Sole proprietorships are one of the oldest and most common ways to carry on business in Bangladesh. The Economic Census 2024 reports that approximately 87.36 per cent of establishments fall within the “individual/family-owned” category, a statistic that, while broader than the legal concept of sole proprietorship, highlights the overwhelming prevalence of owner-managed and unincorporated enterprises. From trading houses to multi-crore import-export operations, thousands of enterprises continue to operate in the name of a single individual through sole proprietorships; most of the time without understanding that in the eyes of the law, the trader and the trade are actually one and the same. The significance of this structure is one of unlimited liability. Every creditor of the sole proprietorship is a creditor of the individual, and any failure of the business can expose not just business assets, but also the personal assets.
This is not merely a technical issue of corporate form. It is a question of risk allocation, credit discipline, and investor protection. Sole proprietorships, as a vehicle for investment and credit is structurally defective. Bangladesh has now formally recognised this structural problem of sole proprietorships by introducing the One Person Company (“OPC”) under the Companies (Second Amendment) Act, 2020. The OPC was not introduced as a convenience, but rather as a policy correction, and yet, given that there are 5,477,024 sole proprietorships doing business in Bangladesh (BSS Economic Census, 2024), instead of falling into disuse, the popularity of sole proprietorships as a form of business registration has lost no steam.
Bangladesh did not so much adopt the sole proprietorship as it inherited it through the same colonial and post-colonial legal architecture i.e., the same common-law and statutory scheme (the Companies Act, 1913 regime culminating in the Companies Act 1994, the Partnership Act 1932, and the Contract Act 1872) shared with India and Pakistan. Crucially, no statute creates the sole proprietorship; it exists by default, as a regulatory permission to trade rather than incorporation. The most seemingly convenient features of a sole proprietorship are also the ones that carry the most fundamental legal consequences:
A SOLE PROPRIETORSHIP NOT A LEGAL ENTITY: Unlike a private limited company, a partnership, or an OPC, a sole proprietorship is not a separate juristic person. This means that a sole proprietorship is not a legal entity distinct and separate from its proprietor. It is essentially an individual trading under a trade name. Thus, the business – registered at the local city corporation – has no existence separate from the owner and the sole proprietor is personally liable for every obligation, debt, tax, and regulatory breach. The sole proprietorship business and its owner are, in law, the same person.
A sole proprietorship operates through registering itself with a trade licence from the relevant local government authority (the City Corporation in metropolitan areas, or the Pouroshava or Union Parishad elsewhere) and acquiring the mandatory tax identification number (TIN) and a VAT/BIN registration from the National Board of Revenue. But none of these confer legal personality. A trade licence is simply a permission to conduct business at a specific location. It is not an instrument of incorporation, and it does not create a juristic person separate from the proprietor. This distinction between registration and incorporation has profound legal consequences for customers, creditors, employees and investors dealing with a sole proprietorship.
UNLIMITED PERSONAL LIABILITY: There is apparent dichotomy here – for the sole proprietor, and the investor or lender of the sole proprietor. For the proprietor, every default is a personal liability, for which he or upon his death, his heirs must take responsibility. This liability is unlimited, which means that the proprietor shall be personally responsible for all business debts and losses. No amount of operational simplicity can outweigh this legal exposure.
For the investor, a default of a sole proprietor does not allow it to go against the entity and the entity’s assets or the other directors – because a sole proprietorship is no legal entity at all. “Investment” in sole proprietorships is legally nothing more than an unsecured personal loan.
For the lender, if a sole proprietor defaults, creditors may attach personal bank accounts and personal properties/assets. From a banking perspective, this creates a paradox because on paper, recovery seems easier because the borrower is personally liable, whereas in reality enforcement is slower, messier, and sensitive, particularly where personal assets are intermingled with homestead/family property and inheritance disputes.
LEGAL EXTINCTION OF LICENVE WHEN THE SOLE PROPRIETOR DIES: When a sole proprietor dies, the business dies with him. There is no perpetual succession, no automatic transfer of rights, no statutory mechanism for continuity of the trade licence by the heirs, and no quick and easy transfer of the going concern. However, any third person can create a trade licence with the same name. Bangladesh is yet to litigate on the goodwill that attaches to the name of a sole proprietorship in the absence of intellectual property registrations.
Upon the death of a sole proprietor, contracts made with the business lapse or become unenforceable, employees in principle lose their employment status and licences become void. Creditors would have to recover their dues from the heirs of the deceased. This single issue alone makes sole proprietorship structurally incompatible with any serious long-term commercial activity.
TAXATION: Sole proprietors are taxed as individuals, often at higher marginal rates and without access to corporate deductions. For FY 2025–2026, individual taxpayers including sole proprietorships are taxed under a progressive income tax structure, with applicable rates ranging from zero per cent to 30 per cent, depending on the level of taxable income earned during the year. In contrast, private limited companies are generally subject to a corporate income tax rate of 27.5 per cent on their taxable profits and public limited companies and OPCs are taxed at 22.5 per cent. Furthermore, no provisions have been introduced in the Financial Acts enacted over the years to allow sole proprietors to deduct legitimate business expenses when determining their taxable income. As a result, sole proprietors are taxed within the individual tax regime rather than the corporate tax regime, which may, in practice, be less efficient for growing businesses than an incorporated structure. This approach fails to recognise the operational costs incurred in generating income, including expenses such as rent, utilities, employee wages, transportation, and other necessary business expenditures.
CAN YOU INVEST IN A SOLE PROPRIETORSHIP? : No. From an investment law perspective, a sole proprietorship is functionally uninvestable because it has no shareholding structure, no equity participation and no exit mechanism. A proprietorship cannot issue shares or add a second person as a shareholder. Risks are rife, as a sole proprietorship is not a legal entity, there are no annual audited accounts, no governance structure (there is no board, no constitution and no minority protection), unlimited liability, and enforcement is difficult.
LENDING TO A SOLE PROPRIETORSHIP: Given all the considerations, regulators in many jurisdictions like India, Pakistan and United Kingdom discourage banks from lending to unincorporated businesses beyond microfinance thresholds; where when they lend, it is usually secured by personal guarantees. Yet, banks in Bangladesh continue to lend extensively to sole proprietorships. This is largely historical, even though credit decisions are based on unverifiable and unaudited data.
What developed economies have done instead is to introduce the legal concept of “One Person Companies (OPC)” through statute, which is so fast, cheap and lightly regulated, that unlimited liability of sole proprietorships are crowded out as a business registration option into a single-member-limited liability OPC instead.
The OPC allows single ownership with limited liability, corporate identity, separate taxation, succession and auditable accounts. This reform has already been implemented in Bangladesh in 2020 (through amendment to the Companies Act), following the Indian experience under the Indian Companies Act, 2013 and similar models in Singapore and Pakistan. In effect, the OPC offers everything a sole proprietor wants, without the existential legal risk.
Yet, the OPC structure has not taken off in Bangladesh. Despite its advantages, OPC adoption in our country remains limited due to high minimum capital thresholds, low public legal awareness, cultural resistance to formalisation, reluctance to disclose financials, and a resistance to foreign equity participation and corporate shareholding. All of these factors lead to governance failures. So, the biggest failure to the adoption of OPCs – compared to sole proprietorships – is that OPCs in Bangladesh are not cheap, not fast and it is not clear from the statute whether an OPC is any less regulated than any other type of company.
From a legal, financial, and policy standpoint, sole proprietorship has become an unsuitable business structure for anything beyond small-scale or short-horizon trading activity, since it offers no protection, no continuity, no scalability, no investor confidence and no institutional credibility. Yet Bangladesh is failing to protect her entrepreneurs from this risky proposition because of incomplete, ad hoc reforms.]The legislature need not do away with sole proprietorships, but it should make limited-liability vehicles so cheap, fast and lightly regulated that the proprietorship becomes the option of last resort rather than first. The reform needed is an easy one: the OPC, recalibrated to inter alia reduce the minimum paid-up capital, provides lighter governance obligations and permit straightforward conversion from sole proprietorship to OPC and from OPC to a private limited company, while making it simpler, cheaper and more commercially accessible. This will allow the market to transition away from a form whose legal and economic costs our country has already absorbed for far too long. And, while the reform remains pending, lenders and investors should operate with prudence, taking a caveat emptor approach.
Anita Ghazi Rahman is a Senior Advocate of the Supreme Court of Bangladesh and Managing Partner at The Legal Circle.
anita@legalcirclebd.com
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