Legal Forms of Business

Organization
Legal forms of Business
There are three main forms of business

Proprietorships
Partnerships
Corporations
Characteristics
Case of formation
Cost of formation
Liability of owners
Durability and stability of each firm
Directness of control
Legal status
Proprietorships
The sole proprietorship is the simplest business form
under which one can operate a business.
The sole proprietorship is not a legal entity.
It simply refers to a person who owns the business and
is personally responsible for its debts.
The sole proprietorship is a popular business form due
to its simplicity, ease of setup.
No agreement is needed.
The advantages of proprietorships may
include
Sole proprietorship is easy and inexpensive to create.
Owners may freely mix business or personal assets.
Lower start-up cost.
Autonomy of business decision and control of profits.
Sole Proprietorships are typically subject to fewer
regulations.
No corporate income taxes. Any income realized by a
sole proprietorship is declared on the owner's
individual income tax return.
The disadvantages of proprietorships
may include
Owners has unlimited liability.
Business cannot be transferred / sold.
Raising capital is hard.
Lack of professionalism
Limited life. In most cases, if a business owner dies,
the business dies as well.
Following are the main steps to start a
proprietorship business
Finalize a business name.
Print basic business stationary i.e. letterheads, visiting
cards etc.
Prepare business stamp (a common rubber stamp will
do).
Open a bank account in the name of sole proprietor
business.
Apply for National Tax Number (NTN) certificate.
Partnerships
Partnership is the second stage in the evolution of forms of
business organization.
It means the association of two or more persons to carry on as
co-owners, i.e. business for profit.
The persons who constitute this organization are individually
termed as partners and collectively known as firm; and the
name under which their business is conducted is called The
Firm Name.
In ordinary business the number of partners should not exceed
20, but in case of banking business it must nor exceed 10.
This type of business organization is very popular in Pakistan.
Required Documents/Information
Name of the Partnership
Place or principal place of business of the Partnership
firm
Names in full and permanent addresses of the Pakistan
National partners and share/P&L ratio of each partner.
Copies of valid and legible CNICs of Pakistan Nationals.
Please note, Partners along with witnesses may be
required to physically present to Registrar for thumb
impression and record.
The advantages of partnerships may
include
Synergy. There is clear potential for the enhancement of value resulting
from two or more individuals combining strengths.
Partnerships are relatively easy to form, however, considerable thought
should be put into developing a partnership agreement at the point of
formation.
Partnerships may be subject to fewer regulations than corporations.
There is stronger potential of access to greater amounts of capital.
No corporate income taxes. Partnerships declare income by filing a
partnership income tax return. Yet the partnership pays no taxes when
this partnership tax return is filed. Rather, the individual partners
declare their pro-rata share of the net income of the partnership on
their individual income tax returns and pay taxes at the individual
income tax rate.
The disadvantages of partnerships may
include
Unlimited liability. General partners are individually
responsible for the obligations of the business,
creating personal risk.
Limited life. A partnership may end upon the
withdrawal or death of a partner.
There is a real possibility of disputes or conflicts
between partners which could lead to dissolving the
partnership. This scenario enforces the need of a
partnership agreement.
Corporations
Corporations are probably the dominant form of business
organization in the World.
Although fewer in number, corporations account for the
lion's share of aggregate business receipts in the World
economy.
A corporation is a legal entity doing business, and is
distinct from the individuals within the entity.
Public corporations are owned by shareholders who elect a
board of directors to oversee primary responsibilities.
Along with standard, for-profit corporations, there are
charitable, not-for-profit corporations.
Registration of Corporations
The procedure of registration, formation and regulation of companies in Pakistan is
given in the Companies Ordinance, 1984.
Whereas the function of registration and management of these companies is vested
with the Securities and Exchange Commission of Pakistan and the Registrar of
Companies appointed by the Securities and Exchange Commission of Pakistan in
various jurisdictions where such company is to be registered.
The following information has to be provided in prescribed manner to the Exchange
Commission of Pakistan for the registration of company.
Name of the company
Principal place of business of the company
Nature of business
Memorandum of Association (MOA)
Articles of Association (AOA)
The name of directors, their permanent addresses and other particulars
Amount of share capital, Authorized and Paid up
Number of shares taken by each shareholder
Advantages of Corporations
Distinct Legal Entity
Limited Liability and Protection of Personal Assets
Easy Measurement of Investment of Every Person
Easy Transferability of Ownership of Shares
Perpetual Succession
Easy to Raise Funds
Part of Regulated and Documented Sector
Accountability and Responsibility
Elevation of Business Status
Establish Credibility
Compact Legal and Organizational Framework
Limitation of Corporations
Lengthy and expensive legal procedure
Excessive Government Regulations
Lack of Incentives
Double taxation
Delay in decision making and action
Conflict of Interest
Speculation
 Proprietorships Partnership Corporations
Registration with
Registration with Tax Registrar of Firms Registration with
Formation Authorities Required Required SECP is Required

Annual Tax Return

Periodic No filing except Annual of All Partners and Periodic SECP filings
Compliance/Filing Tax Return Firm is required required
Limitedpersonal
liability No No Yes
Allowed, But
Transferabilityof Partners have to
interest No visit in Person. Allowed
Until withdrawal or death
Duration of owner At Will Unlimited
Pass-through Yes Corporate Tax
taxation Yes Yes Apply
Abilitytoraise Yes, from partners
capital Not as separate entity only Yes
For Pvt. Limited: 50.
Limitationson Maximum 20 For Public Limited:
numberofowners Yes. Only One Owner. partner No
Thanks