Comparison between sole proprietorship and company registration in Pakistan

In Pakistan, starting a business requires selecting the most appropriate legal structure. Two of the most common business structures are sole proprietorship and company registration (primarily private limited companies). Each structure offers unique advantages and limitations concerning taxation, liability, regulatory compliance, ease of setup, scalability, and banking access. This article presents a detailed comparison between sole proprietorship and company registration in Pakistan to help entrepreneurs, freelancers, and startups make an informed decision.

1. Legal Recognition and Entity Status

Sole Proprietorship
A sole proprietorship is not a separate legal entity. It is simply an extension of the individual who owns the business. Legally, the owner and the business are considered one and the same. The proprietor is personally responsible for all liabilities, debts, and obligations of the business.

Company (Private Limited)
A private limited company, once registered under the Companies Act, 2017 with the Securities and Exchange Commission of Pakistan (SECP), becomes a separate legal entity. This means the company can own property, sue or be sued, enter into contracts, and operate independently of its shareholders.

2. Registration Process

Sole Proprietorship
Registration of a sole proprietorship is relatively straightforward. It involves:

• Registering a business name (if required) with FBR or relevant authorities

• Obtaining a National Tax Number (NTN) from the Federal Board of Revenue (FBR)

• Optionally registering with provincial tax authorities or chamber of commerce for certain business activities

This process typically takes 1–3 working days.

Company (Private Limited)
Company registration is more structured and involves several steps:

• Name reservation via SECP’s eServices portal

• Submission of incorporation documents (Form 1, Form 21, Form 29, and Memorandum & Articles of Association)

• Payment of registration fee (based on authorized capital)

• Issuance of Certificate of Incorporation by SECP

This process typically takes 3–7 working days.

3. Ownership Structure

Sole Proprietorship
A sole proprietorship is owned and managed by one individual only. There is no provision for partners or shareholders in this structure.

Company (Private Limited)
A private limited company must have at least two directors/shareholders (except for a Single Member Company). Ownership is divided into shares, allowing for flexible ownership structure, partner inclusion, and future investment.

4. Liability

Sole Proprietorship
The owner has unlimited liability. If the business incurs debts or faces legal claims, the proprietor’s personal assets (e.g., car, house, savings) can be used to settle obligations.

Company (Private Limited)
A private limited company offers limited liability protection. Shareholders are only liable to the extent of their shareholding. Personal assets remain protected, even if the company incurs losses.

5. Taxation

Sole Proprietorship
Taxed under personal income tax slabs as an individual. As per the Finance Act, 2024, income tax rates for individuals range between 0% and 35% depending on the taxable income bracket. The sole proprietor must file a personal income tax return with a business annexure (Form A).

There is no requirement to file separate financials with SECP.

Company (Private Limited)
Companies are subject to a flat corporate tax rate. For tax year 2025, the rate is:

• 29% for non-listed companies

• 20–25% for small companies that meet the definition under the Income Tax Ordinance, 2001

Companies must file:

• Annual Income Tax Return

• Withholding Tax Statements

• Sales Tax Returns (if registered)

• Audited Financial Statements (where applicable)

6. Business Credibility and Perception

Sole Proprietorship
Often seen as suitable for small or local businesses. May face difficulty when approaching:

• Banks for loans

• International clients

• B2B contracts with large corporations or government agencies

Company (Private Limited)
Seen as more credible and professional. Helps in:

• Attracting investment or VC funding

• Establishing vendor/supplier trust

• Securing tenders and contracts with MNCs or government entities

7. Banking and Finance

Sole Proprietorship
Proprietors can open a business bank account using:

• NTN

• Business name certificate (if any)

• Sole proprietor’s CNIC

However, financing and loan options are often limited or come with personal guarantees.

Company (Private Limited)
A company can open a corporate bank account in its registered name. It enjoys better access to:

• SME bank loans

• Credit lines

• Business financing

Additionally, a company’s creditworthiness is assessed based on its financials, not the personal history of the directors.

8. Compliance Requirements

Sole Proprietorship
Low compliance burden:

• Annual income tax return

• Sales tax return (if applicable)

• Minimal formal recordkeeping

No audit or submission to SECP is required.

Company (Private Limited)
High compliance burden, including:

• Annual submission of Form A and Form 29 to SECP

• Holding annual board meetings and preparing minutes

• Maintaining statutory books (e.g., register of shareholders)

• Filing audited financials (for medium and large enterprises)

• Appointing a company secretary (in some cases)

9. Cost of Formation and Operation

Sole Proprietorship
Low startup cost — only requires FBR registration (free of charge), optionally chamber registration (Rs. 5,000 to Rs. 10,000), and NTN issuance.

Company (Private Limited)
Higher initial cost including:

• Name reservation fee

• SECP registration fee based on capital

• Stamp papers and professional service charges (if using a consultant)

• Ongoing compliance cost (legal, accounting, and filing)

10. Business Continuity

Sole Proprietorship
The business is tied to the proprietor’s life. In case of death or incapacity, the business typically ceases unless legally transferred.

Company (Private Limited)
The company continues to exist regardless of changes in ownership or death of directors/shareholders. It offers better long-term sustainability and legacy planning.

11. Expansion and Investment Potential

Sole Proprietorship
Difficult to raise external investment. The business cannot issue shares or formally admit partners. Growth depends on personal capital and reinvestment.

Company (Private Limited)
Offers scalable growth. The company can:

• Raise capital by issuing shares

• Offer stock options to employees

• Attract angel investors or venture capital

• Go public (if later converted into a public limited company)

12. Record Keeping and Auditing

Sole Proprietorship
Recordkeeping is basic and not subject to audit (except for large taxpayers or if requested by FBR). Profit is shown on personal return.

Company (Private Limited)
Proper accounting records must be maintained. Medium and large companies are required to have annual external audits by registered chartered accountants.

13. Regulatory Bodies Involved

Sole Proprietorship

• Federal Board of Revenue (FBR)

• Provincial Revenue Authorities (if applicable)

• Local Chambers of Commerce (optional)

Company (Private Limited)

• Securities and Exchange Commission of Pakistan (SECP)

• FBR

• State Bank of Pakistan (for foreign shareholding)

• Chamber of Commerce (for trade or export business)

• Registrar of Companies (regional office of SECP)

14. Suitability by Business Type

15. Future Conversion Options

Sole Proprietorship
A sole proprietorship can be converted into a private limited company. The process involves forming a new company and transferring assets/liabilities into the company.

Company (Private Limited)
A private limited company can be later converted into:

• Public Limited Company

• Listed Company

• Holding Company

• Single Member Company (if needed)

Conclusion

Choosing between a sole proprietorship and a company depends on your business goals, scale of operations, risk appetite, and compliance capability. Sole proprietorships are ideal for small, low-risk businesses or those testing market viability. On the other hand, a private limited company offers legal protection, brand credibility, investment potential, and long-term scalability. While the cost and compliance burden may be higher, the strategic advantages often outweigh the initial hurdles.

At Sterling.pk, we assist businesses in evaluating the best registration structure. Whether you’re a freelancer wanting a simple setup or a founder preparing for your next funding round, our expert consultants can guide you through FBR and SECP compliance, tax optimization, and business setup