There are different forms of business formation or establishment in Pakistan. The decision to chose the best suitable form of business is taken by the business owner(s) or investors keeping in view the particular nature of business, costs of registration, tax benefits, flexibility of operation, annual compliance requirements, reporting requirements and other factors.
The three most common forms of business establishment in Pakistan are as follows:
Sole proprietorship concern (also know as a sole trader/owner) is the most common and most favored option for individuals who want to establish a small business in Pakistan, or want to start a home-based business. This form of business is used by majority of start-ups in Pakistan, and it is the simplest way of giving corporate face to a small business. There is no requirement to register a sole proprietorship business in Pakistan. Any business can be conducted through a sole proprietorship unless the law requires a certain business to be carried out only by an association of persons, for example a partnership firm or a limited liability company. Sole proprietorships are not complex business structures, and are therefore quite easy and quick to establish.
The owner of a sole proprietorship business (referred as ‘sole proprietor’ or ‘proprietor’) can pay taxes through his/her personal tax returns. Unlike a limited liability company, the sole proprietor will always be personally liable for affairs of the business, for example to the creditors of the business or to someone having a legal claim against the business. All assets of the business will be considered personal assets of the sole proprietor. A sole proprietor can do business with a trade name other than his own name. This also allows the proprietor to open a bank account in the name of the business.
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. The bank manager will require a request letter on business letterhead with sole proprietor’s signature and stamp.
- Get bank statement of the newly opened bank account.
- Apply for National Tax Number (NTN) certificate. Bank account statement and a copy of sole proprietor’s computerized national identity card will be required along with application for NTN. If sole proprietor already has NTN there is no need to get a new one as the existing NTN can be used for business documentation.
Partnership is a formal corporate structure although more flexible than a limited liability company. The nature of business entity established through a partnership is referred to as a ‘firm’. A partnership or firm is established through written agreement between all the partners. The law governing the partnerships in Pakistan is contained in the Partnership Act 1932.
In Pakistan partnerships are of two kinds:
- Registered Partnership
- Unregistered Partnership
There is no requirement to register a firm, however there are certain benefits of registering a firm. In case of registered firm, the partnership deed is registered with the Registrar of Firms. Unregistered partnership can be dissolved without any formality, however a registered firm can only be dissolved through a written dissolution application to the Registrar of Firms.
By definition partnership is a relation between two or more persons who have agreed through a written partnership deed to conduct the business and share the profits and losses of the business according to the terms of the partnership deed. Partnership business can be conducted by all partners or any of the partners on behalf of others. A maximum of 20 partners are allowed to form a partnership. In a partnership firm the partners’ liability is not limited and they are fully liable for all claims or law suits against the partnership.
Following details must be clearly mentioned in a partnership deed:
- Name of the firm
- Profit and loss sharing percentages of the partners
- Nature of the business to be conducted by the firm
- Full address (place of business) of the firm
- Full names and addresses of the partners
- Duration of the partnership
- Respective investments of the partners
Private Limited Company:
A private limited company is the most formal form of business formation in Pakistan. It is established, operated and dissolved in Pakistan under the Companies Ordinance 1984. The Securities and Exchange Commission of Pakistan (SECP) is the prime authority to regulate private limited companies. Any two or more than two persons can form a private limited company. However, only one person can also form a limited liability company called ‘Single Member Company’.
For registering a private limited company, a Memorandum of Association (stating the objects of company), along with an Articles of Association (stating the working rules of the company) are required to be filed with the Registrar of Companies in the Province in which the company is to be established. Following the submission of the Memorandum of Association and Articles of Association, along with other necessary documents and prescribed fee, to the relevant Registrar of Companies, the said Registrar issues a Certificate of Incorporation of the company which is the official documentary proof that the private limited company is incorporated legally.
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