Legal Considerations when starting your Business

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Legal Considerations when starting your Business img


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As Pakistan ’s start-up culture picks up pace, it is important to consider the wide-ranging legal implications involved in setting up your business. The law requires that you, at the very least, open an account with a local bank, obtain a ‘National Tax Number ’ (NTN) along with the required licenses and commit to paying taxes. Failure to follow these guidelines can prove detrimental to any business's Legal Considerations.

It is recommended that anyone who is considering launching a startup or business in Pakistan is well aware of the different structures under which they can register their business. Registration itself provides a range of benefits, from legal protection for your business to exemptions from several taxes.

Startups may be a sole proprietorship or form a partnership, or register with SECP as a limited liability company. The choice here depends on several factors such as the size, nature, and objective of your business. For example, most small businesses are usually set up as sole proprietorships, as the requirements are relatively easier to comply with. On the other hand, a larger firm, which is capable of complying with the more rigorous requirements, may prefer to register itself as a limited liability company in order to raise more capital.

Sole Proprietorship:

A ‘National Tax Number’ (NTN) certificate is obtained from the FBR after which you will be liable to pay any applicable taxes. The certificate can be applied for online by submitting an NTN form, bank account details, and copies of identification cards. This does not incur any cost except a standard lawyer’s fee in case you hired one. The sole proprietorship remains a popular choice among new startups as it offers the most flexibility and the lowest costs. However, it also fails to protect the individual from excessive liability. Any debt incurred by the company must be paid off by the owner regardless of the initial seed capital.

Partnership/Association of Persons:

Application forms can be obtained from the Registrar of Firms and a partnership deed is to be made on judicial papers. This document is then duly signed by all partners wishing to be a part of the firm, and then submitted to the Registrar. The issuance of a certificate then completes the formation of the partnership. A total cost of 1200-2500 PKR may be incurred in obtaining these documents. While this form of business certainly allows for greater capital and easier management, it fails to provide limited liability. Any debt incurred will be traced back to the partners.

Limited Liability Company:

The Securities and Exchange Commission of Pakistan (SECP) governs the registration of companies. An application may be made online or offline and a certain fee is charged depending on the share capital after which a certificate of incorporation is issued and the company is formed. The reason people opt for forming a business under this structure is the advantage of limited liability company. Since a company is a separate legal entity, the debt of a company will not pass on to the people that control or own it. This effectively increases the risk-taking potential of a company. However, companies are highly regulated, and therefore, running a company can prove expensive with the need to hire accountants, auditors, and lawyers. Once you have decided on the structure, certain other considerations must be made.

Special Licenses:

Some businesses require certain specialized licenses to operate. For example, businesses involved in the manufacture of goods must obtain a certificate of environmental protection and similarly, any business providing professional services must obtain a certificate or a permit from the relevant professional body.

Employment Contracts:

Special care has to be taken when hiring employees. Any company with five or more employees must register themselves with the Federal EOBI. Which then makes it mandatory for the company to set up a fund that provides several benefits for such employees. A startup can consider hiring consultants instead of permanent employees to give itself more flexibility as it scales up.

Intellectual Property Rights: (IPR)

IPO Pakistan is the premier authority that is entitled to issue trademarks, patents, and copyrights. While these may not be necessary. They are recommended to protect IPR and ensure that third parties do not infringe on your rights.

Sales Tax:

A Sales Tax Number (STN) must be obtained from the FBR. An STN is a prerequisite to collecting sales tax.

Professional Taxes:

Certain services may trigger professional taxes. An application must be made to the Excise and Taxation department. Which will then consider any applicable taxes on a case-by-case basis Legal Considerations.

The information presented does not constitute legal advice. If you need more information or have a query, post on Sidekick.pk and get proposals from trusted Professionals.