SMC, Private Limited or Sole Proprietor: Which to Register

The Companies Act 2017 contains no provision for one, and SECP registers only companies and limited liability partnerships. What people mean when they say they registered a sole proprietorship is that they obtained an NTN from FBR, and possibly a provincial or local licence.

This also settles a question competitors answer badly. There is no statutory conversion from a sole proprietorship into a company, because there is nothing to convert. You incorporate a new company and transfer the assets to it, and the proprietorship simply stops. Pages describing a conversion procedure are describing something that does not exist.

Section 18 is the whole of it: on registration, the subscribers become a body corporate with perpetual succession and a common seal. The company is a person, distinct from the people who own it, and its debts are its own.

A sole proprietor has no such statute, so there is no separation to rely on. Section 9(2) makes the point from the other direction: where an association of more than twenty persons carries on business for gain without incorporating, the members are personally liable for all the liabilities of that business.

The Income Tax Ordinance operates on the word "company" and draws no distinction for a single member company, which is a private company under the Companies Act in any event. Both reach the small company rate on the same section 2(59AB) thresholds: paid-up capital plus undistributed reserves not over Rs 50 million, not more than 250 employees, annual turnover not over Rs 250 million, and not formed by splitting up an existing company.

Note the section number. Small company is defined at section 2(59AB). Section 2(59A) is a different thing entirely, the definition of a small and medium enterprise, and the two get confused constantly.

Rather than a revenue figure invented for the purpose, there are statutory points at which the calculation genuinely shifts. Turnover approaching Rs 100 million brings individuals and associations within minimum tax under section 113, which removes one of the better arguments for staying unincorporated. Paid-up capital above Rs 1 million starts the audit obligation. More than twenty participants makes incorporation compulsory under section 9(1).

Everything else is a judgement about liability exposure. A business with real contractual or third-party risk wants the section 18 separation whatever its turnover, and a business with none may reasonably stay unincorporated well past the point where it could afford not to.