In Pakistan, “company” and “firm” are often used interchangeably, confusing many people. While both are forms of business entities, there are significant differences between the two. Understanding these differences is crucial for anyone looking to start a business or invest in one in Pakistan. This blog post will delve into the differences between a company and a firm in Pakistan and its legal structures, ownership, and various other factors.
What is a Company?
A company is a legal entity formed by individuals or organizations to engage in business activities. It is a separate legal entity from its owners, meaning that it can own assets, enter into contracts, and file lawsuits in its name. The company’s owners, also known as shareholders, are not personally liable for their debts or legal liabilities, except for the amount of their share capital. In Pakistan, companies are regulated by the Companies Act of 2017.
There are three types of companies in Pakistan: Private Limited Companies, Public Limited Companies, and Single-Member Companies. Let’s examine each type.
Private Limited Company
A Private Limited Company (Pvt. Ltd.) is Pakistan’s most common type of company. As the name suggests, this type of company has limitations on its ownership and cannot invite the public to subscribe to its shares. A Private Limited Company can have a minimum of two and a maximum of fifty members, and these members are often family members, friends, or business partners. The liability of the members is limited to the amount of their shareholdings in the company. In Pakistan, Pvt. Ltd. companies are required to have a minimum paid-up capital of Rs. 100,000.
Setting up a Pvt. Ltd. company in Pakistan is straightforward. The company must register with the Securities and Exchange Commission of Pakistan (SECP), the regulatory body for companies in the country. The company’s articles of association and other required documents must be submitted, along with a registration fee. Once the company is registered, it receives a certificate of incorporation, establishing its legal existence.
Public Limited Company
A Public Limited Company (Ltd) is a type of company that can offer its shares to the public and raise capital from the general public. The minimum number of members for a public limited company is seven, and there is no limit on the maximum number of members. The members’ liability is limited to the amount of their shareholdings in the company.
Setting up a public limited company is more complex and expensive than a private limited company. A public limited company must have a minimum paid-up capital of Rs. 500,000. In addition to registering with the SECP, a company must also submit a prospectus, a legal document containing information about the company and a firm and its shares, to the SECP for approval before offering its shares to the public.
Single Member Company
A Single-Member Company (SMC) is a type of private limited company that can be formed with only one member. The owner must be a natural person, meaning a company or any other legal entity cannot own an SMC. In an SMC, the single member holds 100% shares of the company’s capital, and their liability is limited to the amount of their shareholdings.
The registration process for an SMC is similar to that of a private limited company, with the only difference being the requirement for only one member instead of two. However, the SECP imposes additional requirements on SMCs, such as submitting a declaration of compliance with the Companies Act and a declaration that the company does not have any outstanding liabilities.
What is a Firm?
A firm, or a partnership, is a business structure where two or more individuals or entities come together to carry out a business activity. The partners share the business’s profits and losses in an agreed-upon proportion. Unlike a company, a firm is not a separate legal entity from its partners. This means that the partners are personally liable for the firm’s debts and legal liabilities and can be sued individually or collectively.
In Pakistan, partnerships are governed by the Partnership Act of 1932. There are two types of partnerships in Pakistan: general and limited. Let us take a closer look at each type.
General Partnership
A general partnership is the most common type of partnership in Pakistan. In this type of partnership, all partners have equal rights in managing the business and share profits and losses equally unless otherwise agreed upon in the partnership agreement. The partners’ liability is unlimited, meaning that if the firm incurs any debts or legal liabilities, the partners are personally liable, even if it means using their assets to settle these debts or liabilities.
In Pakistan, the registration of a general partnership is not mandatory. The partnership agreement can be oral or written and does not need to be registered with any regulatory body. However, to avoid any potential disputes or misunderstandings, it is always advisable to have a written partnership agreement that clearly outlines the rights, responsibilities, and profit-sharing ratios of each partner.
Limited Partnership
A limited partnership is a type of partnership where some partners’ liability is restricted while others’ liability is unlimited. In this type of partnership, there must be at least one general partner, unlimited liability, and one limited partner, limited to the amount of their investment in the partnership. Limited partners cannot participate in the management of the business but can receive a share of the profits, as agreed upon in the partnership agreement.
To register a limited partnership in Pakistan, the partners must apply with the Registrar of Firms, along with a partnership agreement and a registration fee. Once registered, the limited partnership will have a separate legal existence, and the limited partners will not be personally liable for the partnership’s debts or legal liabilities.
Main Differences Between a Company and a Firm
After understanding the definitions and legal structures of a company and a firm, let’s examine the main differences between the two.
Legal Identity
One of the significant differences between a company and a firm is the concept of legal identity. A company is a separate legal entity from its owners, meaning it can own assets, enter into contracts, and file lawsuits in its name. On the other hand, a firm does not have a separate legal identity from its partners, and the partners are personally liable for the firm’s debts and legal liabilities, even if it means using their assets to cover these liabilities.
Liability of Owners/Partners
As mentioned earlier, the liability of owners or partners is limited in a company and a firm, while it is unlimited in a firm. In a company, the owner’s liability is limited to the amount of their shareholdings, and they cannot be held personally liable for the company’s debts or legal liabilities. In a firm, all partners are personally liable for their debts and legal liabilities, and they can be sued individually or collectively.
Legal Requirements and Registration Process
The registration process and legal requirements for a company and a firm differ. The SECP regulates companies in Pakistan, and they must register with the SECP to establish their legal existence. On the other hand, partnerships in Pakistan are governed by the Partnership Act of 1932, and registration with any regulatory body is not mandatory. However, limited partnerships must register with the Registrar of Firms.
Ownership Structure
In a company, ownership is divided into shares; in a firm, ownership is divided into partnership interests. A company can have multiple owners, also known as shareholders, while a partnership can only have a maximum of 20 partners per the Partnership Act of 1932.
Management and Decision Making
In a company or firm, the owners or shareholders do not have a direct role in managing the business. The management and decision-making power lies with the board of directors and the company’s officers. In a firm, all partners participate in the management of the business, and decisions are made jointly by the partners.
Taxation
company and a firm are taxed differently in Pakistan. Companies are subject to corporate tax, currently at a flat rate of 29%. This rate is expected to decrease gradually over the next few years. On the other hand, firms are taxed as individuals, and the partners must declare their share of profits in their personal income tax returns.
Conclusion
In conclusion, the main differences between a company and a firm in Pakistan are their legal identities, liability of owners/partners, registration process and legal requirements, ownership structure, and tax implications. Both have unique features that may be suitable for different businesses, and choosing one should be based on the business’s goals, ownership structure, and other factors. It is always recommended that you seek professional advice before deciding on the type of business entity to set up in Pakistan.
FAQs
Q: Is registering a company or a firm in Pakistan better?
A: Both companies and firms have their advantages and disadvantages. Ultimately, the decision depends on your business goals, ownership structure, and other factors. It is advisable to consult with a legal or financial advisor to make an informed decision.
Q: Can a company be converted into a firm or vice versa in Pakistan?
A: Yes, it is possible to convert a company into a firm, or vice versa, by following the legal and regulatory requirements laid down by the relevant authorities in Pakistan.
Q: Can a foreigner or a foreign company own a company or partnership in Pakistan?
A: Yes, foreigners and foreign companies can own a company or partnership in Pakistan by fulfilling specific legal and regulatory requirements. However, foreign ownership is restricted in particular sectors like banking, media, and real estate.
Q: What are the ongoing compliance requirements for companies and partnerships in Pakistan?
A: Companies in Pakistan are required to file annual returns and maintain proper books of accounts. They are also required to hold annual general meetings (AGMs) and obtain directors’ and auditors’ reports. On the other hand, partnerships are needed to maintain proper books of accounts and submit an annual statement of accounts to the Registrar of Firms. They are also required to provide any other information as requested by the Registrar.
Q: What are the documentation requirements for setting up a company or a firm in Pakistan?
A: The documentation requirements vary depending on the type of company or partnership you wish to set up. However, the required documents generally include a Memorandum of Association and Articles of Association for a company and a partnership agreement for a partnership. Other documents, such as identification documents of the owners/partners, address proof, and NOC (No Objection Certificate) from the landlord, may also be required.