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.
Ahmad Farooq Malik
(Barrister-At-Law)
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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 abank account in the name of sole proprietor business. The bank
manager will require a request letter on business letterhead with sole
proprietors 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 proprietors 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 thePartnership Act
1932.
In Pakistan partnerships are of two kinds:
1. Registered Partnership
2. Unregistered Partnership
Ahmad Farooq Malik
(Barrister-At-Law)
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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
theRegistrar 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 firm
2. Profit and loss sharingpercentages of the partners
3. Nature of the business to be conducted by the firm
4. Full address (place of business) of the firm
5. Full names and addresses of the partners
6. Duration of the partnership
7. Respective investments of the partners
Companies
The 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; or
b. A company limited by guarantee; or
c. An unlimited company
Companies formed in any of the above categories can further be classified in two types:
a. Private company
Ahmad Farooq Malik
(Barrister-At-Law)
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b. Public company
c. 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.
Ahmad Farooq Malik
(Barrister-At-Law)
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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 shares
limits the number of its members to fifty
prohibits any invitation to the public to subscribe for its shares or
debentures.
Single-member company
An 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 soleproprietorships 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 to
work 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 company
A 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 companieshave the option to get their securities listed on a stock exchange.
Ahmad Farooq Malik
(Barrister-At-Law)
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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 Association
A company is governed by its Memorandum of Association (MoA) and Articles of
Association.
The MoA primarily specifies the framework of companys objectives and capital
boundaries,
AoA transcribes rules for conducting its daily business in accordance with applicable
laws 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 capital
The shares are moveable property of the member and are transferable in the manner
provided in the companys 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 Directors
The management of companies is vested in the Board of Directors and they may
exercise such powers as are specified in the AoA and theCompanies 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.
Ahmad Farooq Malik
(Barrister-At-Law)
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Chief executive
All companies are required to appoint a Chief Executive Officer (CEO).
Audit of accounts
Following companies are required to have their accounts audited by a Chartered
Accountant;
a public company
a 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 requirements
The 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.