LLP vs PLC: Which Business Structure is Right for You in Pakistan?
The Securities and Exchange Commission of Pakistan introduced the concept of Limited Liability Partnerships (LLPs) in 2017 which offers another option for starting a business. LLPs are becoming increasingly popular as they offer more flexibility compared to traditional business structures and require less compliance.
One of the standout features of LLPs in Pakistan is the limited liability protection they offer to partners. This means that personal assets are protected in the event of business debts or lawsuits. Another key aspect of LLPs is that they are considered a separate legal entity from partners, and there is no minimum capital requirement. LLPs also have a flexible management structure, while filing of audited statement of accounts with the SECP is mandatory.
Now, let’s compare LLPs to Private Limited Companies (PLCs). It’s worth noting that PLCs come with more compliance requirements in terms of filing returns with the SECP. In addition to filing annual returns, PLCs must also file quarterly and annual withholding statements. They are also income tax and sales tax withholding agent for the Government and thus liable to deduct income tax and sales tax at the time of payment to the payees at certain rates. This extra level of compliance can be seen as a bit of a drawback for some, as it requires additional time and resources to ensure all filings are up to date and compliant with SECP regulations.
Another factor to consider when choosing between an LLP and a PLC is the way in which profits are taxed. Profits from PLCs are taxed again when taken out in the form of dividends, with a tax rate ranging from 7.5% to 25% (15% in most cases). This is known as double taxation, and it can be a consideration for business owners when deciding on a structure. On the other hand, profits from LLPs are not taxed when they are withdrawn by partners, which can be seen as a big plus.
Here is a comparison of the two structures:
|S. No.||Description||Limited Liability Partnership||Private Limited Company|
|1||Separate Legal Entity / Personality from the Owners||Yes||Yes|
|3||Minimum Capital Requirement||No||Yes|
|6||Requirement to appoint auditors||Mandatory – must be a Chartered Accountant||Not mandatory for companies having paid-up capital less than rupees one (1) million.|
|7||Filing of Annual Audited Financial Statements||With SECP and FBR||Only with FBR|
|8||SECP Compliances||Minimum||Minimum compliance for companies having paid-up capital less than rupees one (1) million.|
|9||Income Tax Withholding Agent||Not considered a tax withholding agent unless annual revenue exceeds rupees one hundred (100) million.||Considered a tax withholding agent since inception irrespective of annual turnover|
|10||Sales Tax Withholding Agent||No||Yes|
|11||Minimum Tax||No minimum tax unless annual revenue exceeds rupees one hundred (100) million||Minimum tax applicable irrespective of annual turnover/ sales|
|12||Taxability||Tax slabs applicable for business individuals on net profit exceeding rupees four hundred thousand (400,000).||Fixed tax rate on net profit|
|13||Taxation on withdrawal of profits||No additional tax on withdrawal of profit by partners||Tax applicable on dividends ranging 7.5% to 25% (double taxation)|
|14||Annual Income Tax Filing||Yes||Yes|
|15||Filing of quarterly and annual withholding statements||Not required to file unless LLP withholds taxes on salaries and rental income or its turnover exceeds rupees one hundred (100) million||Required to file quarterly and annual withholding statements|
In conclusion, LLPs and PLCs each have their own unique features and tax implications, and the choice between the two will depend on factors such as the size and nature of the business, liability protection, required capital structure, other business undertakings of partners, and tax implications etc. Make sure to weigh all of these factors carefully when deciding which type of business structure is right for you.