Building a startup is a dream project. If everything goes well, with constant growth, a business takes no time to become profitable. However, the first obstacle eager entrepreneurs need to overcome is to select a structure that caters to their goals and initial budget. Among many legitimate structures, the Sole Proprietorship and the Private Limited Company are the most favoured for open an SME or small venture. But both frameworks are definable with their own regulator proceedings, obligations, expansion extent, and executional funnels. This detailed guide will educate you on all the subtleties between the Private Limited Company vs Sole Proprietorship in Bangladesh, and help you make a wise selection.
Overview of Business Structures in Bangladesh
There are 6 distinct business ownership types in Bangladesh, each with its own regulatory framework. Entrepreneurs looking to initiate a venture need to have a solid understanding of the functionalities and differences of all types. Here is a brief overview of these legal entity types in Bangladesh:
Private Limited Company: A limited, yet multi-shareholder business structure. They refer to the simplest and smallest operative model that Bangladesh allows to have an independent legal identity
Public Limited Company: Public limited companies resemble private limited companies in terms of licensing and registration processes; however, they can share ownership with the general public and get onto stock exchanges
Sole Proprietorship: Owned by an individual, operated as a single entity, it’s the only legally approved model for solepreneurs.
Partnership: In this model, 2 to 20 partners share legal liabilities while establishing a firm without giving it an independent identity
Joint Venture: Joint ventures form when two or more local or international ventures strategically tie up to ensure more streamlined mutual operations and transactions
Branch Office: Branch offices run under the name of a parent company, usually of a foreign country, and require approvals from BIDA, RJSC, and the Bangladesh Bank.
What is a Sole Proprietorship?
A sole proprietorship is a business model where the owner carries the full liability. Any legal or financial responsibilities can be carried out from the business or the owner’s personal account. There is no differential line between them. Sole proprietorship in Bangladesh has become popular, especially for small ventures with no particular objective to scale in the future. Key features of sole proprietorship include:
- No obligation to register the business name as a separate entity
- The owner reserves the right to govern all business activities
- Revenues are estimated for tax as the owner’s personal income
- Requirements for licensing are limited; therefore, less paperwork
- Simpler relocation and dissolution processes
What is a Private Limited Company?
The Private Limited Company (PLC) is a business structure that shares ownership among more than one individual. Unlike solo proprietorship, the legal and financial liabilities are not personal. Instead, the business takes full responsibility to pay taxes, fines, or other forms of penalties under a separate name. The Registrar of Joint Stock Companies and Firms (RJSC) provides clear guidelines for the formulation and registration of the Private Limited Company Bangladesh, supervised by the Companies Act 1994. Definitive characteristics of PLC include:
- Unique legal profile, excluded from operating shareholders and directors
- Definitive registration process with extensive paperwork
- Decisions regarding operations require consent from all shareholders
- PLCs must be registered for TIN and BIN, complying with the TAX and VAT acts
- Hectic relocation, branching, and dissolution processes
Key Differences: Sole Proprietorship vs Private Limited Company
Choosing a business structure is pretty much like deciding on the business’s fate. You determine how it will appear in legal eyes, run operations, scale with time, and who will share its ownership. Among all options, deciding between a Sole Proprietorship and a Private Limited Company is the most distressing, as both are popular startup choices. Still, they share a few defining characteristics to make the decision simpler. Let’s have a look:
Ownership and Structure
A Sole Proprietorship is, by definition, a solo run. The model grants the owner do as he wishes with his business. They carry what can be called merged liabilities. This structure is best when the owner is unwilling to share their venture with anyone else.
Now, a Private Limited Company takes two to fifty owners or shareholders to be formed. The shareholders make up a directorial board and elect a chairperson to run the business. This micro-democratic model weeds out complications and gives way to smooth scaling chances.
Legal Identity and Liability
As mentioned, a Sole Proprietorship’s liabilities are borne by its owner. That means one’s income and expenses can be evaluated as the other’s. The owner can pay business taxes and duties from his own pocket. Conversely, a Private Limited Company is an independent legal entity. It saves the shareholders from any responsibility to compensate for any legal and financial liabilities of their businesses from their individual personal accounts.
Registration
Registering a Sole Proprietorship is simpler, faster, and less expensive. All you need is a trade license from your local city corporation or municipality. In contrast, forming a Private Limited Company is much demanding, where shareholders need to go through preparing a pile of papers and submit them to the Registrar of Joint Stock Companies and Firms (RJSC). Basic paperwork includes a Memorandum of Association (MoA) and Articles of Association (AoA), and the list of shareholders and contributors.
Taxation
Sole Proprietors are taxed as individuals based on personal income tax rates. They are not eligible for corporate tax benefits. Private Limited Companies are taxed separately under the corporate tax regime. While the rates may be higher, companies can access tax deductions, allowances, and other financial incentives.
Fundraising and Growth Potential
A Sole Proprietorship often struggles to raise funds from banks or investors due to its informal nature. Private Limited Companies, with legal recognition and transparent structure, can raise equity, attract investors, and grow more easily.
Perpetuity and Transferability
A Sole Proprietorship ceases to exist if the owner retires, dies, or decides to close it.
A Private Limited Company enjoys perpetual succession—its existence is not affected by changes in ownership or management. Shares can be transferred to others, ensuring continuity.
Advantages & Disadvantages of Each Structure
Looking into the offerings and shortcomings of Sole Proprietorships and Private Limited Companies will give you a clear directive to have a profound understanding of their nuances. Let’s have it:
Advantages of Sole Proprietorship
- Shortest and easiest registration process
- Singular identity shared with the owner
- No regulatory bodies to go through transactions
- Easy tax submission, shown as personal income
- The owner keeps all the profit
Disadvantages of Sole Proprietorship
- Any legal liabilities solely impact the owner’s bank account
- The owner is held accountable for procedural discrepancies
- Have a lower approval rate against bank investment appeals
- Lower credibility in the eyes of foreign investors
- Operations end with the demise of the owner
Advantages of the Private Limited Company
- Liabilities are shared among shareholders
- All sorts of expenses are mitigated by the company account
- Higher credibility for the investors
- Business stays alive after the death of a shareholder
- Governance is more structured with participation of directors
Disadvantages of the Private Limited Company
- Multi-layered registration process where each step demands paperwork
- Frequently observed by regulatory bodies to ensure compliance
- Initiation takes more than one capable shareholder
- Directors preserve the full right to make key decisions
- Complicated exit and transfer process
Registration Process Comparison
The process for company registration in Bangladesh differs for sole proprietorship and the Private Limited Company. With no legal mandates for formal inclusion, sole proprietorship follows comparatively easier registration compliances.
How to Register a Sole Proprietorship in Bangladesh
Bangladesh Jurisdictions extends no regulatory law encompassing the registration of solo-run businesses. The owner can still ask for an official identity by submitting the business name to the local authority, like the City Corporation and the Union Parishad. Essential steps include:
- Selecting a unique business name
- Applying for a trade license to the local governing bodies
- Submitting key documents: National ID, image of the owner, and proof attesting current company address
- Acquiring a Tax Identification Number (TIN); not required for an existing personal TIN
- Opening a personal bank account
- Paying a charge of around BDT 500 to BDT 5000 with the application
How to Register a Private Limited Company in Bangladesh
According to the Companies Act 1994, shareholders aspiring to register a Private Limited Company must:
- Collect and certify a unique name from the RJSC online portal
- Provide a Memorandum of Association (MoA) clarifying relationships between shareholders
- Submit the Articles of Association that outline the business’s operative model
- Submit lists of the shareholders’ and directors’ names with personal documents
- Provide statements on the authorized and submitted capital
- Apply for the TIN with the company name
- Apply for the trade license and file the certificate
- Open a business bank account for making the payments required for the registration
- Show a minimum of BDT 100,000 as authorized capital
How Bangladesh Consultant Can Help You Choose the Right Structure
Bangladesh Consultant, a trusted legal adviser for businesses in Bangladesh, can help you with choosing the most suitable business structure. Despite a few shared similarities, like small business-friendly frameworks, sole proprietorship and the public limited company structures have much to puzzle entrepreneurs with no prior knowledge. The compliance requirements Bangladesh company must agree with may feel even more befuddling. Partnering with Bangladesh Consultant will guide you:
- Through all the steps of business licensing in Bangladesh
- By explaining business liability protection Bangladesh
- By preparing documents and submittals for all registration types
- By estimating the payment amount at different stages
- By providing consultations on legal boundaries for different types of business formations
Conclusion
Difference between sole proprietorship and private limited company can be marked by their evident variations in ownership requisites, scaling scopes, legal boundaries, and risk tolerance. Sole proprietorship provides simpler, more controlled, and cost-efficient embarking and managerial procedures. While the Private Limited Company excels with its more accepted profile, made possible by its boundness to the judicial obligations. With respect to investment and growth opportunities, the latter structure outperforms the former. Before deciding between them, seeking help from a professional advisor, like Bangladesh Consultant, can help avoid registration delay, resubmissions of documents, later migrations, unexpected dissolutions, and other complications.
FAQ
Which is cheaper to register: sole proprietorship or private limited?
Sole proprietorship, with its nominal licensing and supplementary charges, around BDT 500 to BDT 5000, comes as the cheapest business formation model.
Can a foreigner open a sole proprietorship in Bangladesh?
No. As there is no definitive state-authorized procedure to regulate sole proprietorship businesses, foreigners who can’t be identified as Bangladeshi citizens can’t run a solo venture.
Do I need a trade license for a private limited company?
Yes. Having an authenticated trade license is a primary requisite for Private Limited Companies to comply with judicial requirements.
What are the tax rates for both?
In a sole proprietorship, the tax is calculated by the same measure provided for the personal income taxes: 0% for below 3.5 lakh annual income amount and 5% to 30% for above
Can I convert a sole proprietorship into a private limited company later?
Yes. The migration process involves a new registration for the company as per the Companies Act 1986 regulations, and filing existing assets and TIN under the new business name
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