Which is better Company or Partnership Firm?

Separate Legal Person

Which is better Company or Partnership Firm?  a very common question asked by the business owners . A company can enter into contracts, file lawsuits, and face legal action in its own name. In contrast, this is not possible in the case of a firm, because if a firm is sued, all its partners are included.

In the case of a company, although the directors are the ones who run it in practice, they are not legally liable for any of the company’s crimes or liabilities. This is why the personal assets of the company’s shareholders and directors are protected and cannot be sued — but this protection is not absolute.

Example 1

For example, if an entity defaults on its tax payments, then the income tax ordinance permitted recovery from the directors’ personal accounts.

In addition, most corporate agreements include a condition that the directors will provide a personal guarantee. This is why any bank asks for a personal guarantee from the directors before granting a loan to a private Limited. Therefore, this legal protection cannot be taken for granted, but in practice it does have some benefits.

Limited Liability

Which is better Company or Partnership Firm?  Another key difference This means that shareholders are only liable for the amount they have invested in the company, no more than that. They are not subject to any financial liability beyond that. the personal assets of the shareholders are protected, and no claim can be made on their personal assets.

Suppose a corporation has to pay Rs 2 million to a third party, while the total paid-up capital of the entity is only Rs 1 million, which has already been paid by all the shareholders. Now the company will pay whatever debt it has in its own capacity, and the shareholders cannot be obligated to pay any more money.

AOP Liability Unlimited.

Which is better Company or Partnership Firm? the another key difference in a partnership is that the liability of its partners is unlimited. That is, if the firm is unable to pay the required amount to repay the debt, the partners have to pay the remaining amount from their own pockets, that is, from their personal assets.

For example, if the Business owes Rs. 2 million and it has only Rs. 1 million, then the all partners will have to pay the remaining Rs. 1 million from their personal wealth.

Registration:

Which is better Company or Partnership Firm? The next difference about registration:  A company must be registered with the SECP, while a firm or AOP does not have to be registered, a firm can be formed through just a partnership agreement. However, an unregistered firm has a weak legal status and may find it difficult to make legal claims against others.

Concept of Withholding Agent

Which is better Company or Partnership Firm? One key Responsibility-Withholding Agent is someone who deducts tax at a specified rate while making a payment to a supplier, be it salary or any other expenses. If this levy is adjustable, it is adjusted in the annual return.

Section 153

Under Section 153, a company is a withholding agent from the first day, whether it is in profit or not. Whereas, an AOP becomes a withholding agent when the annual revenue of the previous year exceeds 100 million. Thus, an AOP is more suitable for a start-up business, as it does not become a withholding agent initially.

Tax Deduction Rate:

On Company: 5% On AOP: 5.5%

For toll manufacturing:

On Company: 9%

On AOP/Firm: 11%

Withholding Tax on Rent

If a company pays rent on any amount, it deducts 15% tax. While the slab rate is applicable to firms.

Annual rent up to 3 lakhs: 0%

Up to 6 lakhs: 5%

Up to 20 lakhs: 10%

More than 20 lakhs: 15%

Minimum Tax and Other Liabilities

All companies have to pay minimum tax under section 113 every year, even if it is in loss. This condition is applicable to AOP/firms only when the annual revenue is more than 100 million. In addition, alternative corporate tax (17%) applicable for all companies but not on the firms.

Double Taxation and Difference in Tax Rate

Currently corporate tax is 29% on annual profit. After that, when the profit is distributed to the directors in the form of dividend or salary, it also has to be taxed again so the companies have to pay taxes twice. Whereas in an AOP or firm, tax is levied only once, and when the partner withdraws his salary or profit, it is not taxed again, thus saving tax. Thus the companies pay a flat rate of 29% while a slab rate is applicable to an AOP. For example, if the annual profit is 12 lakhs:

Corporate Rate = 29% = Rs 348,000

Firm Tax = As Per Slab = Rs 90,000

Other Legal Requirements

All entities registered with the SECP, file annual filings, and also get an audit done if the paid-up capital is more than one million. These requirements do not apply to an firms. It is also not easy to close a company, a separate wind-up process has to be completed, even if all the directors pass away then the company still exist, On the contrary, a partnership can be dissolved in the event of the death or giving notice of any partner.

Summary

If you are starting a new business, it is more suitable to form an AOP or a firm initially, as it has taxation benefits and legal simplicity. Later, when the profits become high, it can be converted into a company. if you want more about Which is better Company or Partnership Firm?  please get in touch with us through our website by filling out the Contact Us form, or reach out via our social media accounts.