When starting a business in Pakistan, there are different legal structures. Limited Liability Partnerships (LLP) and Companies are two of the most popular options. These structures offer protection and various tax benefits for business owners. However, many people often confuse the two structures, not knowing the key differences between an LLP and a Pakistan-based company. In this blog, we will delve into the basics of LLP and a company in Pakistan and highlight the significant differences between the two.
Before discussing the differences between LLP and companies in Pakistan, let’s first understand what each structure entails.
What is a Limited Liability Partnership (LLP)?
An LLP is a type of business entity in which the partners have limited liability. It is a hybrid structure that combines a partnership’s flexibility with a company’s limited liability. The partners are not personally liable for the LLP’s debts and obligations; they are only liable to the extent of their capital contributions.
The Limited Liability Partnership Act of 2017 introduced the LLP structure in Pakistan. Due to its flexibility and cost-effectiveness, this structure is gaining popularity among small and medium-sized businesses.
What is a Company?
A company is a separate legal entity registered under the Companies Act of 2017. This structure suits larger businesses or those planning to raise capital through investors. In a company, the owners are known as shareholders, and their liability is limited to the number of shares they hold.
In Pakistan, there are two types of companies: private limited companies and public limited companies. A private limited company can have a minimum of two and a maximum of fifty members. On the other hand, a public limited company must have at least seven members, and there is no upper limit on the number of members.
The Differences Between LLP and a Company in Pakistan
Now that we have understood the basic concepts of LLP and a company in Pakistan let’s examine the critical differences between the two structures.
1. Formation Process
The formation process is the first and most significant difference between LLP and a company in Pakistan. In an LLP, partners must register the business with the Securities and Exchange Commission of Pakistan (SECP). The registration process involves applying the LLP agreement and relevant documents. The registration cost is relatively lower than a company, and the process is less time-consuming.
On the other hand, in a company, the registration process involves applying the company’s articles of association and other essential documents to the SECP. Once registered, the company is issued a Certificate of Incorporation and a National Tax Number (NTN).
2. Number of Members
As mentioned earlier, an LLP must have at least two partners, and there is no maximum limit on the number of partners. This makes it an ideal structure for partnerships between two or more individuals. On the contrary, a private limited company must have a minimum of two and a maximum of fifty members, whereas a public limited company must have at least seven members.
3. Liability of Members
The concept of liability is one of the most significant differences between LLP and a company. In an LLP, the partners’ liability is limited to the extent of their contributions to the LLP. This means the partners’ assets are not at risk if the LLP incurs debts. However, in a company, the shareholders’ liability is limited to the amount they have invested in the company. If the company incurs debts, the shareholders cannot cover them with their assets.
4. Management and Decision-Making
In an LLP, the partners have more flexibility regarding management and decision-making. The partners are involved in the business’s day-to-day operations and have an equal say in decision-making. In contrast, in a company, there is a clear distinction between the owners (shareholders) and managers (directors). The shareholders have limited say in the company’s operations, and the board makes significant decisions for directors.
5. Taxes and Compliance
LLP and the company have tax benefits and compliance requirements in Pakistan. For instance, in an LLP, the profits are taxed as the partners’ income, subject to individual income tax rates. On the other hand, in a company, the profits are taxed at a corporate tax rate of 29%. The tax structure for companies is more complex and has different tax benefits for private and public limited companies.
In terms of compliance, both LLP and company are required to file annual returns and maintain proper books of accounts. However, the compliance requirements for a company are more extensive, and stricter regulations are in place, making it a more formal and structured business structure.
Conclusion
In conclusion, choosing the proper business structure is crucial for long-term success. Both an LLP and a company offer advantages and disadvantages, and entrepreneurs must carefully weigh their options before deciding. While an LLP offers flexibility and lower costs, a company provides a more structured and transparent business structure. We hope this blog has helped you understand the differences between an LLP and a company in Pakistan and shed light on what each structure entails.
Frequently Asked Questions
1. Can an LLP be converted into a company in Pakistan?
Yes, an LLP can be converted into a company in Pakistan by following the procedures laid out by the SECP. Sections 78 and 79 of the Limited Liability Partnership Act 2017 outline the conversion process.
2. What is a partner’s liability in an LLP in case of any misconduct or negligence?
If a partner in an LLP is found guilty of misconduct or negligence, they may be held personally liable for any losses incurred to the LLP or a third party due to their actions.
3. Can a foreigner be a partner in an LLP in Pakistan?
According to the Limited Liability Partnership Act of 2017, a foreigner cannot partner in an LLP in Pakistan. However, a foreign corporate entity can be a partner in an LLP if it is allowed under the laws of the country where it is incorporated.
4. Can a foreigner set up a company in Pakistan?
A foreigner can set up a company in Pakistan, subject to the provisions of the Companies Act 2017.
5. Can an LLP raise capital through investors or issue shares to the public?
No, an LLP cannot raise capital through investors or issue shares to the public. It can only raise funds through its partners’ contributions.