There are four types of businesses each with its own legal structure and rules. These are as under:
Sole Proprietorships, Un-Registered Partnerships, Limited Liability Partnership (LLP) registered from SECP, and Limited Company or Limited Liability Company (PVT Ltd in Pakistan). Before starting business, entrepreneurs should carefully decide which type of business structure is best suited to their type of business.
Here is quick overview of these four basic types of businesses to help entrepreneurs make one of their most important decisions.
| Business Types | Sole Proprietor | Partnership | Not For Profit Company NPO | Limited Liability Company (Private Limited and Public Limited) |
| How many members required to form | Only One | From 2 to maximum up to 20 partner | Minimum three members | Pvt. Ltd: 1 to 50 Public Ltd: No limit |
| Procedure to form | Registration with Federal Board of Revenue (FBR) | Registration with Registrar of Firms | Registration with Securities & Exchange Commission of Pakistan (SECP) | Registration with Securities & Exchange Commission of Pakistan (SECP) |
| Periodic compliance with authorities | Annual Tax Return | Annual Tax Return of all Partners and Firm | 1:Periodic SECP filings 2:Periodic FBR Filings | 1:Periodic SECP filings 2:Periodic FBR Filings |
| Personal liability | Not limited | Not limited | Yes | Yes |
| Transfer of interest | No | Allowed, But Partners have to visit in Person. | Yes, Often Limited | Allowed |
| Duration | Until withdrawal or death of owner | At Will | Unlimited | Unlimited |
| Tax Implementation | Yes | Yes | Tax Exemption may be obtained | Yes Corporate Tax Apply |
| Ability to raise capital | not as separate entity | Yes, from partners only | Yes, through donations and grants | Yes |
Please read below material for getting further information in selecting suitable form of business:
What is a Sole Proprietorship?
Sole proprietorship is a business run by an individual. There is no separate legal entity. The owner takes all of the profits and / or losses of the business. The business taxes are paid by the owner through his or her personal income tax return. The noticeable disadvantage of this business structure is that there is unlimited liability of the owner and in case of lawsuits and other debts, the owner is personally held liable.
In order to register a sole proprietorship what you need to do is:
- Think of a unique name for business,
- Make letterhead with business name, logo, phone number and physical office address on it. Also get made a business stamp.
- Visit FBR website www.fbr.gov.pk and register your business on IRIS for free. Please note you require rent agreement of your office and latest paid electricity bill.(not three months later)
- After NTN is issued, take CNIC, letterhead, copy of online verification of NTN, business stamp etc. to any bank of your choice, open a bank account in the name of your business and get account maintenance letter.
What is a Partnership Firm?
Partnership is an association of two or more persons who have mutually decided to carry out business activities jointly and share its profits as well as losses. The partnership agreement may be written or oral.
Persons who have entered into partnership with one another to carry on a business are individually called “Partners“; collectively called as a “Partnership Firm”; and the name under which their business is carried on is called the “Firm Name”. Salient features are as under.
Essential elements of partnership may be narrated as under:
- Contractual Relationship: Contract is necessary for partnership. Partnership does not arise from status, operation of law or inheritance. Partnership agreement may be written or oral. It is better that the agreement is in written form to settle the disputes.
- Number of Partners: At least two people are necessary to constitute a partnership. A partnership consisting of more than 10 persons for a banking business and more than 20 persons for any other business would be considered as illegal.
- Agent: In partnership every partner act as an agent of another partner.
- Existence of Business: Partnership is a business unit and a business is always for profit. It must not include club or charitable trusts, set up for welfare.
- Cooperation: In partnership mutual cooperation and mutual confidence is an important factor. Partnership cannot take place with cooperation.
- Dissolution: Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or declared bankrupt.
- Legal Entity: If partnership is not registered, it has no legal entity.
- Management: In partnership all the partners can take part or participate in the activities of business management. Sometimes, only a few persons are allowed to manage the business affairs.
- Earning and sharing profit: Only that business is considered as partnership, which is established to earn profit. Profits are shared according to already decided ratios.
- Partnership Act: In Pakistan, all partnership businesses are running under Partnership Act,1932.
- Relationship: Partnership business can be carried on by all partners or any of them can do the business for all.
- Share in Capital: According to the agreement, every partner contributes his share of capital. Some partners provide only skills and ability to become a partner of business and earn profit.
- Restriction on the Transfer of Share: In partnership no partner can transfer his shares or rights to another person, without the consent of all partners.
- Unlimited Liability: In partnership the liability of each partner is unlimited. In case of loss, the private property of the partners is also used up to pay the business debts.
What Is a Limited Liability Partnership?
A limited liability partnership (LLP) is a business structure that provides some liability protection for its owners, along with some potential tax breaks and other advantages.
LLP is a relatively new business structure in Pakistan. It was introduced by Securities and Exchange Commission of Pakistan (SECP) in 2017. This was initiated by SECP as there was a high demand for an alternative to the traditional partnership structure (AOP) and private limited company incorporation; an alternative that allows entrepreneurs to organize their business in a flexible, innovative yet an efficient manner.
Unlike an AOP, a LLP is a separate legal entity. which means that liability of each partner is limited to his/her ownership in the LLP.
It’s a structure most commonly used by professionals such as doctors, attorneys, and accountants who go into practice together.
Comparison of Limited Liability Partnership Structure with Traditional Partnership or AOP (Association of Persons)
| Association of Persons | Limited Liability Partnership | |
| Legal Status | Not a Separate Legal Entity | Separate Legal Entity |
| Liability Limit | Unlimited Liability | Limited Liability |
| Taxation | Single Taxation Layer | Single Taxation Layer |
| Cost to Administrate | Low Cost of Forming and Maintaining Partnership | Low Cost of Forming LLP; means that Cost of Maintaining the LLP is higher than AOP but lower than a Private Limited Company |
Private Limited Company Registration
All you need to know about Pvt Ltd Registration in Pakistan from SECP
A Private Limited Company offers limited liability and legal protection to its shareholders. A Private Limited Company in Pakistan lies somewhere between a partnership firm and a widely owned public company. It can be registered with a minimum of two people. A person can be both a director and shareholder in a Private Limited Company.
The liability of the members of a Private Limited Company (PLC) is limited to the number of shares held by them. A Private Limited Company in Pakistan can begin with operations after getting the Certificate of Incorporation. A PLC can be incorporated within 15 working days.
How to start / form / make a Private Limited Company in Pakistan?
Registration of Company:
The procedure of registration, formation and regulation of companies in Pakistan is given in the Companies Act 2017. SECP is department with authority to form and manage the company incorporation. The following information has to be provided in prescribed manner to the Exchange Commission of Pakistan SECP for the registration of company.
- Name of the company
- Principal place of business of the company
- Nature of business
- Memorandum and Articles of Association (MOA)
- The name of directors, their permanent addresses and other particulars
- Amount of share capital, Authorized and Paid up
- Number of shares taken by each shareholder
Advantages of Limited Liability Companies
The basic features and advantages to carry out the business through a company registered in Pakistan are as under:-
- Distinct Legal Entity: A Company registered is separate from its shareholders/directors. It has its own legal entity. It can borrow money and invests funds, own property, sue and be sued, enter into contracts etc.
- Limited Liability: Company Incorporated gives the privilege of limited liability to its members up to a maximum of their investment in shares in that company. Debts of company are the debts of the company and not of the people running the company or owning shares in it. Personal property of the shareholders can not be attached for the recovery of debts.
- Investment of Every Person is Easley Measurable: In a limited company, the investment of every member, director, or promotor is known as it is pre-determined at the time of incorporation.
- Transferability of Ownership of Shares; A private limited company provides clear and convenient legal framework for the transferability of interest (shares). It means that the process of transfer of shares in a company registered in Pakistan is easy and transparent.
- Perpetual Succession One of the major advantages of a Company registered in Pakistan is its Perpetual Succession. In contrast to partnership, the death of one or more or even of all the members does not affect its legal status and do not end the company.
- Funds Easy to Raise: Preference by the financial sector in extending the financial assistance to documented and organized form of incorporated business.
- Accountability and Responsibility: Every Private Limited Company prepare its proper books of accounts and get them audited.
- Business Status: Incorporation gives an elevated status than partnership and Proprietor-ship in the organizational hierarchy.
- Establish Credibility: Having an incorporated business would give any business more credibility among potential customers, vendors, partners and employees.
- Legal and Organizational Framework: The company must function within the limits prescribed through its Memorandum and Article of association and regulates its existence through a set of bylaws mentioned in.