Selecting Suitable Form of Businessimages (5)

Table below will show you a comparison of different kind of businesses in Pakistan. This may help you in selecting a suitable form of business. The information provided below is for information only. However, it is always advisable to get proper legal advise to take a decision

  Sole Proprietor Partnership Not For Profit Company Limited Liability Company (Private Limited and Public Limited)
Formation Registration with Tax Authorities Required Registration with Registrar of Firms Required Licensing and Registration with SECP is Required Registration with SECP is Required
Periodic Compliance / Filing No filing except Annual Tax Return Annual Tax Return of All Partners and Firm is required Periodic SECP filings required Periodic SECP filings required
Limited personal liability No No Yes Yes
Transferability 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
Pass-through taxation 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
Limitations on number of owners Yes. Only One Owner. Maximum 20 partner No For Pvt. Limited: 50For Public Limited: No

Please read below material for getting further information in selecting suitable form of business:

Sole Proprietorship

The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. The sole proprietorship is a popular business form due to its simplicity, ease of setup.

The advantages of a sole proprietorship include:

  • Sole proprietorship is easy and inexpensive to create.
  • Owners may freely mix business or personal assets.
  • Lower start-up cost.
  • Autonomy of business decision and control of profits.

The disadvantages of a sole proprietorship may include:

  • Owners has unlimited liability.
  • Business cannot be transferred / sold.
  • Raising capital is hard.
  • Lack of professionalism
  • Lack of financial controls.
  • The death of the owner resolves the business unless

Following are the main steps to start a sole proprietorship business:

  • Finalize a business name.
  • Print basic business stationary i.e. letterheads, visiting cards etc.
  • Prepare business stamp (a common rubber stamp will do).
  • Open a bank account in the name of sole proprietor business.
  • Apply for National Tax Number (NTN) certificate.

Registration of Firm/Partnership in Pakistan:

Partnership is the second stage in the evolution of forms of business organization. It means the association of two or more persons to carry on as co-owners,  i.e. a business for profit. The persons who constitute this organization  are individually termed as partners and collectively known as firm; and the name under which their business is conducted is called “The Firm Name”.

In ordinary business the number of partners should not exceed 20, but in case of banking business it must nor exceed 10.  This type of business organization is very popular in Pakistan.

DEFINITION

  1. According to Section 4 of Partnership Act, 1932

“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

  1. According to Mr. Kent

“A contract of two or more competent persons to place their money, efforts, labour and skills,

some or all of them, in a lawful commerce or business and to divide the profits and bear the

losses in certain proportion.”

CHARACTERISTICS

The main characteristics of partnership may be narrated as under:

  1. Agreement: Agreement is necessary for partnership. Partnership agreement may be written or oral. It is better that the agreement is in written form to settle the disputes.
  1. Audit: If partnership is not registered, it has no legal entity. So there is no restriction for the audit of accounts.
  1. Agent: In partnership every partner acts as an agent of another partner.
  1. 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.

  1. Cooperation: In partnership mutual cooperation and mutual confidence is an important factor. Partnership

cannot take place with cooperation.

  1. Dissolution: Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or declared bankrupt.
  1. Legal Entity: If partnership is not registered, it has no legal entity. Moreover, partnership has no separate legal entity from its members and vice versa.
  1. 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.
  1. Number of Partners: In partnership there should be at least two partners. But in ordinary business the partners must not exceed 20 and in case of banking business it should not exceed 10.
  1. Object: Only that business is considered as partnership, which is established to earn profit.
  1. Partnership Act:In Pakistan, all partnership businesses are running under Partnership Act, 1932.
  1. Payment of Tax:In partnership, every partner pays the tax on his share of profit, personally or individually.
  1. Profit and Loss Distribution: The distribution of profit and loss among the partners is done according to their agreement.
  1. Registration: Many problems are created in case of unregistered firm. So, to avoid these problems partnership firm must be registered.
  1. Relationship: Partnership business can be carried on by all partners or any of them can do the business for all.
  1. 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.
  1. Transfer of Rights: In partnership no partner can transfer his shares or rights to another person, without the consent of all partners.
  1. 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.

Advantages and Importance of Registration of a Firm

The advantages of registration may be grouped into.

(A) Legal advantages.

(B) General advantages.

Legal Advantages

  1. Settlement of Claims

Registered firms can file suit against the third parties. So the rights of registered firms are safe guarded by law. But an un-registered firm or its partner cannot enforce its claim against the third parties or its co-partner.

  1. Protection of Rights

The rights and privileges of new partner are also protected in registered firm. But if incoming partner fails to register himself, he will incur great risk, because he will not be in a position to file suit for his dues against his firm or his co-partners.

  1. Protection of Property

The property of the retired of deceased partner continues to be liable for the acts firm does after his death or retirement until public notice is served for the change to registrar, So there is strong inducement for partners of registered firms to have the changes noted in the register. But if there is unregistered firm, the private propel1y of the out-going partner will be considered liable to charge the debts inspite of retirement.

  1. Protection to Creditors

Registered firm has to maintain correct, complete and upto date record of its partners who will be liable for the obligations of the firm. The statement recorded in the register regarding constitution of firm would afford a strong safeguard against untrue refusal of partnership and the evasion of liability to persons who want to deal with the firm.

GENERAL ADVANTAGES OF REGISTRATION OF FIRM

  1. Government Facilities

Government provided many facilities and privileges to registered firms. It gives protection to business and production, which makes it more profitable.

  1. Public Confidence

People have more confidence in the registered firms than in unregistered firms, because they think that these firms are working under the supervision of the government and there are no chances of fraud or misrepresentation on behalf of registered firms. Thus they make business contracts with them without any fear.

  1. Credit Facilities

Banks and other financial institutions provide credit to registered firms without any hesitation. As these firms abide by the government rules and regulations, so they have full trust in them.

  1. Legal Protection

Registered firms have full legal protection as compared with unregistered firms. As they work strictly in accordance with the government rules and regulations so they have no fear from government to turn their work illegal. Thus these firms work with liberty without any fear.

  1. Business Reputation

Registration adds to reputation. Other firms cannot copy their products. Such firms use their trade marks which are registered and no other firm Registered or non registered can use this trade mark. These firms advertise only their trade mark but not products.

When people find a product up to their standard they note its trade mark. This makes the firm’s business more profitable.

ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP

ADVANTAGES OF PARTNERSHIP

Following are the advantages of partnership:

  1. Simplicity in Formation

This type of business of organization can be formed easily without any complex legal formalities. Two or more persons can start the business at any time. Its registration is also very easy.

  1. Simplicity in Dissolution

Partnership Business can be dissolved at any time because of no legal restrictions. Its

dissolution is easy as compared to Joint Stock Company.

  1. Sufficient Capital

Partnership can collect more capital in the business by the joint efforts of the partners as compared to sole proprietorship.

  1. Skilled Workers

As there is sufficient capital so a firm is in a better position to hire the services of qualified and skilled workers.

  1. Sense of Responsibility

As there is unlimited liability in case of partnership, so every partner performs his duty honestly.

  1. Satisfaction of Partners

In this type of business organization each partner is satisfied with the business because he can take part in the management of the business.

  1. Secrecy

In partnership it is not compulsory to publish the accounts. So, the business secrecy remains

within partners. This factor is very helpful for successful operation of the business.

  1. Social Benefit

Two or more partners with their resources can build a strong business. This factor is very

helpful in solving social problems like unemployment.

  1. Expansion of Business

In this type of business organization, it is very easy to expand business volume by admitting

new partners and can borrow money easily.

  1. Flexibility

It is flexible business and partners can change their business policies with the mutual

consultation at any time.

  1. Tax Facility

Every partner pays tax individually. So, a firm is in a better position as compared to Joint

Stock Company.

  1. Public Factor

Public shows more confidence in partnership as compared to sole proprietorship. If a firm is

registered, people feel no risk in creating relations with such business.

  1. Prime Credit Standing

The liabilities of partners are unlimited, so the banks and other financial institutions provide them credit easily.

  1. Minority Protection

In partnership all policy matters are decided with consent of each partner. This gives protection to minority partners.

  1. Moral Promotion

Partnership is the best business for small investors. It promotes moral courage of partners.

  1. Distribution of Work

There is distribution of work among the partners according to their ability and experience. This increases the efficiency of a firm.

  1. Combined Abilities

Every partner possesses different ability, which helps in running the business effectively, when combined together.

  1. Absence of Fraud

In partnership each partner can look after the business activities. He can check the accounts. So, there is no risk of fraud.

DISADVANTAGES OF PARTNERSHIP

The disadvantages of partnership are enumerated one by one as under:

  1. Unlimited Liability

It is the main disadvantage of partnership. It means in case of loss, personal property of the

partners can be sold to pay off the firm’s debts.

  1. Limited Life of Firm

The life of this type of business organization is very limited. It may come to an end if any

partner dies or new partner enters into business.

  1. Limited Capital

No doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is small

as compared to Joint Stock Company. So, a business cannot be expanded on a large scale.

  1. Limited Abilities

As financial resources of partnership are limited as compared to Joint Stock Company, so it is

not possible to engage the services of higher technical and qualified persons. This causes the

failure of business, sooner or later.

  1. Limited number of Partners

In partnership, the number of partners is limited, so the resources are also limited. That is why

business cannot expand on large scale.

  1. Legal Defects

There are no effective rules and regulations to control the partnership activities. So, it cannot handle large-scale production.

Required Documents/Information:

  • Name of the Partnership
  • Place or principal place of business of the Partnership firm
  • Names in full and permanent addresses of the Pakistan National partners and share/P&L ratio of each partner.
  • Copies of valid and legible CNICs of Pakistan Nationals.
  • Please note, Partners along with witnesses may be required to physically present to Registrar for thumb impression and record.

Please Note: The aforestated statement must be signed by all the partners of the partnership for the time being or any authorized Legal agent (Lawyer / Attorney or other) on their behalf. Furthermore, the statement must be verified by the persons signing it. Once Registrar of Partnerships is satisfied that the above mentioned requirements have been complied with the registrar records entry of the statement in Register of Firms and files the statement.

Generally the firm/Partnership seeks registration to avoid certain disabilities. The following necessary information is required for registration of firm/Partnership.

  • Name of the firm under which the business is to be carried on.
  • Principal place of business of the firm.
  • Nature of business.
  • The duration of firm. Generally  its “AT WILL”
  • The name of partners, their permanent addresses and other particulars.
  • The date of joining of each partner in the firm.
  • Physical appearance of all Partners in Registrar of Firms Office.

Registration of Company:images (6)

The procedure of registration, formation and regulation of companies in Pakistan is given in the Companies Ordinance, 1984. Whereas the function of registration and management of these companies is vested with the Securities and Exchange Commission of Pakistan and the Registrar of Companies appointed by the Securities and Exchange Commission of Pakistan in various jurisdictions where such company is to be registered. The following  information has to be provided in prescribed manner to the Exchange Commission of Pakistan for the registration of company.

  • Name of the company
  • Principal place of business of the company
  • Nature of business
  • Memorandum of Association (MOA)
  • Articles of Association (AOA)
  • 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 in Pakistan is separate from its shareholders/directors. It has its own rights and liabilities. It can borrow money and invests funds, own property, sue and be sued, enter into contracts etc.

Limited Liability and Protection of Personal Assets

Company Incorporation in Pakistan (also known as Company Registration in Pakistan) gives the privilege of limited liability to its members up to a maximum of their investment or share in the entity or undertaken by them in event of winding up. Debts of company are the debts of this artificial legal person 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.

Easy Measurement of Investment of Every Person

In a company registered in Pakistan, the investment of every person, member, director, promotor is known as its pre-determined at the time of incorporation

 Easy Transferability of Ownership of Shares

A private limited company registered in Pakistan 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.

Easy to Raise Funds

Preference by the financial sector in extending the financial assistance to documented and organized form of incorporated business.

Part of Regulated and Documented Sector – Accountability and Responsibility

Every Private Limited Company or other registered in Pakistan prepare its proper accounts and get them properly audited. So Preparation and audit of accounts shows accountability and responsibility.

 Elevation of Business Status

Incorporation gives a status higher 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.

Compact Legal and Organizational Framework

The entity must function within the limits prescribed through its charter and regulates its existence through a set of bylaws.

For further details about registration of a company in Pakistan please click here or call at +92-321-5043262 or +92-51-2229005 to talk to professional consultants at Synergy Business Consulting.