For a more flexible yet formal legal structure, partnership firms are the preferred choice. The law relating to partnerships is contained in Pakistan as per the Partnership Act, 1932 ("Partnership Act") which defines a "partnership" as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
A Partnership firm can be formed with two or more individuals upto twenty partners (other than certain specified cases, such as partnership firms for law practice, accountants firm or any other consultancy services firm), otherwise it is required to be registered as a company under the Companies Act 2017 (formerly the Companies Ordinance, 1984).
There is a percentage sharing that is agreed on based on the share in the equity or capital invested by each individual. At times there are arrangements where one partner brings in the land and building while the other brings in machinery and working capital. While there are partnerships where each individual brings in a certain amount of money. In each case there will be an understanding on profit sharing ratios after deduction of all expenses.
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. 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.