A company is a separate legal entity:
Advantages of Incorporating a Company: A company is a separate legal entity and distinct from its directors and shareholders. A company has many of the same legal rights and responsibilities as a person, like entering into contracts, the right to sue or be sued, borrowing money, paying taxes owning assets, and hiring employees.
Four types of companies exist in Pakistan:
- Single Member Company
- Private Limited Company
- Public Unlisted Company
- Public Limited Company
Single Member Company:
A single-member company is a private company with only one member or director and the benefits of limited liability. Subject to special amendments, all the provisions of the Companies Act 2013, which apply to limited liability companies also apply to sole traders.
Private Limited Company:
A Private Limited Company is a company whose maximum limit of members is fifty, prohibits invitation to the public to subscribe to shares, and restricts on transferability of shares. The minimum number of members and directors required is two and three respectively.
Public Unlisted Company:
Can issue the shares to the public but not through Stock Exchange. The minimum requirement of members and directors is 3. There is no maximum limit on several shares and free transferability of shares exists.
Public Listed Company:
A listed company means a public company, body corporate, or any other entity whose securities are listed on the Securities Exchange. A Public Company is a company that has sold all or a portion of itself to the public via an initial public offer. The listing of a company on the Exchange is a graduating step in enhancing the company’s official and public standing. Listed companies have the highest standard of efficiency and profitability, creating an avenue for investors to take advantage and share the returns of the company.
The company enjoys limited liability:
Limited liability is the legal structure of the organization that limits the extent of an economic loss to assets invested in the organization and that keeps the personal assets of investors and owners off-limits. The primary difference between a partnership a and private limited company is that LLC separates the business assets of the company from the personal assets of the owners, insulating the owner from the
Company’s debt and liabilities.
Tax Benefits:
Lower withholding tax deductions for companies in comparison to sole proprietors and partnerships in Pakistan. Increased tax credits and rebates for Companies. Withholding tax deduction on goods sold by corporate is 4% in comparison to 4.5% on registered partnership/sole proprietor entities and withholding income tax on services provided by corporate is 8%.
Perpetual Standing:
The legal status of the company will not cease even if one or more than one of its members dies.
Boost Business status:
Being a registered company under SECP provides the company additional credibility and provides extra commerce in the market. It provides sophisticated status in the organizational hierarchy. It has a more credible and transparent public perception.
Transferability of shares:
There is the ease in transferring shares among shareholders. Since members can transfer shares. Within 15 days after receipt of the valid instrument of transfer, the company processes the transfer.
Access to finance:
It’s easier to obtain finance since the company has audited financial statements as per regulatory requirements. In the high-interest environment, it’s more efficient to have investors’ money in comparison to financial institutions.
Income splitting:
The company can with hold its profits and do not distributes its profit at the time of higher taxation and wait for a reduction in tax rates.
Economies of Scale:
Availability of a large number of resources and economies of scale in production. Companies entail larger investments resulting in the procurement of increased productive machinery and an efficient workforce. Invariably, companies have a larger investment amount because they possess more members/investors and more members mean increased investment. Sole trading concerns and Partnerships firms suffer due to low resources and mostly required funds. A higher amount of resources in production enables the company to enjoy economies of scale, by reducing the cost of production. As such, the company earns higher profit due to its large margin between the cost of production of the product and the selling price of the product.
Diversification of Risk:
Larger Investment allows for investment in different sectors leading to lesser risk since one sector’s poor performance will not impose doubt on the company’s ability to continue as a going concern.
Research and Training:
Increased investment will allow the company to invest an increased amount in research and development. This activity allows the company to develop new products, more efficient processes, or improve those that already exist.
Improved liquidity:
Payments from customers will be more prompt since the company has access to higher-quality lawyers.
Professional Management:
Invariably, higher quality professionals are more inclined to apply in the corporate sector instead of sole proprietorship and partnerships. There are increased qualified people who have sound knowledge and experience concerning managing the company as well as the field in which the business is operating.
Management:
Companies enjoy isolated management from that of ownership. They are managed by the Board of Directors who are democratically elected.