So, you’ve decided to take the plunge and register your company. Great! But before you jump in, it’s important to understand the different types of companies you can choose from in Pakistan. Each one has its own unique structure and rules, so you’ll want to pick the one that best suits your business needs.
This article will guide you through the various company types available in Pakistan, explaining their key features and helping you make an informed decision for your business venture. Let’s get started!
Different Kinds of Companies in Pakistan
Since companies are formed under the law, the types of companies allowed are also defined by the law. Different countries have different rules about the types of companies you can create. In general, companies can be classified based on a few things:
- Liability of Members: How much are the company’s owners (members) personally responsible for the company’s debts?
- Number of Shareholders: How many people own shares in the company?
- Share Capital: Does the company issue shares to raise capital?
In Pakistan, the law allows for several types of companies, including:
- Companies Limited by Shares: Members’ liability is limited to the amount they haven’t paid on their shares.
- Companies Limited by Guarantee: Members’ liability is limited to a specific amount they agree to contribute if the company closes down.
- Unlimited Companies: Members have unlimited liability, meaning their personal assets can be used to pay off company debts.
You might also hear about these common company types, based on the number of shareholders:
- Single-Member Companies (SMCs): Only one shareholder.
- Private Limited Companies: A limited number of shareholders, and shares can’t be offered to the public.
- Public Limited Companies: Can have many shareholders, and shares can be offered to the public.
We’ll explain each of these in more detail later, so you can see which one is the right fit for your business.
Company Types in Pakistan: Which One Suits You?
Pakistani law offers you a range of options when registering your company. You can choose the best fit based on your specific goals and needs:
- Company Limited by Shares: The most common type, where the owners’ liability is limited to their unpaid share amounts.
- Company Limited by Guarantee: Here, owners’ liability is capped at a pre-agreed amount if the company winds up.
- Unlimited Company: A less common type where owners have unlimited liability for the company’s debts.
- Trade Organization: A group formed to promote and protect the interests of businesses in a particular industry.
- Not-for-profit Association: An organization created for charitable or social purposes, not for making a profit.
We’ll dive deeper into each type, so you can understand their pros and cons and make the right choice for your venture.
| Business Type | Minimum Members | Formation Process | Compliance Requirements | Personal Liability | Transfer of Interest | Duration | Tax | Raising Capital |
|---|---|---|---|---|---|---|---|---|
| Sole Proprietor | 1 | Register with FBR | Annual Tax Return | Not Limited | No | Until Death/Withdrawal | Yes | Not as a separate entity |
| Partnership | 2-20 | Register with Registrar of Firms | Annual Tax Return for all Partners and the Firm | Not Limited | Allowed (in-person) | At Will | Yes | From partners only |
| Not-for-Profit Company | 3 | Register with SECP | 1. Periodic SECP filings 2. Periodic FBR Filings | Yes | Allowed | Unlimited | May be tax-exempt | Through donations and grants |
| Limited Liability Company | Register with SECP | 1. Periodic SECP filings 2. Periodic FBR Filings | Yes | Allowed | Unlimited | Yes (Corporate Tax) | Yes | |
| – Private Limited | 1-50 | |||||||
| – Public Limited | No limit |
Picking the Perfect Company Type: Factors to Consider
Choosing the right company type is a big decision. Here are a few things to think about before you make your choice:
Shareholders
How many owners (shareholders) will your company have? If you want to keep it within a close circle of family and friends, that’s different from needing a large pool of public investors.
Liability
How much personal responsibility are the owners willing to take on for the company’s debts? This is important to consider in case the company ever faces financial trouble.
Profit or Non-Profit
Is your goal to make money, or are you setting up a non-profit venture for a social cause?
Once you’ve thought about these factors, you can choose the company type that’s best for you from the list we’ll provide below.
After that, we’ll guide you through the step-by-step process of registering your company, including how to do it online through the SECP portal.
Company Limited by Shares
A company limited by shares comes in three flavors, and you can pick the one that fits the number of partners (or promoters) you have. The big advantage of this type of company is “limited liability.” This means the company is seen as a separate legal person, so its debts stay with the company itself. If you’ve fully paid for your shares, you won’t be personally liable for any company debts, even if it shuts down.
The following are the three types of “Limited by Shares” companies:
- Single Member Company (SMC)
- Private Limited Company
- Public Limited Company
Single Member Company (SMC): The Solopreneur’s Choice
If you’re flying solo in your business venture, an SMC is your perfect match. You’ll be the sole owner, decision-maker, and everything in between. But, you can appoint someone else as CEO if you need to. When registering an SMC, you’ll also have to name a family member as a trustee, just in case something happens to you. And remember, your company name will end with “(SMC-Private) Limited”.
Private Limited Company: Ideal for Family Businesses and Small Ventures
Sometimes, going it alone isn’t the best option, especially if you need more capital or skilled people to help run your business. In that case, teaming up with one or more partners to form a Private Limited Company might be the way to go. You’ll need at least two directors to manage the company, and one of them can be the CEO. You can also hire someone as a CEO if you prefer. Just remember, you can’t have more than 50 shareholders in a Private Limited Company; if you need more, you’ll have to register as a Public Limited Company.
For small businesses and family-run ventures that don’t need to raise funds from the public, a Private Limited Company is often the best choice among the different company types available. And don’t forget, your company name will end with “(Private) Limited”.
Public Limited Company: When You’re Thinking Big
You might start small, but every business has the potential to grow into something huge. If you have ambitious plans and need to invite the public to invest in your company, a Public Limited Company is the ideal choice right from the start. To register one, you’ll need at least three people involved at the time of incorporation.
However, before you can invite the public to buy shares in your company, you’ll have to meet certain legal and regulatory requirements. Your company name will end with the word “Limited”. If you’re dreaming big and want to raise funds from the public, a Public Limited Company is the preferred option among the different company types.
Company Limited by Guarantee
Unlike companies limited by shares, a company limited by guarantee offers you the option to register with or without share capital. This provides additional flexibility depending on your business needs and financial structure.
The following are the two options for the “Companies limited by guarantee”:
- Company Limited by Guarantee with Share Capital
- Company Limited by Guarantee without Share Capital
Company Limited by Guarantee with Share Capital
If you opt for a company limited by guarantee that also has share capital, you’ll need to do two things:
- Subscribe to shares, just like in a regular company limited by shares.
- Provide a guarantee to contribute a certain amount of money if the company winds up or closes down.
This guarantee is a unique feature of this company type and is not required in a standard company limited by shares. Both the share subscription amount and the guarantee amount will be clearly stated in the company’s Memorandum of Association (MoA).
Company Limited by Guarantee without Share Capital
If you choose to register a company limited by guarantee without share capital, things get a bit simpler. You won’t have to deal with shares at all. Instead, you just need to provide a guarantee to contribute a certain amount of money if the company ever needs to be wound up. This guarantee amount will be clearly mentioned in the company’s Memorandum of Association (MoA).
Unlimited Company: Full Responsibility for Members
Unlike a limited liability company where owners have limited risk, an unlimited company places full responsibility on its members. If the company faces closure, the members are personally liable for all its debts. This means their personal assets could be used to settle the company’s dues.
Private Unlimited Company
In Pakistan, you have the option to register a private unlimited company, but it requires at least two members. Keep in mind, in this type of company, you and the other members have unlimited liability. This means if the company faces closure, you’ll all be personally responsible for paying off all its debts. Your company name will also need to include the word “Unlimited” at the end.
Public Unlimited Company
Just like a private unlimited company, you can also register a public unlimited company in Pakistan. However, you’ll need at least three members to start one. Remember, in a public unlimited company, all members have unlimited liability. This means if the company faces financial trouble and has to shut down, each member is personally responsible for paying off all its debts. The company’s name must also include the word “Unlimited” at the end.
Not-for-Profit Companies
If you’re passionate about making a positive impact and want to establish a formal organization for your public welfare activities, consider registering a Not-for-Profit Company. This type of company enhances your credibility and recognition. Legally, it can only be registered as a public company.
As a member, you’ll commit to contributing a specific amount to the company’s funds. You’ll also agree to share responsibility for the company’s debts up to a certain limit, should it ever need to close down.
One unique feature is that your company’s name doesn’t need to include words like “Limited” or “Guarantee Limited”.
Foreign Company
A foreign company is basically a business that’s registered and running its operations in a country that’s not its home country. Companies usually go this route to tap into new markets, enjoy tax benefits or favorable regulations, or establish a physical presence in a foreign country.
These foreign companies can operate as branches or subsidiaries of their parent companies. It’s important to note that they must follow all the laws and regulations of the country they’re operating in. This includes registering with the authorities, paying taxes, and complying with labor laws. They may also need to appoint local directors or representatives to ensure compliance.
Setting up a foreign company requires careful planning and thorough research to ensure you’re following all the local rules and minimising any risks or legal issues.
Partnership Firm: Joining Forces in Business
A partnership, sometimes called an Association of Persons (AOP), is a business where two or more people join forces. It’s formed through a partnership agreement, which lays out the rules like how profits and losses are shared, each partner’s responsibilities, and how long the partnership will last.
Partnerships are a popular choice for small businesses, especially those offering professional services, because they’re flexible and easy to set up. Just keep in mind that a partnership isn’t a separate legal entity, so the partners are personally liable for the partnership’s debts and obligations.
Partnerships are governed by the Partnership Act of 1932. You’ll need to file annual tax returns and financial statements to stay compliant.
Here are the key things to know about partnerships in Pakistan:
- It’s a Contract: A partnership is based on a contract, whether written or spoken. It’s best to have a written agreement to avoid misunderstandings later on.
- Number of Partners: You need at least two people to form a partnership. But there are limits: no more than 10 partners for a banking business and no more than 20 for other businesses.
- Everyone’s an Agent: Each partner acts on behalf of the others.
- It’s About Business: Partnerships are for profit-making businesses, not for clubs or charities.
- Cooperation is Key: Mutual trust and working together are essential for a successful partnership.
- It’s Not Forever: Partnerships can dissolve if a partner leaves, passes away, or goes bankrupt.
- Legal Status: An unregistered partnership doesn’t have a separate legal identity.
- Management: All partners can participate in running the business, or some may be designated to manage things.
- Profit Sharing: The whole point of a partnership is to earn profits, which are shared according to a pre-decided ratio.
- The Law: Partnerships in Pakistan operate under the Partnership Act, 1932.
- Sharing the Load: Any partner can act on behalf of the whole partnership.
- Capital Contributions: Partners contribute capital as agreed upon; some may contribute skills or expertise instead of money.
- Transfer of Shares: A partner can’t transfer their share or rights without the consent of all other partners.
- Unlimited Liability: Each partner has unlimited liability. If the business incurs losses, personal assets may be used to pay off debts.
Conclusion
Navigating the world of company types in Pakistan might seem overwhelming at first, but armed with the right information, you can confidently choose the structure that best aligns with your vision and goals. Remember, each company type has its own unique advantages and disadvantages, and the ideal choice will depend on factors like your business objectives, the number of owners, desired liability structure, and the need for external funding.
Whether you’re a solo entrepreneur embarking on a new journey or a group of individuals with a shared vision, there’s a company type tailored to your needs. Carefully consider your options, weigh the pros and cons, and make an informed decision to set your business up for success.
Need expert guidance on choosing the right company type or navigating the registration process? HETCO is here to help. Contact us today for a personalized consultation.