Choosing the Right Business Structure: Company Registration in Pakistan
The entrepreneurial ecosystem has been booming in Pakistan in the recent years and many entrepreneurs are coming up with innovative business ideas. Now with the disruption caused by COVID-19, there are even more opportunities for entrepreneurs to rebuild the shattered business ecosystem. Historical evidence suggests that a lot of iconic companies started during the economic downturns and recessions.
There are many factors that contribute to the success or failure of a business. However, in this article, we will discuss one such factor: choosing the right business structure that is ideal for your new business. We will also explain the process of company registration in Pakistan and answer the FAQs around the incorporation process.
Note: Please feel free to set up a FREE call with our legal experts if at any point you find the need.
Types of Business Structures in Pakistan
To start with, we will discuss the different business structures available for entrepreneurs and businesspersons in Pakistan.
- Sole Proprietorship
- General Partnership or Association of Persons (AOP)
- Limited Liability Partnership (LLP)
- Single Member Company (SMC Private Limited)
- Private Limited Company (PLC)
- Public Limited Company (Not being discussed in this article)
Sole proprietorship is registered with the Federal Board of Revenue and the General Partnership is registered with the Registrar of Firms in your respective city/district.
The corporate structures (LLP, SMC, PLC, and Public Limited Company) are registered with the Securities and Exchange Commission of Pakistan (SECP).
- Sole Proprietorship
Sole proprietorship is the simplest form under which an individual can conduct a business. It is not a separate legal entity and responsibility of liabilities and debt rest with the proprietor.
Sole Proprietor pays the taxes on his personal income.
- Partnership (AOP)
Partnership or Association of Persons is another simple business structure. It works just like the sole proprietorship but with multiple partners. Partners enter into a simple agreement that lists their respective shares and terms of doing business.
Partnership is not a legal entity and all liability rests with partners. Income of the partnerships is taxed only once and partners are not required to pay tax on salaries or profits drawn by them.
- Limited Liability Partnership (LLP)
In contrast to a General Partnership or an Association of Persons (AOP), the LLP is a separate legal entity and provides protection to other partners from joint liability created by the misconduct of another partner.
This business structure combines the advantages of Limited Liability Company and the flexibility of a general partnership (regulated under Partnership Act, 1932) at a low compliance cost.
- Single Member Company (SMC)
A Single Member Company is set up as a separate business entity from its owner and only has one shareholder. The single member serves as a director and has complete control of the company.
Small business owners who are running their business as a non-corporate entity e.g. sole proprietorship can form an SMC which is a corporate entity with limited liability.
- Private Limited Company (PLC)
A private limited Company (PLC) is the ideal business structure for SMEs that need to raise capital on a small to medium scale.
A PLC is a separate legal entity from its shareholders. Shareholders elect a board, that, along with the company’s CEO takes the operational decisions.
in contrast to the LLP where only the income of partners is taxed, the company pays corporate tax on its profits and shareholders separately pay the taxes on income (dividends or salaries)
A company may also require a company secretary, legal advisor and auditor depending on its size
|Suitable For||Tax Liabilities||Compliance Cost|
|1||Sole Proprietorship||Small retailers, traders, and other self employed individuals||-Single Taxation: On personal income only-Low Income Tax Rate than PLC for small income brackets but tax rate increased with income||Low|
|2||General Partnership or AOP||Consulting firms||-Single Taxation: On the income of partnership only-Low Income Tax Rate than PLC for small income brackets but tax rate increased with income||Low|
|3||Limited Liability Partnership (LLP)||Small and Medium Enterprises (SMEs)||-Single Taxation: Only LLP’s income will be taxed. Partners’ income (salaries or dividends) will not be taxed. –||Medium|
|4||Single Member Company (SMC)||Small Businesses with Single Owner who want to form a corporate entity and limit their personal liability or raise capital|
-Double taxation-Lower tax rate
|5||Private Limited Company (PLC)||SMEs that need to raise capital on small to medium scale||-Double Taxation-High corporate tax rate||High|
|6||Public Limited Company||Medium and Large Enterprises that need to raise capital on large scale||Very High|
Importance of Choosing the Right Business Structure
When starting a business, entrepreneurs need to have a clear understanding of the requirements of their business and the pros and cons of different company structures.
Every business structure has its unique tax liabilities and different tax rates. Moreover the level of compliance varies for different structures. Corporate entities have more compliance cost than the non-corporate entities. Compliance requires spending time and money on auditors, accountants and tax filing experts. It would not be advisable to register a private limited company without understanding the exact compliance requirements. Even among the corporate entities, tax rates and compliance levels differ for different structures. For example, compliance cost for a private limited company is more than that of a Limited Liability Partnership.
Moreover, investors and credit lenders are generally comfortable putting capital in corporate entities. So the entrepreneurs who plan to raise capital need to consider this upfront.
All these factors need to be taken into account before narrowing down on a business structure.
Choosing a Business Structure while Applying for Company Registration in Pakistan
Let’s have a detailed look on the questions an entrepreneur needs to ask before choosing the right business structure:
i. How many co-founders/partners will your business have?
If you are a single owner of the company and putting in all the capital, you might want to go with a Single Member Company. In case you are looking for more partners/co-founders, or looking to raise the capital, a Limited Liability Partnership or a Private Limited Company may be a good choice for you.
ii. Degree to which your personal assets are at risk (limited or unlimited liability?)
Business structures like Sole Proprietorship and General Partnership firms have unlimited liability. This means that in case of default of debt or other liabilities, the aggrieved party can legally recover the debt/liabilities from the partners or sole proprietor. This poses a high risk to the personal assets of partners. However, in a private limited company or a limited liability partnership, the liability is limited to the value of shares each member holds in the partnership or company.
iii. Plans of getting money and offering share to investors
If you are looking to raise capital, you should opt for a private limited company or a limited liability partnership as they are created under a sound legal framework and provide more protection to investors and lenders. Non-corporate structures are not recommended for this and SMC won’t serve the purpose either.
iv. Income Tax Rates and layers Applicable
Tax rates vary for different business structures. So you need to take this factor into account while deciding on a structure.
We have done a detailed article here to explain the tax liabilities that apply to different business structures in Pakistan.
v. Cost of maintaining the business entity
It is important to consider how much compliance costs you are ready to bear.
How to Register a Company in Pakistan?
Under this section we will explain the process of registering a private limited and a single member company in Pakistan.
If you want to read the process of registering an LLP, please hop onto this link. For the process of registering a partnership firm (AOP), visit this page.
Incorporation of a Company involves four main steps:
- Filing an Application with the SECP for name reservation. Three proposed names are shared at this stage, in order of preference. Prohibited words are to be avoided when selecting the names. You can check the availability of names here before applying.
- Drafting the incorporation documents i.e. the (i) Incorporation Application (ii) Memorandum of Association (iii) Articles of Association and (iv) supporting documents including director consents, power of attorneys.
- Arranging all other supporting documents mentioned in the next section; and
- Submission of documents with the SECP and addressing any queries (or objections if any) raised by the Company Registration Office (CRO), SECP viz. the incorporation docs.
Documents Required for Company Registration in Pakistan
The following documents are required by the SECP for purposes of company incorporation. It should be noted however, that depending on each individual case, additional documents may be sought by the SECP before a company is successfully incorporated.
- CNIC’s/Passport copies of subscribers/shareholders of the Company;
- Articles of Incorporation;
- Memorandum of Incorporation;
- Letter of confirmation of name availability issued by the SECP;
- Proof of registered or correspondence address and;
- Power of Attorney in favor of an authorized representative to act and file documents on behalf of the Company.
Where can I register my company?
Companies are registered with the Securities and Exchange Commission of Pakistan. The SECP has Company Registration Offices (CROs) located in Lahore, Islamabad, Peshawar, Karachi and Quetta which facilitate persons desirous of incorporating a new Company.
What happens if my company name is already taken?
With an application for incorporation of a Company three (3) proposed names, in order of preference, are submitted. This is to ensure that if one name is unavailable or rejected by the SECP, the Company can still be incorporated under a name chosen by its members.
Can a foreign national be a director of a company?
A foreign national can be director of a company subject to security clearance by the Ministry of Interior, Government of Pakistan.
Are there any benefits of forming an SMC?
The primary benefits of incorporating an SMC are easier and fewer compliance requirements and more streamlined management as the single member is empowered to take all decisions as opposed to a Private Limited Company where the Board of Directors ( or the shareholders, as the case may be have to agree before the Company makes a decision.
How many days does it take to register a company?
Usually, if all documentary requirements are complete, the SECP registers a Company within a period of seven (7) days.
Is a physical presence of a person needed for company registration?
Companies may be incorporated either through a physical filing or through the SECP ‘e services’ portal. In case of physical filing, there must be an authorized person who files the requisite documentation on behalf of the Company. In case of e filing, any one of the directors/members may file incorporation documents with the SECP.
Can a company’s director receive a salary like an employee?
Yes, a company director may be granted a salary and other benefits through contract.
Why is a company called a separate legal entity?
A company is referred to as a separate legal entity as an incorporated company can hold assets and liabilities under its own name. A company can also be sued and can sue independently of its members/directors and has its own legal rights and obligations, seperate from those of its management/owners.
The process of registering a company can be a daunting task for many business owners. But there is no need to worry. Just schedule a FREE call with our expert consultant and we will take care of it for you.
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