Understanding the Two Popular Business Structures
When starting a business in Pakistan, entrepreneurs often face the decision of choosing between a Limited Liability Partnership (LLP) and a Private Limited Company (Ltd Pat.). Although both provide limited liability to their owners, they differ in formation, governance, tax treatment, and reporting obligations. Below, we break down the key differences and then present a concise comparison table.
1. Legal Status and Formation
- LLP is a hybrid entity that combines partnership characteristics with the limited liability of a corporation. It is registered under the LLP Act 2017.
- Private Limited Company is a separate legal entity under the Companies Ordinance 2017, requiring at least two directors and no restriction on the number of shareholders.
2. Liability and Capital
- In an LLP, partners’ liability is limited to their agreed-upon capital contribution. Partners are not personally liable for debts beyond this amount.
- In a private limited company, shareholders’ liability is limited to the unpaid portion of their shares. Shareholders do not risk personal assets.
3. Management and Governance
- LLP allows partners to manage the firm directly. There is no formal board of directors.
- Private Limited Company requires a board of directors, with specific roles such as Chairperson, Managing Director, and statutory auditors.
4. Taxation
- LLP is taxed as a partnership. Profits are taxed at the individual partner’s marginal rate, and partners must file personal income tax returns.
- A private limited company is taxed at the corporate rate (currently 22% for companies with investment in specified sectors; otherwise 29% for others). The company also needs to pay withholding taxes on certain payments.
5. Compliance and Reporting
- LLP submits annual accounts to the Registrar, but the requirements are less stringent than those for a company. Minimal audit requirement unless turnover exceeds a certain threshold.
- Private Limited Company must file audited financial statements, maintain statutory registers, submit annual returns, and conduct an annual AGM. The audit threshold can be as low as PKR 1 crore in many sectors.
6. Capital Raising
- LLP cannot issue shares and is limited to private funding from partners.
- Private limited companies can issue shares (public or private) and raise capital from the market or private investors.
Comparison Table
| Aspect | LLP (Pakistan) | Private Limited Company (Pakistan) |
|---|---|---|
| Legal Form | Hybrid Partnership | Separate Corporate Entity |
| Formation Act | LLP Act 2017 | Companies Ordinance 2017 |
| Minimum Partners/Shareholders | 2 | 2 Directors (Shareholders can be more than 2) |
| Liability | Limited to capital contribution | Limited to unpaid share value |
| Management | Partners manage directly | Board of Directors; AGM required |
| Taxation | Partnership taxes (personal rates) | Corporate tax (22%/29%) |
| Annual Audit | Optional unless turnover > threshold | Mandatory if turnover > PKR 1 crore |
| Share Capital | No share structure | Share issuance permissible |
| Reporting Complexity | Low | High |
| Capital Raising Flexibility | Restricted to partners | Can issue shares, borrow from banks |
Choosing between an LLP and a private limited company depends on your business objectives, desired governance structure, and willingness to comply with higher regulatory burdens. If minimal reporting and direct control are priorities, an LLP may be ideal. If you anticipate scaling and taking on external investors, a private limited company offers greater flexibility.
