setting up a business in pakistan

Ahmad Farooq Malik(Barrister-At-Law)

SETTING UP A BUSINESS IN PAKISTAN

There are different forms of business formation or establishment in Pakistan.

The decision to choose the best suitable form of business is taken by the business owner(s) or investors keeping in view the particular nature of business, costs of registration, tax benefits, flexibility of operation, annual compliance requirements, reporting requirements and other factors.

TYPES OF BUSINESSES ORGANISATIONS

Sole proprietorship

Sole proprietorship concern (also know as a sole trader/owner) is the most common and most favored option for individuals who want to establish a small business in Pakistan, or want to start a home-based business.

This form of business is used by majority of start-ups in Pakistan, and it is the simplest way of giving corporate face to a small business.

There is no requirement to register a sole proprietorship business in Pakistan. Any business can be conducted through a sole proprietorship unless the law requires a certain business to be carried out only by an association of persons, for example a partnership firm or a limited liability company.

Sole proprietorships are not complex business structures, and are therefore quite easy and quick to establish.

The owner of a sole proprietorship business (referred as ‘sole proprietor’ or ‘proprietor’) can pay taxes through his/her personal tax returns.

The sole proprietor will always be personally liable for affairs of the business, for example to the creditors of the business or to someone having a legal claim against the business.

All assets of the business will be considered personal assets of the sole proprietor.


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A sole proprietor can do business with a trade name other than his own name. This also allows the proprietor to open a bank account in the name of the business.

Following are the main steps to start a sole proprietorship business:1. Finalize a business name.2. Print basic business stationary i.e. letterheads, visiting cards etc.3. Prepare business stamp (a common rubber stamp will do).4. Open a bank account in the name of sole proprietor business. The bank manager will require a request letter on business letterhead with sole proprietor’s signature and stamp.5. Get bank statement of the newly opened bank account.6. Apply for National Tax Number (NTN) certificate. Bank account statement and a copy of sole proprietor’s computerized national identity card will be required along with application for NTN. If sole proprietor already has NTN there is no need to get a new one as the existing NTN can be used for business documentation

Partnership:

Partnership is a formal corporate structure although more flexible than a limited liability company.

The nature of business entity established through a partnership is referred to as a ‘firm’.

A partnership or firm is established through written agreement between all the partners.

The law governing the partnerships in Pakistan is contained in the Partnership Act1932.

In Pakistan partnerships are of two kinds:1. Registered Partnership2. Unregistered Partnership


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There is no requirement to register a firm, however there are certain benefits of registering a firm. In case of registered firm, the partnership deed is registered with the Registrar of Firms. Unregistered partnership can be dissolved without any formality, however a registered firm can only be dissolved through a written dissolution application to the Registrar of Firms.

By definition partnership is a relation between two or more persons who have agreed through a written partnership deed to conduct the business and share the profits and losses of the business according to the terms of the partnership deed. Partnership business can be conducted by all partners or any of the partners on behalf of others. A maximum of 20 partners are allowed to form a partnership. In a partnership firm the partners’ liability is not limited and they are fully liable for all claims or law suits against the partnership.

Following details must be clearly mentioned in a partnership deed:

1. Name of the firm2. Profit and loss sharing percentages of the partners3. Nature of the business to be conducted by the firm4. Full address (place of business) of the firm5. Full names and addresses of the partners6. Duration of the partnership7. Respective investments of the partners

CompaniesThe Companies Ordinance, 1984 (the Ordinance) and The Companies (General Provisions and Forms) Rules, 1985 provide the legal framework for operations of companies in Pakistan and the Securities and Exchange Commission of Pakistan (the Commission) is the regulatory authority in this regard. In Pakistan, a company may be formed with or without limited liability and the Ordinance provides for the following categories of the companies:

a. A company limited by shares; orb. A company limited by guarantee; orc. An unlimited company

Companies formed in any of the above categories can further be classified in two types:a. Private company


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b. Public companyc. Single Member Company

Any three or more persons associated for any lawful purpose may, by subscribing their names to the Memorandum of Association (document that defines the objectives of the company) and complying with the registration requirements, form a public company. There is no limitation as to the maximum number of members of such a company and after complying with the prescribed requirements; it may offer its shares and other securities to the general public. The public company may get its shares and other securities listed on the stock exchange(s).

A private company can be established by any one or more persons associated in such manner as specified in the case of a public company and means a company which by its articles of association (document that defines the standard operating procedures of the company),

a. Restricts the right to transfer its shares, if any;b. Limits the number of its members to fifty;c. Prohibits any invitation to the public to subscribe for the

shares, if any, or debentures of the company.

The name of every public limited company should include the word “Limited” as the last word of the name. And the name of every private company and a company limited by guarantee should respectively include the parenthesis and word “Private” and “Guarantee” before the last word “Limited”. The Commission may grant licence to a non-profit association for the promotion of commerce, art, science, religion, sports, social services, charity or any other useful object to be registered as a company with limited liability without the addition of the words “Limited”, “(Private) Limited” or “(Guarantee) Limited” as the case may be, to its name.


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Private company

A private company can be easily formed by a minimum of two members (except for a single member company) and may commence its business immediately after its incorporation. A private company, through its Articles of Association (AoA):

restricts its members to transfer shareslimits the number of its members to fiftyprohibits any invitation to the public to subscribe for its shares ordebentures.

Single-member companyAn individual is entitled to obtain corporate status by forming a single member company and avail privileges of limiting the liability. The introduction of the concept of a single member company has facilitated sole proprietorships to obtain corporate status, giving them the privilege to limit the liability of their proprietors. All the shares are vested with single member, however, he / she is required:

to nominate two individuals, one of whom shall become nominee director in case of death of the single member and the other shall become alternate nominee director towork as nominee director in case of non-availability of the nominee director.

Single-Member company is required to appoint a qualified company secretary and to write “SMC” in addition to Private Limited with its name.

Public companyA public company can be formed by three members or more. It is entitled to commence business after obtaining a commencement of business certificate from the Registrar of Companies.

A public company does not have restrictions with regard to maximum number of members and transferability of the shares. A public limited company should have a minimum of three members.

Public companies have the option to get their securities listed on a stock exchange.


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A company cannot be listed unless it has made a public issue which is subscribed by at least 500 members. However this is applicable for listing of shares. For listing of securities other than shares, minimum number of members is three.

A listed company may buy back its own shares subject to conditions specified in the Companies Ordinance, 1984.

Memorandum and Articles of AssociationA company is governed by its Memorandum of Association (MoA) and Articles of Association.

The MoA primarily specifies the framework of company’s objectives and capital boundaries,

AoA transcribes rules for conducting its daily business in accordance with applicablelaws e.g. transfer and transmission of shares, mode of alteration in capital, holding of meetings, voting, powers and duties of directors and chief executive, distribution of dividends, capitalization of profits and reserves, preparation of accounts, winding up, etc.

Share capitalThe shares are moveable property of the member and are transferable in the manner provided in the company’s AoA.

Company may have different kinds of share capital and classes of shares with distinctive rights attached thereto, if so provided in its constitutive documents i.e. MoA & AoA.

Management DirectorsThe management of companies is vested in the Board of Directors and they may exercise such powers as are specified in the AoA and the Companies Ordinance 1984. A single member company is required to have at least one director, whereas every other private limited company should have at least two directors. A public company is required to have at least three directors in case of an unlisted company and seven in case of a listed company.All directors must be natural persons.


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Chief executiveAll companies are required to appoint a Chief Executive Officer (CEO).

Audit of accountsFollowing companies are required to have their accounts audited by a Chartered Accountant;

a public companya private company, which is a subsidiary of a public company, or;a private company having a paid-up capital of PKR3 million or more.

Filing requirementsThe Companies Ordinance, 1984, requires companies incorporated in Pakistan to file various statutory returns relating to meetings of members, issuance and allotment of shares, appointment of and change in directors, chief executive and auditors, annual audited accounts, annual list of members etc. with the Registrar within the prescribed time limits.

The effort is targeted at ensuring compliance of the regulated entities with applicable laws and regulations and protecting the interests of the investors, depositors and other stakeholders.

setting up a business in pakistan

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