While you’re starting a new business in Pakistan, you primarily have to choose between the basic types of business entities like Sole Proprietorship or Private Limited Company or Partnership or Limited Liability Partnership (LLP). Each of them are best for particular situations or purposes and also differ in traits in view of the liabilities, taxes and the capacity to regulate the profit and loss of the business. Thus, whether your business is home-based, factory oriented or office set-up, think well, identify your resources, build your plans and then decide what option to choose from these categories. Yet, in this post we will discuss the differences between sole proprietorship and private limited company in Pakistan and their advantages over each other:
What is a Private Limited Company?
A private limited company is a corporation which does not sell company shares to the public and keep them private. The company is either managed by the shareholders or they appoint directors for the purpose. These are usually small to medium sized businesses. The financial statements of a private limited company are not public, their shares do not trade on Pakistan Stock Exchange and their accounts are not required to be audited.
- Liability of Shareholders: The liability is limited to the contributed amount.
- Minimum Capital Required: PKR 100,000 is the minimum capital required.
- Number of partners: Maximum 50 partners and minimum 2 partners are allowed.
Benefits of a Private Limited Company in Pakistan:
A Private Limited Company has many benefits over sole proprietorship; some of which are:
- Shareholders’ liability is restricted to the scope of their shareholding. Apart from fraudulent cases, they are not required to pay company’s debts with their personal assets.
- They work under the Companies Act 1984.
- Since there is no trading of shares publicly, the chances of hostile takeover are very low.
- They have a separate and individual legal entity and have their own liabilities and assets.
- They have a self-reliant identity and an uninterrupted succession which is unlike their shareholders. In case of the death or termination of a shareholder, the company will still be existent.
- The tax burden is low.
What is a Sole Proprietorship?
This is defined as a business which has only one proprietor/owner and no lawful difference exists between the owner and the business. The control lies within the hand of a single individual where his liability is unrestricted as the owner and business do not have any legal dissimilarities.
- Liability of Shareholder: Unrestricted liability
- Minimum Capital: No minimum capital requirement
- Maximum and Minimum partners: Only one shareholder
Benefits of Sole Proprietorship in Pakistan:
Sole Proprietorship has many benefits over private limited companies; some of which are:
- Sole Proprietorship is the easiest and most simplest way to do business in Pakistan.
- The registration process is very simple and fast.
- There isn’t any lawful difference between the business and the owner; therefore, shareholders or board of directors are not needed.
- The owner has all the powers and he/she is not accountable to anyone.
- Very few lawful regulations and compliance are to be followed as compared to a private limited company.
- Since the owner and business income is the same; therefore, the income tax is only required to be paid once a year.
To summarize, both private limited company and sole proprietorship have advantages over each other. One has to choose between these two types of business entities, on the basis of the nature of their business given that both of them are good for particular situations or purposes.