Partnership Firm

Partnership Firm

ASSOCIATION OF PERSONS/ PARTNERSHIP FIRM

“Association of persons” includes a firm, a Hindu undivided family, any artificial juridical person and any body of persons formed under a foreign law, but does not include a company.

 

“Firm” means the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

 

An association of persons shall be a resident association of persons for a tax year if the control and management of the affairs of the association is situated wholly or partly in Pakistan at any time in the year.

 

When two or more people become joint owner with a view to carry on a business together and sharing the profits/losses in agreed proportions of their investment ratios. This is known as Partnership. The Partnership Act has defined Partnership as; “The relation which subsists between persons who have agreed to combine there property, labour or skill in some business and to share the profits/losses there of between them.

 

The partnership firm shall file income tax return declaring total income and tax thereon.

 

Without prejudice to it, each partner shall have to file separate income tax return and shall have to declare share of its income from partnership firm.

 

PRINCIPLES OF TAXATION OF ASSOCIATIONS OF PERSONS:

 

An association of persons shall be liable to tax separately from the members of the association and where the association of persons has paid tax the amount received by a member of the association in the capacity as member out of the income of the association shall be exempt from tax.

 

LIABILITY OF AOP TO DEDUCT TAX:

 

An association of persons whether constituted by or under the law or not is liable to deduct tax on the payment of salary to employee.

 

An association of persons whether constituted by or under the law or not is liable to deduct tax on the payment to non-resident on account of royalty or fees for technical services.

 

An association of persons constituted by or under the law is liable to deduct tax on the payment to resident person:

 

(a) for the sale of goods,
(b) for rendering services and
(c) on execution of contract

 

An association of persons whether constituted by or under the law or not is liable to deduct tax on the payment on account of brokerage and commission.

 

DISSOLUTION:

 

Where any business or profession carried on by an association of persons has been discontinued, or where an association of persons is dissolved, all the provisions of this Ordinance, shall, so far as may be, apply as if no such discontinuance or dissolution had taken place.

 

Every person, who was, at the time of such discontinuance or dissolution, a member of such association of persons and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax payable by the association of persons.

 

For a more flexible yet formal corporate structure, partnership firms are the preferred choice. The law relating to partnerships is contained in Pakistan as per the Partnership Act, 1932 (“Partnership Act”) which defines a “partnership” as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

 

A Partnership firm can be formed with two or more individuals upto twenty partners (other than certain specified cases, such as partnership firms for law practice, accountants firm or any other consultancy services firm), otherwise it is required to be registered as a company under the Companies Ordinance, 1984.

 

There is a percentage sharing that is agreed on based on the share in the equity or capital invested by each individual. At times there are arrangements where one partner brings in the land and building while the other brings in machinery and working capital. While there are partnerships where each individual brings in a certain amount of money. In each case there will be an understanding on profit sharing ratios after deduction of all expenses.

 

In partnership, like sole proprietorship, the liability of the firm is not limited as it extends to the personal assets of the incoming partners. The limited liability partnership model is not practiced in Pakistan.

 

There are two types of Partnership firms that you can opt for:

 

1. Unregistered Partnership
2. Registered Partnership

 

In each case, a Partnership Deed is written, preferably with the help of a lawyer, where both the parties are identified along with their residential address and Computerized National Identity Card (CNIC) number.

 

The profit sharing ratio is stated and the nature of business proposed to be carried out by the firm is also stated. The amounts being brought in by each partner are stated as well. The profit and loss sharing ratio is also stated in the Partnership Deed. The firm becomes effective from the date of execution or signing of the Partnership Deed.

 

In case of Registered Partnership the Partnership Deed is registered with the Registrar of Companies. There is no mandatory requirement to register the firm.

 

The Partnership Deed remains effective as long as the business is a going concern, thereafter if desired by the partners the firms may be dissolved. Upon dissolution of the firm, after pro-rata distribution of profit, in case of profit, the partners are able to withdraw their initial investment. In case of loss, the amount of loss is reduced from the capital of the partners in the pre-agreed ratio as decided as per the Partnership Deed.

 

In case of Registered Partnership, an application for the dissolution of the firm is required to be filed.