Types of business structures in Nepal

If you're thinking of starting a business, you’ll need to look at the advantages and disadvantages of each different business structure and work out which structure best suits your needs.

 The most common types of business structures in Nepal are:

      1.     Sole Proprietorship

      2.     Partnership

      3.     Company

      4.     Joint Ventures

 

1. Sole Proprietorship

Sole Proprietorship is one of the oldest forms of business structure in India. This type of structure is owned and controlled by a single man, therefore it is also known as a one man army. It is basically suited for those businesses which are small in size or have limited investment. This is the simplest and relatively inexpensive business structure that you can choose when starting a business in Nepal. As a sole proprietorship, you’ll generally make all the decisions about starting and running your business, although you can employ people to help you.

Key aspects of a sole proprietorship structure

• Is simple to set up and operate.
• Gives you full control of your assets and business decisions.
• Requires fewer reporting requirements and is generally a low-cost structure.
• Allows you to use your individual Permanent Account Number (PAN) to lodge tax returns.
• Has unlimited liability - all your personal assets are at risk if things go wrong. Your assets can be seized to recover a debt.
• Any losses incurred by your business activities may be offset against other income earned (such as your investment income or wages). Subject to certain conditions.
• As the business owner, you're not considered an 'employee' of the business. You should pay yourself, which is usually a distribution of your profit, but this is not considered 'wages' for tax purposes.
• If you're a business owner without employees, there's no obligation to pay payroll tax. You can choose to make voluntary social security fund contribution to yourself though, to help to reduce your annual tax.
• It's relatively easy to change your business structures, if the business grows, or if you wish to wind things up and close your business.
• Not required to conduct audit up to turnover of 1 crore in each fiscal year.
  
• You can't split business profits or losses made with family members and you're personally liable to pay tax on all the income derived.

2. Partnership

A Partnership is an agreement between two or more persons who come together for a common objective to earn profits. The owners of the partnership business are individually known as partners. Different people of various skills, knowledge, and talent come together to form a business. It is a relation between various partners to share profit as well as loss in the agreed ratio. When it comes to registration of a partnership, it is not mandatory but it is always advisable to register it. When two or more partners come together for a business they make a partnership deed which is a written agreement specifying names of each partner, address, capital invested by each partner and profit sharing ratio.

Key aspects of a partnership structure

• Minimum members to form a partnership is 2.
• Tax rate shall be 25% (equivalent to corporate tax rate of Nepal)
• Not required to carry annual audit up to turnover of 1 core in one fiscal year.
• All the partners have jointly or personally liable against liability.
• The profit shared among partners are on the basis of the agreed ratio.
• Registration of the partnership firm is mandatory within 6 months of partnership agreement.
• As explained above the partnership deed helps to solve various conflicts among the partners.
• Mutual trust and faith should be there among the partners. All partners can act together or one partner can act on behalf of others.

3. Company

A company is a type of business structure. You may consider a company structure when starting or growing your business.

A company is a separate legal entity, unlike a sole proprietorship or a partnership structure. This means the company has the same rights as a natural person and can incur debt, sue and be sued. The company’s owners (the shareholders) can limit their personal liability and are generally not liable for company debts.

A company is a complex business structure, with higher set-up and administrative costs because of additional reporting requirements.

You need to register a company with the Office of Company Registrar (OCR). Company officers and directors must comply with legal obligations under the Companies Act 2063.

Key aspects of a company structure

• Is a separate legal entity.
• Has limited liability compared to other structures.
• Is a more complex business structure to start and run.
• Involves higher set up and running costs than other structures.
• Requires you to understand and comply with all obligations under the Companies Act, 2063.
• Means that business operations are controlled by directors and owned by the shareholders.
• Must be registered with Income Tax Department to obtain Permanent Account Number (PAN).
• Companies should compulsorily prepare books of accounts and conduct yearly audit from Chartered Accountants.
  
• The money business earns belongs to the company.
• Requires an annual company tax return to be lodged with the Inland Revenue Department (IRD).

Before deciding on your business structure, it is important to seek professional advice from a business adviser, solicitor or accountant to ensure the structure you choose meets your personal circumstances and business objectives. 

For more information please contact at firdiventures@gmail.com or call at +977-9801187679