Company Formation for Small Businesses in Nepal

Small businesses are the heartbeat of Nepal’s economy. From digital consultancies and eco-tourism startups to construction suppliers and boutique manufacturers, they power employment, local innovation, and foreign investment inflows.

But before any of that can happen, one critical step determines your business’s success, formal company formation.

For both Nepali entrepreneurs and foreign investors, setting up a small business in Nepal isn’t just about getting a certificate; it’s about creating a legally recognized entity that can operate, hire, and scale with credibility.

If you’ve been wondering how to register your company, what the process costs, and what compliance obligations come after registration, this comprehensive guide is for you.

We’ll walk through the full company formation journey, from name reservation at the Office of the Company Registrar (OCR) to tax registration, labor compliance, and ongoing governance, all tailored for small businesses and foreign companies entering Nepal.

Understanding What “Company Formation” Really Means

Company formation is the legal process of creating a distinct corporate entity under the Companies Act 2006. Once registered, the business becomes a separate legal person, it can own assets, enter contracts, open bank accounts, and be held liable in its own name.

For small businesses, this separation is crucial. It protects founders from personal financial risk while opening doors to banking, credit, and partnerships that informal businesses simply can’t access.

Under Nepalese law, small businesses typically form as Private Limited Companies, which offer flexibility, limited liability, and minimal compliance compared to Public Limited Companies.

A registered company also becomes eligible for Foreign Direct Investment (FDI) under the Foreign Investment and Technology Transfer Act 2019 (FITTA 2019), making it a suitable structure for foreign entrepreneurs looking to invest in Nepal’s growing market.

Legal Foundation: The Acts That Govern Small Business Registration

Several core laws regulate the process of company formation and operation in Nepal:

• Companies Act 2006 & Rules 2064 – governs the formation, governance, and dissolution of companies.

• Foreign Investment and Technology Transfer Act (FITTA) 2019 – regulates all FDI approvals, technology licensing, and capital inflows.

• NRB Directives – outline foreign currency inflow/outflow rules and repatriation procedures.

• Industrial Enterprises Act 2020 – classifies industries, defines small and medium enterprises (SMEs), and outlines tax incentives.

• Income Tax Act 2002 & VAT Act 1996 – govern taxation, PAN/VAT registration, and compliance.

• Labor Act 2017 & Social Security Act 2018 – mandate employee registration, contract terms, and social security contributions.

These laws ensure that your company operates transparently, protects shareholder rights, and contributes to Nepal’s formal economy.

Choosing the Right Business Structure

The structure you choose determines your legal and financial flexibility. For small businesses, three main options are available:

Private Limited Company (Pvt. Ltd.)

The most common form for small businesses. It requires:

• A minimum of one shareholder and one director.

• Clear Memorandum and Articles of Association (MOA/AOA).

• No public offering of shares.

This structure offers limited liability, making it ideal for service, trade, and tech companies.

Branch Office

Used by foreign companies wanting to extend their operations into Nepal without creating a new legal entity. It must:

• Be approved by the Department of Industry (DOI) and Nepal Rastra Bank (NRB).

• Operate only within the scope permitted by the parent company.

Liaison Office

For market research and representation only. It cannot conduct income-generating activities. Common among foreign consulting and tech firms exploring Nepal.

Why Small Businesses Should Register Formally

Many small entrepreneurs start informally, using personal bank accounts and avoiding early compliance costs. However, the long-term benefits of formal registration far outweigh the short-term convenience.

Key advantages include:

• Legal identity and ownership protection.

• Eligibility for bank loans, digital payments, and tenders.

• Tax-deductible expenses and transparent accounting.

• Access to foreign investment and export incentives.

• Enhanced credibility with clients, partners, and regulators.

Formal registration is also essential if you plan to scale beyond local operations — especially if you target cross-border clients or government projects.

The Office of the Company Registrar (OCR) and How It Works

The Office of the Company Registrar (OCR), under the Ministry of Industry, Commerce and Supplies, is the authority responsible for company registration and record-keeping.

Its online system (https://ocr.gov.np) allows electronic name reservation, document uploads, and application tracking.

OCR ensures compliance with the Companies Act 2006 by verifying:

• The uniqueness and legality of the company name.

• The completeness of the Memorandum and Articles of Association.

• Shareholder and director identities.

• Registered office address and paid-up capital.

Once all criteria are met, OCR issues a Certificate of Incorporation, officially recognizing your company as a legal entity.

Company Formation Process for Small Businesses

The process typically follows a logical sequence. Here’s how it flows in practice:

Name Reservation:
Submit a unique company name through the OCR portal. The name must not resemble existing entities or include restricted terms like “Government” or “Authority.”

MOA and AOA Drafting:
Your Memorandum of Association (MOA) outlines objectives, capital, and ownership; the Articles of Association (AOA) govern internal management.

Document Submission:
Upload promoter citizenship or passport copies, proof of office address, and the digital signature of authorized representatives.

Application Review:
OCR reviews your application and supporting documents. Incomplete or inconsistent filings are the most common reason for delay.

Certificate of Incorporation:
Upon approval, OCR issues your certificate, the official start of your legal existence.

Integrating PAN, VAT, and Social Security Registration

Once incorporated, the next step is registering with the Inland Revenue Department (IRD) for taxation purposes.

Permanent Account Number (PAN):
Every company must obtain a PAN for income tax filings under the Income Tax Act 2002.

Value Added Tax (VAT):
If your annual turnover exceeds NPR 5 million, VAT registration becomes mandatory under the VAT Act 1996.

Social Security Fund (SSF):
Under the Social Security Act 2018, registered employers must enroll all employees and contribute 31% of basic salary, 20% employer and 11% employee contributions.

Formal registration in these systems ensures your company can legally employ staff, file taxes, and maintain transparent operations.

Foreign Direct Investment and Small Business Setup

Foreign investors can form small businesses in Nepal through FITTA 2019 provisions.

Key requirements include:

• Minimum foreign investment amount (currently USD 20,000 equivalent).

• Approval from the Department of Industry (DOI) or Investment Board Nepal (IBN).

• Capital inflow verification by Nepal Rastra Bank (NRB).

Foreign ownership is permitted in most sectors except those restricted for national interest, such as security or small retail trade.

Once approvals are secured, investors can repatriate profits and dividends, provided annual audits and tax compliance are maintained.

Cost and Timeline of Small Business Formation

While costs vary based on authorized capital and sector, here’s an overview:

Total time: 7–15 business days for domestic ownership, up to 30 for foreign participation.

Accounting and Audit Compliance

Even small companies are required to maintain transparent books and annual audits.

Under Companies Act 2006 (Section 109), companies must:

• Keep accurate financial records.

• Prepare annual balance sheets and profit-and-loss statements.

• Have accounts audited by a certified auditor.

Timely audit submission strengthens credibility with banks, investors, and regulators. DCV often recommends monthly bookkeeping to avoid year-end backlog and ensure readiness for taxation or FDI reporting.

Hiring, Labor Compliance, and Employment Contracts

Once your business begins operations, compliance under the Labor Act 2017 becomes mandatory.

Employers must:

• Issue written employment contracts specifying role, pay, and benefits.

• Register workers with the Social Security Fund (SSF).

• Maintain attendance, leave, and payroll records.

Complying with labor law not only protects your business from disputes but also builds trust among employees and foreign partners, assessing your governance standards.

Popular Small Business Opportunities in Nepal

Foreign investors and local entrepreneurs alike are increasingly drawn to Nepal’s emerging sectors.

Information Technology & Consulting:
Low setup costs, skilled labor, and export potential under FITTA incentives.

Tourism & Hospitality:
A growing domestic and international tourism base; opportunities in eco-lodges, travel consultancies, and digital booking platforms.

Agro and Food Processing:
High government support and export incentives for sustainable farming, tea, coffee, and herbal products.

Construction & Engineering Services:
Booming urban infrastructure projects provide consistent demand for design, contracting, and consultancy services.

E-commerce and Trading:
Nepal’s digital transformation offers strong opportunities for small retail, logistics, and cross-border trade operations.

Challenges Small Businesses Face in Nepal and How to Overcome Them

While Nepal’s startup environment is improving, small businesses still face barriers such as:

• Delays in FDI approvals.

• Complex tax filing procedures.

• Limited access to financing.

• Low digital adoption among traditional sectors.

Partnering with a professional advisor like DCV helps navigate these issues, ensuring compliance and efficiency from day one.

Maintaining Annual Compliance: The Key to Long-Term Stability

Every registered company, regardless of size, must maintain regular compliance with the OCR and tax authorities.

Ongoing duties include:

• Filing annual returns and audit reports to OCR.

• Renewing business license and tax clearance.

• Maintaining shareholder records and AGM minutes.

• Paying taxes and SSF contributions on time.

Neglecting compliance can lead to penalties or a company strike-off, which can block repatriation and future investment opportunities.

Frequently Asked Questions

What is the best company type for small businesses in Nepal?
A Private Limited Company is most suitable for flexibility, limited liability, and ease of management.

Can a foreign investor start a small business in Nepal?
Yes. Foreigners can own up to 100% in most sectors under FITTA 2019, subject to minimum investment thresholds.

How long does company formation take?
Typically 7–15 business days for local entities and up to 30 days for foreign-owned ones.

What taxes do small businesses pay?
Corporate income tax (25%), VAT (13%), and social security contributions (31% total).

Do small businesses need an auditor?
Yes. Every registered company must appoint a licensed auditor and submit annual audit reports to OCR.

Company formation for small businesses in Nepal is more than a legal formality, it’s the foundation of credibility, growth, and protection.

By registering your company under the Companies Act 2006 and complying with tax, labor, and investment regulations, you not only secure your business legally but also position yourself for expansion and funding opportunities.

At Digital Consulting Ventures (DCV), we help local and foreign entrepreneurs incorporate confidently,  from name reservation and FDI approval to PAN, VAT, SSF, and annual compliance filings.

💬 Book a consultation today and start your small business registration in Nepal the right way, efficiently, legally, and strategically.