Advantages And Disadvantages of a Company in Pakistan

We wrote article on “how to register a private limited company in Pakistan” and a large number of people has sent us emails and requested to explain the major advantages and disadvantages of company formation in Pakistan.

In Pakistan, people generally think that if they will form a private limited company their business will grow exponentially. It is not true. You should assess your business first and decide whether it is time to convert it to a company or not . No doubt, registration of company is necessary if you have plan to provide Hajj & Umrah Services or banking services etc. but if you have just started your business then my advice is to establish your business first and then go for company formation.



Before going in to detail let me explain; generally there are three types of businesses i.e. sole proprietorship, partnership and private limited company (there are other types of businesses also but I am too simple as this article is written for a person who has no technical knowledge)

Advantages of company in Pakistan, Following are advantages of a private limited company in Pakistan:

1. Unlimited life
The private limited company is considered as separate legal entity than its directors and all companies have unlimited lives. Sole proprietorship losses its life when its owner dies. However, in case of  a company death of a director does not effect life of  the company.

2. Limited liability
Sole proprietorship and partnership have unlimited liabilities but companies not. Suppose, a shopkeeper purchases inventory of Rs. 5 million on credit and next day he loses his inventory due to fire he has to pay the amount to his supplier by selling its personal assets. However, in case of loss in company you will loose your share in company only and you will not be required to pay from your pocket.

3. Easy transfer of Ownership
It is easy to transfer ownership from one person to another like from father to son or from sister to brother in a private limited company while it is difficult to transfer ownership in other types of businesses.

4. Reputation
In Pakistan, people generally rate companies higher than other types of businesses. Therefore, company carry good image among public and other stake holders .  Although, it may be deceptive.

5. Tax Benefit
In Income Tax law of Pakistan, directors can receive salaries from their own company. In individual business, owner is not allowed to give salary to himself  but if you are director of a company you can receive salary. By this way, you can reduce your net profit and ultimately you will have to pay less taxes.

Following are five major disadvantages of company formation in Pakistan:

1. Regulated by complex corporate law
In Pakistan, companies are regulated by companies ordinance, 1984. There are certain statutory requirements of Securities and Exchange Commission of Pakistan (SECP) and companies have to follow these requirements. This definitely increases work load for documentation etc. Companies has to file their financial accounts, list of directors, details of Annual General Meetings (AGMs) etc to the  Securities and Exchange Commission of Pakistan (SECP) as per law. Companies are required to intimate any change in their address to commission also.

2. Tax Disadvantages
Sole proprietors and partner don’t pay  income tax if they earn taxable income less than Rs. 400000 (Year 2012-13), however, company has to pay tax even it declares Rs. 1 as profit. Moreover, almost all companies are withholding agents and they have to file withholding statements on quarterly basis.For companies , it is obligatory to file their financial statements (i.e. balance sheet, income statement, statement of change in equity, statement of cash flow, notes to accounts etc) to Federal Board of Revenue (FBR) along with their annual Income Tax returns.

3.  Difficult to Administer
In sole proprietorship, it is easy to plan, easy to take decision and to implement these decisions. Contrary to this, complex procedure is to be followed for taking and implementing decisions in private limited company.

4. Difficult to Wind up
It is not easier to wind up a private limited company. Most of time, company has to pay fine to SECP if it wants to die.

5. Cost Disadvantages
Generally, companies have to bear more expenses than other type of businesses. In Pakistan, companies are required to be registered with social security, has to pay tax at higher rate (i.e. 35%), has to employ company secretary, legal adviser etc. In a nut shell, companies have cost disadvantages over other types of businesses.