Partnership Firms

Partnership Firms - option for small to medium businesses

This segment covers aspects pertaining to partnership firms such as formation, legal recognition, taxation, compliance requirements, flexibility, and risks associated with each type of partnership.

Partnership firms are a popular choice for businesses in Pakistan due to their simplicity, flexibility, and ease of formation. Whether registered or unregistered, these entities play a vital role in the country's economic landscape, catering to a diverse range of industries and sectors. In this article, we'll delve into the intricacies of partnership firms in Pakistan, exploring both registered and unregistered forms, their features, advantages, and legal requirements.

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In partnership, like sole proprietorship, the liability of the firm is not limited as it extends to the personal assets of the incoming partners. The limited liability partnership model is not practiced in Pakistan.

There are two types of Partnership firms that you can opt for:

1. Unregistered Partnership and
2. Registered Partnership

In each case, a Partnership Deed is written, preferably with the help of a lawyer, where both the parties are identified along with their residential address and Computerized National Identity Card (CNIC) number.

The profit sharing ratio is stated and the nature of business proposed to be carried out by the firm is also stated. The amounts being brought in by each partner are stated as well. The profit and loss sharing ratio is also stated in the Partnership Deed. The firm becomes effective from the date of execution or signing of the Partnership Deed.

In case of Registered Partnership, the Partnership Deed is registered with the Registrar of Companies of the concerned province/district. Another tyoe of registered partnership is the Limited Liability Partnership.

There is no mandatory requirement to register the firm.

The Partnership Deed remains effective as long as the business is a going concern, thereafter if desired by the partners the firms may be dissolved. Upon dissolution of the firm, after pro-rata distribution of profit, in case of profit, the partners are able to withdraw their initial investment. In case of loss, the amount of loss is reduced from the capital of the partners in the pre-agreed ratio as decided as per the Partnership Deed.

In case of Registered Partnership, an application for the dissolution of the firm is required to be filed.

Details and some more information on each type of partnership firms is given under relevant segments below.

Partnership firms - Registered Firms

Formation: Registered partnership firms in Pakistan are governed by the Partnership Act of 1932. According to this act, a partnership firm can be formed with a minimum of two and a maximum of twenty partners for any lawful business purpose. The process of registering a partnership firm involves drafting and executing a partnership deed, which outlines the terms and conditions of the partnership, including profit-sharing ratios, capital contributions, roles and responsibilities of partners, and procedures for decision-making and dispute resolution. Once the deed is signed by all partners, it must be submitted to the Registrar of Firms in the relevant district along with the prescribed fee for registration.

Legal Recognition: Registered partnership firms enjoy certain legal benefits, including the ability to operate under a recognized business name and enter into contracts in their own name. While they do not have a separate legal personality like corporations or limited liability partnerships, registered partnership firms can still sue and be sued in the name of the firm itself. This provides a level of legal recognition and protection to the partners and their business activities.

Taxation: Registered partnership firms in Pakistan are not taxed as separate legal entities. Instead, they are taxed as "pass-through" entities, meaning that profits are distributed among the partners and taxed at their individual income tax rates. Partners are required to include their share of partnership income in their personal tax returns and pay taxes accordingly. This taxation structure simplifies the tax compliance process for partnership firms and their partners.

Compliance Requirements: Registered partnership firms must comply with various legal and regulatory requirements to maintain their status. These include filing annual returns with the Registrar of Firms, updating any changes in the partnership deed or partners' details, and adhering to accounting and auditing standards prescribed by the relevant authorities. Failure to comply with these requirements may result in penalties or loss of registration status.

Partnership Firms - Registered - Limited Liability Partnership

Limited Liability Partnerships (LLPs) in Pakistan: A Segment

Limited Liability Partnerships (LLPs) are a specialized form of partnership that offer a unique blend of features from both partnerships and corporations. In Pakistan, LLPs provide an attractive business structure for professionals, entrepreneurs, and small to medium-sized enterprises seeking to combine the flexibility of a partnership with the limited liability protection typically associated with corporations. Here, we'll explore the key characteristics and benefits of LLPs in Pakistan.

Formation: LLPs in Pakistan are governed by the Limited Liability Partnership Act, 2017. To form an LLP, a registration process with the Securities and Exchange Commission of Pakistan (SECP) is required. The LLP agreement, similar to a partnership deed, outlines the rights and responsibilities of partners, profit-sharing arrangements, decision-making processes, and other relevant provisions. One of the distinguishing features of LLPs is that partners are not personally liable for the debts and obligations of the LLP, except to the extent of their capital contribution.

Limited Liability Protection: The primary advantage of LLPs is the limited liability protection they provide to their partners. Unlike traditional partnerships, where partners are personally liable for the debts and obligations of the firm, LLP partners enjoy limited liability, shielding their personal assets from business liabilities. This feature provides a level of security and peace of mind to partners, especially in industries with higher risk exposures.

Legal Recognition and Flexibility: LLPs have a separate legal identity from their partners, allowing them to enter into contracts, acquire assets, and sue or be sued in their own name. This distinct legal personality enhances the credibility and recognition of LLPs in the eyes of clients, creditors, and other stakeholders. Additionally, LLPs offer flexibility in terms of management structure, decision-making processes, and profit distribution, allowing partners to tailor the LLP agreement to suit their specific needs and preferences.

Taxation: LLPs in Pakistan are taxed as pass-through entities, similar to traditional partnerships. This means that LLPs themselves are not subject to income tax; instead, profits and losses are passed through to the individual partners, who are then taxed at their personal income tax rates. This taxation structure simplifies the tax compliance process for LLPs while providing partners with the flexibility to manage their tax liabilities effectively.

Compliance Requirements: LLPs are subject to certain compliance requirements set forth by the SECP, including annual filing of financial statements and LLP returns. Additionally, LLPs must maintain proper accounting records and adhere to statutory audit requirements based on their annual turnover. Compliance with these regulations ensures transparency, accountability, and good governance within the LLP.

Conclusion: Limited Liability Partnerships (LLPs) offer a compelling business structure for professionals, entrepreneurs, and SMEs in Pakistan, combining the benefits of limited liability protection with the flexibility and tax advantages of a partnership. By providing partners with a secure and efficient framework to conduct business, LLPs contribute to the growth and development of the Pakistani economy, fostering innovation, entrepreneurship, and sustainable business practices.

Partnership Firms - Registrar Offices

Some of the Registrar Offices in the country are as follows:

Sindh Government has launched a portal for 'Ease of Doing Business':

Partnership Firms - Unregistered Firms

Formation: Unregistered partnership firms, also known as 'oral partnerships', are formed without executing a written partnership deed or registering with the authorities. While they are not legally recognized as distinct entities separate from their partners, they are governed by the general principles of contract law and the Partnership Act of 1932. In an unregistered partnership, the terms of the partnership are usually based on verbal agreements or implied understandings among the partners.

Flexibility and Informality: Unregistered partnership firms offer greater flexibility and informality compared to their registered counterparts. Since there is no requirement to draft a formal partnership deed or comply with registration formalities, the formation process is relatively quick and inexpensive. This makes unregistered partnerships particularly suitable for small businesses and ventures with limited resources or a short-term outlook. nevertheless, drafting a partnership deed is always advisable to avoid any future complications.

Risk and Limitations: However, the informality of unregistered partnerships also poses certain risks and limitations. Without a written partnership deed, the rights, obligations, and liabilities of the partners may be ambiguous or subject to misinterpretation. Moreover, unregistered partnerships lack the legal protections and benefits afforded to registered firms, making it more challenging to enforce rights or resolve disputes through legal means.

Conclusion

Partnership firms, whether registered or unregistered, play a significant role in the business landscape of Pakistan. While registered partnerships offer legal recognition, protection, and tax benefits, unregistered partnerships provide flexibility and informality, albeit with certain risks and limitations. Ultimately, the choice between registered and unregistered partnership forms depends on the specific needs, objectives, and circumstances of the partners involved. However, regardless of the form chosen, clear communication, mutual trust, and a shared vision are essential ingredients for the success of any partnership venture in Pakistan.

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