Difference between Sole Proprietorship and Private Limited Company in Pakistan

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 compliances 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.

Differences between Sole Proprietorship and Private Limited Company:

‍

1. Company Formation:

The formation or start of a sole proprietorship company is much simpler than a private limited company. The first reason is that a sole proprietorship firm can initiate with a limited amount of financial resources while loads of resources are required to start out a private limited company. The second reason is that a lot of paperwork and official procedures are needed to form a private limited firm as compared to a sole proprietorship company.

2. Liabilities:

The major difference between the two is that the proprietor of a sole proprietorship firm has extensive liabilities whereas the stockholders of a private limited firm have some defined liabilities. Also, in the case of a sole proprietorship company, failure in the payment of debts can result in the confiscation of the owner’s personal assets; on the other hand, only the shareholders’ investment is at risk in case of nonpayment of debts by a private limited company.

3. Ownership:‍

Given that the owner of a sole proprietorship company has the exclusive possession of the business, in case of his/her demise the company usually comes to a close; however, a private limited firm doesn’t stop functioning in case of the absence of any shareholder. The directors and other shareholders ensure the stability of business operations in the nonexistence of any shareholder. This is due to the fact that the business and owners in a private limited firm are considered different entities while they are considered a similar entity in terms of sole proprietorship company.

4. Decision Making:

In a private limited firm, the board of directors (designated by the shareholders) is authorized to make decisions. At times, there are certain disagreements between the directors regarding any particular decision. On the contrary, the owner or proprietor of a sole proprietorship firm is free to make all decisions on his own and is not answerable to anyone.

5. Financial Resources:

A private limited firm has unlimited financial resources as compared to a sole proprietorship firm which has limited resources. The reason is simple; a sole proprietorship company has only one shareholder i.e. the owner while a private limited company can have as many as two hundred shareholders at a time which signifies that more finance can be generated by selling company shares to more financiers.

6. Tax Payment:

Talking about the taxes, a private limited business pays more taxes than a sole proprietorship business. The reason is that in case of sole proprietorship, the business and owner are considered a single entity as per the law denoting that the owner is only obligated to file income tax individually. Quite the opposite, a private limited business is considered as a separate lawful division from the stockholders indicating that they are required to pay corporate taxes.

7. Privacy and Security:

‍The data and financial accounts of sole proprietorship firm are more private in comparison to a private limited firm due to the fact that the financial records are only accessible to the owner unlike a private limited firm where the financial records can be accessed by all shareholders. ‍

8. Income and Profits:

In a private limited firm the profits are shared amongst the shareholders through dividends on the basis of the shareholder’s share in the company while a sole proprietorship company’s owner enjoys the business profits alone.

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.