How to Differentiate Between a Partnership and a Sole Proprietorship

A sole proprietorship is a default business entity. It is what a single person's business becomes if the owner takes no formal steps to create a separate business entity. The business activities of the company are inseparable from the individual. No separate tax returns are filed, and the owner may not even maintain a separate bank account. A general partnership is the same as a sole proprietorship, except it has two or more owners. There is no limitation of liability in a sole proprietorship or general partnership -- the owners are jointly and severally liable for all debts and obligations of the business. Limited partnerships have one general partner who is liable, but limited partners only stand to lose the amount they have invested.

• 1

  Determine if the company is a corporation. If the company is an S-corporation or C-corporation, or a limited liability corporation, it is not a sole proprietorship or partnership. You can find this information on the company letterhead, in the articles of incorporation, by checking business registration or licensing records in your county, or your with your state's Secretary of State. If you see an "Inc." after the company name, it's a corporation. If you see "LLC," it's a limited liability corporation. If you see "LLP," it's a limited liability partnership. If it is not registered at all, it is probably a sole proprietorship or partnership.

• 2

  Determine ownership of the company. If the company is not a corporation or a limited liability company, and has two or more owners, it is either a general partnership or a limited partnership. It is not a sole proprietorship.

• 3

  Determine the nature of the partnership. If the partnership has just one person, or a few owners, managing the day-to-day operations of the business, and the other partners have no role in running the business on a day-to-day basis, the company may be a limited partnership. The general partner has the management role and retains the liability risk. The role of the limited partner is restricted to being a "silent partner," with little to no role in the daily activities of the company. If the limited partner attempts to take an active role in the company, a court could disallow their limited partner status, allowing them to be sued for the debts and obligations of the company.

• 4

  Count the owners. If there is only one owner, and the company is not a corporation or limited liability corporation, it is sole proprietorship.