedly by an individual. On the other hand, a board of directors is appointed for governing purposes, and the shareholders are the owners of the business organization.
2. With regard to liability, a sole proprietorship has unlimited liability, whereas a corporation has limited liability.
3. Sole Proprietorship is dissolved after the death of its owner. On the other hand, the corporation continues to exist even after the death of the owners or the shareholders since it is a separate legal entity.
4. Only one owner is allowed in the case of sole proprietorship. On the other hand, the “C corporation” can have unlimited owners and the “S corporation” can have a maximum of 100 owners.
5. There is less scope of business in a sole proprietorship when compared to a corporation.

References

1. https://pdfs.semanticscholar.org/b26e/97e9d2c772939a21b85a168ed5621cde6b94.pdf
2. http://www.cpestore.com/pdf_courses/TAX272207/TAX272207_toc.pdf