ByWhen starting a business, one of the initial decisions you’ll face is choosing between registering as a company, operating as a partnership (Association of Persons – AOP), or working as an individual under your own NTN (National Tax Number). Each option has distinct advantages and disadvantages in terms of taxation, compliance, and operational requirements. Below is a detailed breakdown to help you decide.
Individual Business (Sole Proprietor)
If you already have an NTN, you can add your business name to it and begin operations. This option is simple and best suited for small-scale operations or startups.
Advantages:
- Ease of Registration: No need for SECP (Securities and Exchange Commission of Pakistan) registration. Only FBR registration is required.
- Minimal Compliance: File a single tax return annually with no additional reporting obligations.
- Lower Compliance Costs: No requirement for filing financial statements or SECP forms.
- Withholding Tax Relaxation: If your turnover is below Rs. 100 million in the last three years, you are exempt from withholding taxes.
Disadvantages:
- Limited Credibility: Some clients or businesses may prefer dealing with a registered company.
- Higher Tax Rates on High Profits: Tax rates can go up to 35%-40% on higher profits, compared to the fixed corporate tax rate.
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How to Add Your Business to NTN via FBR Portal?
How to File Income Tax Return of Company with FBR?
Partnership Business (AOP – Association of Persons)
A partnership business involves two or more individuals pooling resources and sharing profits.
Advantages:
- Simple Registration: No need for SECP involvement; only FBR registration is necessary.
- Lower Initial Costs: Compliance requirements are limited compared to a company.
- Withholding Tax Benefits: Similar to an individual, AOPs with a turnover below Rs. 100 million benefit from relaxed withholding tax rules.
- Profit Sharing Flexibility: Profits can be distributed as agreed among partners.
Disadvantages:
- Joint Liability: Partners are personally liable for the debts and obligations of the business.
- Higher Tax Rates: Similar to individuals, tax rates for AOPs can reach 40% on high profits.
Private Limited Company
A private limited company is a separate legal entity that offers benefits in terms of structure and credibility but comes with added complexities.
Advantages:
- Limited Liability: Owners’ personal assets are protected from business liabilities.
- Corporate Credibility: Companies are more likely to attract larger clients and investors.
- Lower Tax Rates on High Profits: Corporate tax rates are capped at 29%, lower than the maximum individual or AOP rates.
- No Turnover Limits for Compliance: Unlike individuals and AOPs, companies are not bound by turnover thresholds for withholding taxes.
Disadvantages:
- Complex Registration: Must register with SECP and FBR. Additional documentation is required for sales tax registration.
- Ongoing Compliance: Companies must file tax returns, annual financial statements, and SECP forms (Form A, Form 9).
- Higher Costs: Legal and administrative costs are higher due to compliance and auditing requirements.
- Withholding Tax Obligation: Companies must withhold taxes under section 153 regardless of turnover.
Key Taxation Points
- Turnover Tax: Applicable at 1.25% for companies, AOPs, and individuals with annual sales exceeding Rs. 100 million.
- Super Tax: Companies and AOPs with profits exceeding Rs. 500 million are subject to an additional super tax of up to 10%.
- Withholding Tax:
- Companies must withhold tax on all payments exceeding Rs. 200,000.
- AOPs and individuals are exempt if turnover is below Rs. 100 million.
- Rental Income:
- Companies must withhold tax on rental payments exceeding Rs. 300,000 annually.
- AOPs and individuals have a threshold of Rs. 1.5 million annually.
Conclusion and Recommendation
For startups or small businesses, beginning as an individual or AOP is more manageable. The compliance burden is lighter, and tax rules offer more flexibility for businesses with lower turnover. Once the business grows and requires a professional structure or engages in activities like exports, registering as a private company becomes advantageous.
Careful planning and consultation with a tax professional are recommended to ensure compliance and make the most tax-efficient choice for your business.
