Types of Business in Pakistan
Are you planning to start a business in Pakistan? Great! But wait; do you know what types of business in Pakistan are available to you? Knowing what are the types (forms to be specific) of business in Pakistan is important to make a decision for your business. Choosing the right type of business will impact your future.
Depending on the size, nature, and ownership structure of a business, different types of legal entities can be established in Pakistan.
Let’s look at the types of business that are allowed in Pakistan from a structural point of view. Each type has its benefits and drawbacks.
On search, you may come across at least five major types of business;
Sole proprietorship
Un-registered Partnership
Registered Partnership
Limited Liability Partnership (LLP)
Company (companies are also of different types)
Sole Proprietorship
A sole proprietorship is one of the basic and common types of business in Pakistan. It is a business entity in which you as the owner will operate the business on your own. You will have full control over the business and will be responsible for all its debts and obligations including any tax obligations. And of course, all the profits will also be for you alone.
Advantages & Disadvantages of Sole Proprietorship
Advantages
Easy to set up and operate
This is the easiest form of business as there are no registration requirements as a form of business. Though for certain business activities, you may have to get a license from the authorities.
The owner has complete control over the business
Since you are the sole owner of the business, you will have full control over the business. You will not be required to get any approvals for decisions that you think are best for the business. Just decide (of course logically) and you can go for it.
Low start-up costs
As mentioned above, there’s no registration requirement, and you can start your business at a low cost, depending on the nature of your business.
Minimal legal formalities
The owner has the right to all the profits generated by the business
Yet another benefit of this type of business is that it has minimal legal formalities. All you have to do is to register yourself with the tax department as a DBA (doing business as).
Disadvantages
Like it has certain benefits, there are a few drawbacks also in the sole proprietorship.
Unlimited personal liability:
As you are the sole owner of the business, you and your business are treated as one. Any liability of the business will fall on you. You will have unlimited personal liability for all the debts and obligations of the business. If your business incurs a large debt or faces a legal dispute, your personal assets may be at risk.
Limited ability to raise capital
As a sole proprietor with minimum resources and creditworthiness, you will have limited access to third-party resources. It will be difficult for you to obtain loans or investments to expand the business.
The limited scope of operations:
Sole proprietorships are typically small businesses and may not have the resources to expand or diversify their operations. So it may take you a long time to expand your operations due to resources limitation.
Unregistered Partnership
If you are planning to start a business with one (or more) of your friends or family members, you can go for a partnership. You can enter into a partnership by registering the partnership or without registration.
In this form of business, you and your partners will own the business and will be personally liable like in the case of a sole proprietorship. The only difference will be the sharing of the profit and loss of the business as per your oral or written agreement.
Advantages & Disadvantages of Unregistered Partnership
Advantages & Disadvantages of Unregistered Partnership
Advantages
Easy to set up and operate
Just like a sole proprietorship, you can start an unregistered partnership in an easy-to-set-up way. All you have to do is to agree with your partner(s), on the terms and you are good to go.
No legal formalities are required for registration
As you will be entering into an unregistered partnership, you will save on registration costs. You are your partners will register only in the Tax department as individuals.
Profits are shared among the partners according to the agreement
As a partner, you will share the profits of the business with your other partner(s) on the agreed terms and none other.
Partners have complete control over the business
The partnership will give you and your partner(s) full control over the business operations. Your mutual decision for any deal will be the decision of the business, good or bad.
Disadvantages
Unlimited personal liability:
You along with your partner(s) will be personally responsible for the debts and obligations of the partnership. If the partnership incurs loss or or faces a legal dispute, the personal assets of all the partners may be at risk.
Lack of legal protection
Since the partnership is not registered with the government, it may not have the legal recognition and protection that registered partnerships and companies have. In case of a dispute, it may be difficult to enforce the agreement or prove the terms of the partnership
Lack of trust:
An unregistered partnership is based on an oral or written agreement between the partners. Lack of recognition may impact your creditworthiness and people may not feel comfortable dealing with your business.
Registered Partnership
A registered partnership is a business entity that is owned and operated by two or more individuals. It is registered with the government under the Partnership Act, of 1932. Each partner is personally liable for the debts and obligations of the partnership.
The partnership agreement is a legal document that outlines the rights and responsibilities of each partner and the terms and conditions of the partnership concerning operations, entitlement to profit, and liability for loss.
Advantages & Disadvantages of Registered Partnership
Advantages
Easy to set up and operate
To register a partnership, you will have to write an agreement and apply for registration with the concerned registrar of firms. Meeting very few requirements can get you to register your partnership firm.
Legal recognition and protection
A registered partnership firm will give you recognition. Your business will have its unique name which can be registered with the registrar of Trademaks to prohibit others from using the same name.
Profits are shared among the partners according to the agreement
If your partnership firm makes a profit, all the partners will have a share in it. You will get what you have agreed with your partners.
Partners have complete control over the business
Like an unregistered partnership, your partnership firm will be in your control, fully. All the partners will be making decisions as per the agreement, which may contain no interference in the day-to-day affairs of some of the partners if agreed.
A partnership can sue or be sued in its own name
Since a registered partnership firm has legal recognition, it can sue in its name and can be sued also. Any authorized partner or managing partner can sue others on behalf of the firm.
Disadvantages
No Separate Legal Entity
A partnership firm has no legal entity and the partners and the firm are treated as same. In case of any liability, you are your partners will be jointly and severally liable to third parties.
Unlimited personal liability
Each partner will be personally responsible for the debts and obligations of the partnership. If your firm makes a loss, the creditors will have a claim against all of you. Your creditors will be able to sue either of you or all of you and in case of large debt or a legal dispute, the personal assets of the partners may be at risk.
Lack of flexibility: The Partnership Act, of 1932 provides a framework for the operation of registered partnerships, which may limit the ability of the partners to structure the partnership in a way that suits their needs
Limited ability to raise capital: Registered partnerships may find it difficult to raise large amounts of capital, as investors may prefer to invest in entities that have more formal organizational structures.
Limited Liability Partnership (LLP)
A limited liability partnership (LLP) is a relevantly new concept in Pakistan that combines the features of a partnership and a company. It’s a partnership with the limited liability of the partners and a separate legal entity.
You can register an LLP with SECP under the Limited Liability Partnership Act, 2017. Unlike a partnership, each partner in an LLP has limited liability for the debts and obligations of the business. This means that the personal assets of the partners are not at risk in case of a legal dispute or financial loss.
Advantages & Disadvantages of LLP
Advantages
Limited liability for partners except for wrongful acts or omission or fraud
Profits are shared among the partners according to the agreement
Partners have complete control over the business
Flexible management structure
Disadvantages
Higher compliance requirements: LLPs are required to comply with certain legal formalities, such as maintaining proper accounts, the appointment of an auditor, and submitting annual financial statements and which may increase the administrative burden on the business
Limited ability to raise capital: LLPs may find it difficult to raise large amounts of capital, as investors may prefer to invest in a more formal form of business
The limited scope of operations: LLPs are not allowed to engage in certain activities, such as banking and insurance, which may limit their scope of operations
Limited Liability Company
A company is a business entity that is registered with the SECP under the Companies Act, 2017. It is a separate legal entity that is owned by shareholders and managed by a board of directors.
The liability of the shareholders is limited to the amount of their investment in the company. The profits of the company are distributed among the shareholders in the form of dividends.
In this form of business, you have the option to choose a company from different types of companies.
Advantages & Disadvantages of Limited Liability Company
Advantages
Separate legal entity
Limited liability for shareholders
Ability to raise large amounts of capital
Clear and well-defined management structure
Transferability of ownership
Disadvantages
Higher compliance requirements: Companies are subject to a range of legal formalities, such as filing annual returns, holding regular board meetings, annual general meetings, and maintaining proper accounts, which may increase the administrative burden on the business
Higher start-up costs: The process of incorporating a company and complying with the legal formalities may be more expensive than other types of businesses
Limited control: Shareholders in a company have limited control over the day-to-day operations of the business, which may not suit some entrepreneurs who prefer to have full control over their business
Conclusion
In conclusion, Pakistan offers a range of options for entrepreneurs to establish a business entity depending on their needs and preferences. Each type of business entity has its own advantages and disadvantages, and it is important to carefully evaluate the options before making a decision. Whether it is a sole proprietorship, partnership, LLP, or company.
If you need any further guidance on choosing the best type of business in Pakistan, you can contact us for consultation.
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