Difference between sole proprietorship and partnership company registration in Pakistan

In Pakistan, two of the most common forms of business entities are sole proprietorships and partnership firms. Both structures are relatively easy and cost-effective to set up, making them ideal for small business owners, freelancers, and startups. However, they differ significantly in terms of ownership, legal recognition, registration procedures, tax implications, and liability. Understanding these differences is essential for entrepreneurs to select the most suitable structure for their business. This article provides a comprehensive comparison between sole proprietorship and partnership company registration in Pakistan.

1. Legal Framework
Sole proprietorships are not governed by any specific legislation. They operate under general business laws and are primarily regulated by the Federal Board of Revenue (FBR) for tax purposes. In contrast, partnership companies are governed by the Partnership Act, 1932, which defines their formation, operations, rights, and dissolution. Registered partnerships are legally recognized by the Registrar of Firms in the respective province.

2. Number of Owners
A sole proprietorship is owned and managed by a single individual. There is no provision for shared ownership or shared decision-making. A partnership company must have at least two and up to twenty partners, who jointly own and manage the business.

3. Registration Authority
Sole proprietorships are registered only with the Federal Board of Revenue (FBR) to obtain a National Tax Number (NTN). There is no requirement to register with any other regulatory authority. Partnership companies must be registered with the Registrar of Firms in their local district under the provincial Industries or Labour Department. They must also register with FBR for taxation purposes.

4. Legal Status
A sole proprietorship is not a separate legal entity from its owner. The owner and the business are treated as the same person in the eyes of the law. A partnership firm, once registered, is recognized as a distinct legal entity, although it still does not have the separate legal status of a company.

5. Liability
In a sole proprietorship, the owner bears unlimited liability. This means that in the event of business losses or debts, personal assets of the owner can be seized. In a partnership, all partners also face unlimited liability, unless structured as a limited liability partnership (LLP). However, the risk is shared among all partners.

6. Business Name
Sole proprietors can operate under their personal name or a trade name. The business name is not exclusive or protected unless separately trademarked. A partnership firm usually operates under a chosen firm name that is documented in the partnership deed and registered with the Registrar of Firms, offering more formality and potential name protection.

7. Documentation Required
To register a sole proprietorship, the owner typically needs

• CNIC copy

• Business letterhead

• Utility bill or rent agreement

• FBR online application via IRIS portal
  For a partnership firm, the documentation includes

• Partnership deed

• Form I (application form)

• CNICs and photos of partners

• Address proof and utility bill

• Stamp paper and fee challan

• Application to the Registrar of Firms

8. Time and Cost for Registration
Sole proprietorship registration can be completed within 1–2 working days and generally involves no official fee unless a consultant is engaged. Partnership registration takes 5–10 working days, and the official registration fee is usually between Rs. 500 to Rs. 2,000, excluding the cost of stamp papers or legal assistance.

9. Taxation
Sole proprietors are taxed as individuals under progressive tax slabs ranging from 0% to 35% depending on their income. Partnership firms are pass-through entities, meaning the firm itself is not taxed, but each partner pays tax on their share of profit in their individual return. However, firms may be subject to minimum tax under Section 113 if applicable.

10. Sales Tax Registration
Both sole proprietorships and partnership firms must register for sales tax if they deal in taxable goods or services. Sales tax is registered with

• FBR for goods and ICT services

• PRA, SRB, KPRA, or BRA for services in the respective provinces
  Both structures are equally eligible to obtain Sales Tax Registration Number (STRN).

11. Business Bank Account
Banks require the following to open a sole proprietorship account

• NTN certificate in the owner’s name

• CNIC

• Business letterhead and stamp

• Address verification
  To open a partnership account, banks usually require

• Certificate of registration from Registrar of Firms

• Partnership deed

• NTN

• Authority letter from all partners

• CNICs of authorized signatories

12. Decision Making and Management
In a sole proprietorship, all decisions are made by the owner alone. There is no legal distinction between the business and the individual. In a partnership firm, decision-making is usually defined in the partnership deed, allowing for shared responsibilities and dispute resolution mechanisms.

13. Succession and Continuity
The business of a sole proprietor ceases to exist upon the owner’s death or incapacity. In a partnership, if one partner dies or withdraws, the business can continue under the terms of the partnership deed or by mutual agreement of the remaining partners.

14. Dispute Resolution
Sole proprietors have no formal structure for dispute resolution since there is only one owner. In partnerships, disputes among partners can be resolved based on provisions in the partnership deed, and registered firms can enforce those rights legally in court.

15. Legal Recourse and Enforcement Rights
Unregistered sole proprietors and partnerships face limitations in enforcing legal contracts or recovering dues through court. A registered partnership firm can initiate and defend lawsuits in the firm’s name, giving it legal standing in business disputes.

16. Public Perception and Credibility
A registered partnership enjoys more credibility and trust compared to an unregistered sole proprietorship, especially when dealing with corporate clients, banks, and government bodies. Partnerships can also register with the Chamber of Commerce, enhancing their market recognition.

17. Access to Government Schemes and Bids
Registered partnerships are eligible to apply for

• Government procurement tenders

• SME support programs

• Trade and export incentives
  Sole proprietors often face difficulty unless they meet additional documentation and registration requirements.

18. Ease of Dissolution
A sole proprietorship can be dissolved instantly by the owner through simple closure of operations and deregistration with FBR. A partnership must follow the procedure defined in the deed or the Partnership Act, including settlement of accounts and notifying the Registrar of Firms.

Comparison Table

Conclusion
Choosing between a sole proprietorship and a partnership company depends on your business goals, number of owners, risk appetite, and future growth plans. A sole proprietorship is ideal for individuals who want full control and a simple tax structure, while a registered partnership firm offers shared ownership, higher credibility, and legal enforceability. Understanding the legal, tax, and compliance implications of each structure is crucial for making an informed decision that supports long-term success.