Difference Between Sole Proprietorship and Corporation (With Table)

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 the particular company.

Sole Proprietorship vs Corporation

The difference between sole proprietorship and corporation is that sole proprietorship is handled entirely by one individual. He/she is responsible for handling the operations of the business. On the other hand, a corporation refers to a large company. Here, shareholders are the owners. They appoint a board of directors who governs the corporation.

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 Between Sole Proprietorship and Corporation

Parameters of ComparisonSole ProprietorshipCorporation
MeaningSole Proprietorship is wholly managed by one individual.Shareholders are the owners here.
LiabilityUnlimited liabilityLimited liability
Existence of businessA sole proprietorship is dissolved after the death of its owner.The corporation continues to exist even after the death of the owners/shareholders.
Minimum membersOnly one owner.C corporation – Unlimited owners, S corporation – Not more than 100.  
Scope of businessLess 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?

Corporation generally 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 purpose and the shareholders are the owners of the business organization.
  2. With regard to liability, sole proprietorship has unlimited liability whereas the 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-case of sole proprietorship. On the other hand, the “C corporation” can have unlimited owners and “S corporation” can have a maximum of 100 owners.
  5. There is less scope of business in sole proprietorship when compared to corporation.

Conclusion

There are different types of business. Some of them are limited liability partnerships, corporations, company and sole proprietorships. A corporation is owned by a group of shareholders and a board of directors involves in the governing process of the organization.

On the other hand, a sole proprietorship is entirely managed by an individual. It is more of a one-man army. Here the owner is responsible to bear the entire risk of the organization. Registration of the firm is also not mandatory in the case of a sole proprietorship. The decision-making authority is affected in a corporation while the owners are free to take decisions in a sole proprietorship.

References

  1. https://pdfs.semanticscholar.org/b26e/97e9d2c772939a21b85a168ed5621cde6b94.pdf
  2. http://www.cpestore.com/pdf_courses/TAX272207/TAX272207_toc.pdf
x
2D vs 3D