Difference between a sole proprietorship and a company in Pakistan

Choosing the right business structure is one of the most important decisions an entrepreneur in Pakistan has to make. The two most commonly adopted forms of business registration in Pakistan are sole proprietorships and companies (especially private limited companies). Each structure has its own advantages, limitations, legal implications, and tax obligations.

This article explains the key differences between a sole proprietorship and a company in Pakistan, including legal formation, liability, tax treatment, regulatory requirements, ownership structure, and operational impact. This comparison aims to help business owners, startups, freelancers, and professionals make informed decisions when setting up a business.

Definition of a Sole Proprietorship

A sole proprietorship is a business owned and managed by a single individual. It is not a separate legal entity from the owner. The individual is responsible for all operations, assets, liabilities, and profits of the business.

In Pakistan, sole proprietorships are not registered with the Securities and Exchange Commission of Pakistan (SECP) but typically register with the Federal Board of Revenue (FBR) to obtain a National Tax Number (NTN) and with local chambers or licensing authorities if required.

Definition of a Company

A company, under the Companies Act, 2017, is a separate legal entity incorporated with the SECP. The most common type is the private limited company, which has limited liability, perpetual succession, and a separate legal identity from its shareholders and directors.

Companies can be:

• Private Limited Company

• Single Member Company (SMC)

• Public Limited Company

• Non-Profit Company (Section 42)

In most cases, entrepreneurs opt for either a private limited company or an SMC for small to medium enterprises (SMEs).

Legal Identity

Sole Proprietorship

• No separate legal identity

• The owner and business are considered the same person

• Legal liability is personal and unlimited

Company

• Separate legal entity

• Can sue and be sued in its own name

• Shareholders are not personally liable for business debts

Registration Process

Sole Proprietorship

• No SECP registration

• Register NTN with FBR (free of charge)

• Optional registration with Chamber of Commerce or provincial authorities

• Generally completed within 1–2 working days

Company

• Must be incorporated with SECP

• Name reservation, digital signatures, and submission of incorporation documents required

• Incorporation fees vary with authorized capital

• Additional registrations with FBR, bank account setup, and other licenses

• Takes 3–5 working days or more

Ownership and Management

Sole Proprietorship

• Owned and operated by one person

• Owner has full control over decision-making

• Cannot have partners or issue shares

Company

• Owned by shareholders and managed by directors

• Can have multiple shareholders (2–50 in a private limited company)

• Ownership is transferable through shares

Capital Contribution

Sole Proprietorship

• No minimum capital requirement

• Capital is contributed solely by the owner

• Limited access to formal loans or investor funding

Company

• Minimum capital can start from PKR 100,000

• Can issue shares to raise capital

• Eligible for bank loans, equity investment, and venture capital

Liability

Sole Proprietorship

• Unlimited personal liability

• Owner is personally liable for all debts, losses, and legal claims

Company

• Limited liability protection

• Shareholders’ liability is restricted to their shareholding

• Personal assets of shareholders are generally protected

Taxation

Sole Proprietorship

• Taxed as an individual under personal income tax rates

• Required to file annual income tax return using IRIS portal

• May also be required to register for sales tax (if applicable)

Company

• Subject to corporate tax under the Income Tax Ordinance, 2001

• Corporate tax rate is 29% for tax year 2025

• Required to file audited financial statements and income tax returns

• Withholding taxes and advance tax obligations apply

Compliance Requirements

Sole Proprietorship

• Minimal compliance

• Submit annual income tax return

• No requirement for audited accounts or SECP filings

Company

• High compliance obligations

• Must maintain statutory registers

• File Form A (annual return) and Form 29 (changes in directors) with SECP

• Submit audited financial statements annually

• Hold board meetings and maintain meeting minutes

Banking and Financial Recognition

Sole Proprietorship

• Bank account is opened in the owner’s name or as a business account under the proprietor’s NTN

• May face difficulty obtaining business loans or corporate credit cards

Company

• Business bank account is mandatory in company’s name

• Better credibility and acceptance by financial institutions

• Eligible for government tenders and B2B partnerships

Perpetual Succession

Sole Proprietorship

• No perpetual succession

• Business ends with the death or incapacity of the owner

• Difficult to transfer ownership

Company

• Has perpetual succession

• Continues regardless of changes in ownership or management

• Easy to transfer ownership via share transfer

Public Perception and Credibility

Sole Proprietorship

• Perceived as small-scale and informal

• May not be trusted for large contracts or government dealings

Company

• Higher credibility and trustworthiness

• Essential for dealing with banks, multinationals, and government tenders

• Enhances brand image

Cost of Registration and Operation

Sole Proprietorship

• FBR NTN registration is free

• Chamber membership (optional) may cost around PKR 3,000–10,000

• Lower operational and compliance costs

Company

• SECP name reservation: PKR 1,000

• Incorporation fee: PKR 5,500+ depending on capital

• Digital signature: PKR 1,500–2,000

• Auditor fees and legal advisor fees may apply annually

Flexibility and Control

Sole Proprietorship

• Full control by the owner

• More flexibility in business operations

• No interference from directors or shareholders

Company

• Decisions may require board approval

• Directors and shareholders may have conflicting interests

• Bound by the Companies Act and Memorandum/Articles of Association

Exit Strategy

Sole Proprietorship

• Cannot be sold as a going concern easily

• No formal procedure to transfer business

Company

• Can be sold through share transfer

• Easier to plan mergers, acquisitions, or restructuring

Tax Advantages and Disadvantages

Sole Proprietorship

• Lower tax burden if profits are small

• Personal exemptions apply

• May be required to pay minimum tax on turnover if income is low

Company

• No personal tax exemptions

• Can benefit from expense deductions, depreciation, and tax credits

• Eligible for export incentives and tax refunds

Suitability Comparison

Which One Should You Choose?

Choose a Sole Proprietorship if:

• You are starting a small-scale or freelance business

• You want full control and minimal paperwork

• You are testing a business idea before scaling

• You have low liability risks

Choose a Company if:

• You are starting a scalable business with partners or investors

• You want to build brand credibility and professionalism

• You need access to funding, loans, or corporate clients

• You plan long-term continuity and possible business sale

Transitioning from Sole Proprietorship to Company

As your business grows, you may outgrow the structure of a sole proprietorship. You can transition to a company by:

• Incorporating a new private limited company

• Transferring business assets and liabilities

• Updating bank, tax, and licensing registrations

• Informing customers and suppliers of the new legal entity

This transition allows better legal protection and a strong foundation for business expansion.

Conclusion

The choice between a sole proprietorship and a company in Pakistan depends on your business goals, size, compliance capability, and risk profile. Sole proprietorships are best for small, flexible businesses with low overheads, while companies offer better protection, credibility, and long-term growth opportunities.

Sterling.pk provides expert services for both types of registrations. Whether you want to register a sole proprietorship with FBR or incorporate a company with SECP, our consultants ensure compliance, speed, and professional support at every stage of your business journey