Sole Proprietorship vs. Partnership Business in Nepal: Which Is Better?

Business registration in Nepal involves choosing the right legal structure. Many local entrepreneurs start as sole proprietorships or partnership firms due to their simplicity. In a sole proprietorship, one owner operates the business, whereas a partnership has two or more co-owners. Both forms are governed by Nepali law: the Private Firm Registration Act, 2014 (1958 AD) for sole proprietorships, and the Partnership Act, 2020 (1964 AD) for partnerships.

For foreign companies, it’s important to note: foreigners cannot form sole proprietorships or partnerships under Nepal’s Foreign Investment and Technology Transfer Act. Foreign equity is only permitted in companies (private or public) registered with the Company Registrar. Still, understanding sole and partnership structures is useful when working with Nepali partners.

Understanding Business Registration in Nepal: Key Structures

Nepal’s business registration is overseen by the Office of Company Registrar under the Ministry of Industry, Commerce and Supplies.

• Sole proprietorships (also called private firms) must register under the Private Firm Registration Act, 2014. Registration depends on the business type: Department of Cottage & Small Industries (cottage/rural businesses), Department of Commerce (trading businesses), or Department of Industry (others).

• A sole proprietorship has no separate legal identity. The owner and business are one, and the proprietor carries unlimited personal liability. Documents needed include an application form, citizenship certificate, photos, and sometimes a memorandum of the firm.

• Partnerships are formed under the Partnership Act, 2020. They require at least two partners, each with unlimited liability. Registration is through the Office of Company Registrar with a partnership deed, citizenship documents, and photos.

Neither form requires minimum capital. Fees are low and based on authorized capital.

Key Differences: Sole Proprietorship vs Partnership

Advantages and Drawbacks

Sole Proprietorship – Pros

• Simple and inexpensive to set up

• Owner has full decision-making control

• Easy tax reporting (personal return)

• Minimal compliance requirements

Sole Proprietorship – Cons

• Unlimited liability risks personal assets

• Limited growth potential

• Ends if owner exits or dies

Partnership – Pros

• Shared capital contributions

• Combined expertise and resources

• Shared financial and management risks

Partnership – Cons

• Unlimited liability for all partners

• Disputes and slower decisions possible

• Annual renewal required

Registration Process and Costs

Sole Proprietorship Steps

1. Choose and reserve a business name.

2. Prepare documents: application, ID, photos, and memorandum if required.

3. Submit to the relevant department (Industry, Commerce, or Cottage Industries).

4. Pay registration fee (from NPR 1,100 based on capital).

5. Obtain registration certificate.

6. Register for PAN and VAT if applicable.

Partnership Steps

1. Draft a partnership deed (objectives, profit-sharing, roles).

2. Prepare application form, deed, citizenship copies, and photos.

3. Submit to Office of Company Registrar.

4. Pay fee (NPR 600–15,000 based on capital).

5. Obtain certificate within about 2–3 weeks.

6. Renew annually within 35 days of fiscal year-end.

Taxation and Compliance

• Sole proprietorships: Profits taxed as personal income of the owner. No annual renewal required.

• Partnerships: Profits divided and taxed on each partner’s return. Must renew annually.

Which Is Better?

• A sole proprietorship is best for a single entrepreneur seeking simplicity, full control, and low compliance.

• A partnership is ideal when two or more people want to pool resources, share risks, and combine expertise.

• Both expose owners to unlimited liability. For asset protection, a private limited company is often better.

Frequently Asked Questions

Q: Can foreign investors register a sole proprietorship or partnership in Nepal?
A: No. Foreign investors can only invest through private or public limited companies. Sole proprietorships and partnerships are reserved for Nepali citizens.

Q: What are the main advantages of a sole proprietorship?
A: It is cheap, quick to set up, gives the owner full control, and has simple tax reporting.

Q: How is a partnership registered and what are the fees?
A: Partners submit an application and deed to the Office of Company Registrar. Fees range from NPR 600 to 15,000 depending on capital.

Q: Does a partnership require annual renewal?
A: Yes. Partnerships must renew registration every year within 35 days of fiscal year-end.

Q: When is a sole proprietorship better than a partnership?
A: A sole proprietorship suits single founders seeking simplicity. A partnership works better when multiple founders pool resources and expertise.