WHAT IS A PARTNERSHIP?
Before we talk about partnership registration/formation in Pakistan, we must first understand what a partnership actually is? A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favoured over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits (usually referred to as Dividend Tax) before it is distributed to the partners i.e. there is no dividend tax levied. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a company.
CIVIL LAW DEFINATION OF PARTNERSHIP
In civil law systems, a partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise; contribute to it by combining property, knowledge or activities; and share its profit. Partners may have a partnership agreement (or deed as commonly called in Pakistan), or declaration of partnership and in some jurisdictions like Pakistan such agreements may be registered with the partnership registration office. A partnership is also considered to be a legal entity, and it has to maintain its accounts and file its income tax returns separately from its owners.
TYPES OF PARTNERS TO A PARTNERSHIP
There are two types of partners. General partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances. The liability of limited partners is limited to their investment in the partnership.
A silent partner is one who still shares in the profits and losses of the business, but who is uninvolved in its management, and/or whose association with the business is not publicly known; these partners usually provide capital.
ISLAMIC PARTNERSHIPS AND THE MODERN ALTERNATIVE
The Qirad and Mudaraba institutions in Islamic law and economic jurisprudence were the precursors to the modern limited partnership. These were developed in the medieval Islamic world, when Islamic economics flourished and when early trading companies, big businesses, contracts, bills of exchange and long-distance international trade were established.
In medieval Italy, the Qirad and Mudaraba concepts were adapted in the 10th century as the commenda, a limited partnership institution which was generally used for financing maritime trade.
According to section 4 of the Partnership Act of 1932, which applies to Pakistan, “Partnership is defined as the relation between two or more persons who have agreed to share the profits and losses according to their ratio of business run by all or any one of them acting for all”. This definition superseded the previous definition given in section 239 of Indian Contract Act 1872 as – “Partnership is the relation which subsists between persons who have agreed to combine their property, labour, skill in some business, and to share the profits thereof between them”. The 1932 definition added the concept of mutual agency.
In terms of Tax Law in Pakistan, Partnerships are referred to as Association of persons and separate sections have been inserted in income tax ordinance, sales tax act and so forth to regulate such partnerships.
There is no compulsory requirement for registration of a partnership in Pakistan . Nonetheless some litigation and tax related consequences and advantages are linked to a registered partnership.
BENEFITS FOR FORMING A PARTNERSHIP
Reduction of general costs. Business partnering can be cheaper and more flexible than a merger or acquisition, and can be employed when a merger or acquisition is not feasible.
Business partnerships provide a competitive advantage through the co-operation (the co-opetitive advantage) and even better opportunitiers of revenues, occupation and investment in the sector of application.
Partnership takes a new approach to achieving business objectives. It replaces the traditional customer-supplier model with a collaborative approach to achieving a shared objective; this may be to build a hospital, improve an existing service contract or launch an entirely new programme of work. Essentially, the Partners work together to achieve an agreed common aim whilst each participant may still retain different reasons for achieving that common aim.
HOW MANY MEMBERS/PARTNERS ARE REQUIRED FOR PARTNERSHIP REGISTRATION IN PAKISTAN
Any twenty or less persons desiring to carry out a lawful commercial activity or a profession may form a partnership except in certain cases e.g. where twenty or more persons may form partnership to undertake practice as lawyers or accountants or any other practice which cannot be carried out as a limited liability company under the provisions of law. In all other cases where the number of intended partners increases beyond the figure of twenty a company should be incorporated.
CAN COMPANIES FORM PARTNERSHIPS?
Yes, two or more companies can form a legal partnership in pakistan to achieve common objectives through alignment of resources in pursuit of long term goals. Such partnering can be used as alternative to traditional mergers and acquisitions.
PARTNERSHIP FORMATION / REGISTRATION
Like most countries in the world, First step for expansion for sole proprietors and sometimes the first step for businesses is the formation of a partnership in Pakistan. Partnerships may have small to medium sized business set-ups. Partnerships are normally formed where there is a desire to have some structural flexibility along with some formality of relationship between partners.
A partnership may be registered with the Registrar of Firms of an area where the office of the firm is situated or proposed to be situated. A statement in prescribed form must be delivered to the relevant Registrar stating:
- Name of the Partnership
- Place or principal place of business of the Partnership firm
- Names of any other places where the partnership is carrying out its business
- Date when each partner joined the partnership
- Rights and Liabilities of Each Partner to the partnership
- Names in full and permanent addresses of the partners
- Duration of the partnership
- A complete, properly executed partnership deed/Agreement
The aforestated statement must be signed by all the partners of the partnership for the time being or any authorized Legal agent (Lawyer / Attorney or other) on their behalf. Furthermore, the statement must be verified by the persons signing it. Once Registrar of Partnerships is satisfied that the above mentioned requirements have been complied with the registrar records entry of the statement in Register of Firms and files the statement.
If you have made your mind and thinking of forming/registering a partnership as this seems the only plausible option, then look no further for professional advice, contact Masood and Masood and we will do all the paper work for you.