IS A BUSINESS ALWAYS A COMPANY?

Sep 20, 202313 min read

By Maha Faisal

The article below details the confusion a layman may face differentiating between a Business and a Company. Broadly speaking, a Company is an entity which is formed under the provisions provided in the Companies Act, 2017, however, a Business essentially can be any entity which is engaged in commercial, industrial or professional activities, not necessarily limited to that. We will now delve into greater detail of both;

WHAT IS A BUSINESS?

In order to set up a successful business it is essential to first determine the types of structures that would be best suited for the type of business you are setting up. To ensure that an individual has considered all the ramifications and chosen the best structure for their type of business, it is essential that one works with an experienced lawyer. At Zaman & Co. we pride ourselves in having a strong team of experienced lawyers that have helped several individuals set up successful businesses.

TYPES OF BUSINESS STRUCTURES

The major Business structures comprise of; sole proprietorship, General Partnership, Partnership at Will, Limited Partnership and Limited Liability Partnership (LLP)[1]

SOLE PROPRIETORSHIP

A sole Proprietorship or in other words, a sole trader is a type of Business which is owned and run by a single individual or a sole proprietor. In a sole proprietorship, there is no distinction between the Business and the Proprietor. It is the simplest way to start a business and does not require any registration with the State. The Sole Proprietor enjoys all the profits, liabilities and makes all the decisions regarding the running of the Business. In a sole Proprietorship, the business itself does not file tax returns, instead, the income (or loss) passes through and is reported on the owner’s personal tax return. [2]

GENERAL PARTNERSHIP AND PARTNERSHIP AT WILL

This is the most common type of business entity to exist, under a General Partnership, two or more individuals agree to share all assets, profits and liabilities of a business. It is one of the most common legal entities to exist because of its simplicity and tax benefits. However, each partner is personally responsible for the business, including debts and lawsuits, and is held liable for the actions of their partner(s)[3]. Each general partner has the power to bind the partnership in matters pertaining to the partnership’s business. [4]

A Partnership in Pakistan is governed under the Partnership Act, 1932, according to which a Partnership should function and covers those clauses under which a Partnership may remain silent.

Generally, the partnership deed has a clause regarding the expiration or dissolution of a partnership firm. However, such a partnership for which the said clause does not exist is called a Partnership at Will. As the name suggests it can continue its operations for as long as the partners want it to, and can be terminated as and when any one of the partners serves a notice for such termination.

The two conditions of Partnership at will are: (i) There should not be a specific date on the agreement, and (ii) The agreement should not contain any information regarding the termination of the partnership. This type of partnership is suitable for businesses where the partners do not have any certainty or idea about the termination of the partnership and for businesses whose nature is non-deferring or perpetual. [5]

LIMITED PARTNERSHIP AND LIMITED LIABILITY PARTNERSHIP

A Limited Partnership consists of two types of Partners; Limited Partners and General Partners. A limited Partnership is similar to that of a General Partnership, however, the key difference is that the personal liability of Partners is limited. The Limited Partnership separates at least one general partner with unlimited personal liability from limited partners whose liability typically will not exceed their contribution to the partnership. Limited Partnerships have been used since the 1800s as a way to allow some members to passively invest in a partnership without fearing reprisals for the actions of other partners. In a Limited Partnership, a limited partner often has to keep a certain amount of distance from the decision-making of the corporation. [6]

A limited liability Partnership (LLP) is something that is now becoming more and more prevalent in Pakistan. An LLP is similar to a Limited Partnership, however, in a Limited Partnership there must be one General Partner, whereas, in a Limited Liability Partnership all Partners are Limited Partners.

Partners will not be liable for the tortious damages of other partners but potentially for the contractual debts depending on the Partnership Deed. Limited Liability Partnerships are popular for larger partnerships and especially for professionals. Like with general partnerships, a Limited Liability Partnership must have two or more partners, but it has flexibility in structuring the amount of control and proceeds each partner retains. Almost all decisions in a Limited Liability Partnership can be allocated to certain partners except those involved in changing the partnership agreement which requires approval of all partners. [7]

WHAT IS A COMPANY?

A company, unlike a business, is a creation of law, thus its types and kinds are defined by law, this differs for each country as per their laws. Companies can be differentiated based on the nature of the liability of members, number of shareholders and their share capital.

TYPES OF COMPANIES

The law in Pakistan enables an individual to register as a Single Member Company, a Private Limited Company or a Public Limited Company. In Pakistan, the type of companies aforementioned must be registered with the Securities and Exchange Commission of Pakistan (SECP). At Zaman & Co. we pride ourselves on our capability to engage in any or all issues pertaining to and with the (SECP).

SINGLE-MEMBER COMPANY

If an individual wishes to start a company without any shareholders, then registering it as an SMC would be the best option. A single-member company is governed under the Single Member Companies Rules, 2003 [8] and the Companies Act, 2017 [9]. Under a SMC, the individual setting up the company will be the sole shareholder and director of the said company, however, an additional person may be appointed to act as the Chief Executive Officer, if deemed necessary. As per Section 14(1)(c) of the Act, 2017 and Section 3 of the Rules, a nominee is also to be appointed by the individual setting up the company who in the event of death of the same shall be responsible for (i) transfer the shareholder’s shares to the legal heirs of the deceased as per the applicable law; and (ii) manage the affairs as a trustee, till such time the title of share is transferred. The Company name will end with SMC-Private.

PRIVATE LIMITED COMPANY

A Private Limited Company is defined under Section 2(49) as a company which can be formed by two or more persons. Under the Companies Act, 2017, a private limited company is defined as a company which by its Articles of Association; (i) restricts the right to transfer its shares; (ii) limits the number of its members to fifty; (iii) prohibits any invitation to the public to subscribe to its shares, debentures, or redeemable capital. [10]

A Private Limited Company comprises a minimum of two or more shareholders; however, the number of shareholders cannot go beyond fifty. All decisions in a Private Limited Company are made by shareholders; their stakes are defined by their initial investment in the company. A Private Limited Company is best for small and/or family businesses with no public funding. Moreover, if a shareholder proposes to sell his shares, the other non-selling shareholders have a right of pre-emption to buy the shareholder's shares before he may sell them to a third-party buyer. The company’s name will end with Private Limited.

PUBLIC LIMITED COMPANY

A public company is defined under Section 2(1)(52) of the Companies Act, 2017, as a company which is not private. Essentially, this means that a public limited company can garner funds from the Public in order to expand the business, there is no limit to the number of shareholders. As per Section 2(1)(38) of the Companies Act 2017, a listed public company is essentially an entity that is listed on the Pakistan Stock Exchange (“PSX”) and may sell its shares to the general public which any person may purchase. Section 14(1)(a) of the Act stated that an unlisted public company, on the other hand, is an entity that is not listed on the PSX. [11]

A public limited company must have at least three shareholders and three directors (a minimum of seven directors in the case of a listed public company) on its board of directors. Moreover, such a company needs to appoint a company secretary. In comparison to other entities, a public company is subject to more onerous compliance and reporting obligations. It is pertinent to mention that certain types of specialized companies, such as non-banking financial institutions, may only be created as a public limited company. The name of the company will end with the words Limited.

BUSINESS CONTRACTS

A contract is defined as an agreement which is enforceable in law. In order for a contract to be enforceable under the law, in other words legally binding, there must be a proposal and an acceptance of the proposal in order to constitute an agreement (All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void). [12]

For such an agreement to be legally binding, and result in a valid contract;

1. There must be free consent of the parties,

2. The parties must be competent to contract,

3. The consideration must be lawful,

4. The object must be lawful,

5. The agreement must not be expressly declared to be void,

6. The agreement must comply with the provisions of the law requiring it to be in writing, attested or registered.

TYPES OF BUSINESS CONTRACTS

There exist several types of contracts, however, the Business contract that is the best fit for you will depend on whether one is setting up a Business or a Company. When setting up either a company or business of any kind it is essential that the right type of business contract is used, so as to maximise the protection of any and all individuals involved. We at Zaman & Co. pride ourselves on having extensive knowledge regarding any and all kinds of contracts and guiding our Clients in selecting the type of contract that will protect them and their business. Below we will delve into several common types of contracts in greater detail;

PARTNERSHIP AGREEMENT/DEED

The Partnership agreement for a business will be the sole device through which the rights, responsibilities, and profit and loss distribution will be governed. When drafting a Partnership Agreement, it is essential to include: The Capital Contributions of each Partner, Profit and loss distribution, Management, voting methods, signing authority, Partnership tax elections, Partnership withdrawal and dissolution.

The specifications of the Partnership Agreement will depend on which type of Business you are setting up i.e. whether it is a General Partnership, Partnership at Will, Limited Partnership or Limited Liability Partnership. An operating Agreement is not required for a Sole Proprietorship as it has no Partners. [13]

STAKEHOLDER AGREEMENTS

In the case of Companies, very specific stakeholder agreements are required, depending on whether you are setting up a Single-Member Company, a Private Limited Company or a Public Limited Company. The goal of the stakeholder agreement is the same; to ensure that all parties who are affected or obligated have a clear and detailed understanding of the rights and obligations of all parties, as well as the consequences and liability associated with failure to fulfill those obligations. For the protection of your business and all parties involved, a specifically-drafted stakeholder agreement should be prepared, with the assistance of an experienced attorney. [14]

A Stakeholders Agreement should detail the restriction i.e. the don’ts for the parties involved; Termination i.e. the causes for termination of agreement, violation and breach of terms; Confidentiality, in order to keep terms of the contract confidential; Miscellaneous provisions, includes anything that is not stipulated in the above-mentioned sections. [15]

INDEMNITY AGREEMENTS

An indemnity agreement is a contract that protects one party to a transaction from the risks or liabilities created by the other party to the transaction. Other names of Indemnity agreements are Hold harmless agreement, no-fault agreement, release of liability, or waiver of liability. An indemnity agreement can work in both ways that is to protect the indemnified party from any liability arising from third-party claims and to prevent the indemnitor from making any claims against the indemnified party.

Indemnity agreements are generally required for high-risk transactions such as, but not limited to, hiring a party to provide services for your business, allowing a party to use your property or equiptment, when providing high-risk services and when permitting high-risk activities on your property.

There are three types of Indemnity Agreements; Broad form indemnity agreement (a party is indemnified from liability even when that party is the sole cause of the liability); Intermediate form indemnity agreement‌ (indemnifies a party for negligence unless the party is solely at fault, meaning the indemnitor will still protect a partly negligent indemnitee); Comparative form indemnity agreement (each party is responsible for acts caused by its negligence. Each party agrees to hold the other harmless for actions caused by its negligence).

An indemnity agreement should contain the following key terms: ‌ Governing law and jurisdiction; Indemnification clause‌; Scope of coverage; Indemnification exceptions; ‌Notice and defense of a claim‌;‌Settlement and consent clause‌; ‌Enforcement and Duration of the Agreement. [16]

NON DISCLOSURE AGREEMENTS

Non-Disclosure Agreements (NDA), are legally enforceable contracts that create a confidential relationship between a person who has sensitive information and a person who will gain access to that information. A confidential relationship means one or both parties have a duty not to share that information. There exist two types of NDAs: unilateral NDA (one party agrees not to reveal confidential information) and mutual NDA (both sides agree that they will not share confidential information).

NDAs are required when an organisation releases products (ensuring that technical, financial or other proprietary material cannot be shared with third parties); when hiring employees (to ensure employees cannot share your organization’s sensitive data while on the job or once they leave); new partners (during negotiations with a new partner or investor, to ensure information shared during the same is protected); when onboarding new clients (NDA can protect your organization by identifying which information cannot be shared so that there is no accidental exposure to legal liability) and during Mergers and Acquisitions (when selling a business, sensitive financial and operational information must be shared not just with the entity that’s buying your business, but with intermediaries and brokers as well, therefore, the NDA ensures that data is protected). All NDAs should include these specific elements; Identification of Parties; Definitions; Obligations; Scope; Time frame; Return of Information; Exclusions and Remedies.

JOINT VENTURE AGREEMENTS

A joint venture is when two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. [17]

There are essentially two types of Joint Venture Agreements; Contractual (Contractual joint ventures exist solely through a written contract) and separate legal entity (a separate legal entity is formed through a corporation or limited liability company (LLC)). It is essential to put the joint venture agreement in writing to protect your rights if a dispute arises. Key elements of a joint venture agreement include; Business address; Joint venture types; Purpose of the agreement; Names and addresses of members; Duties and obligations; Voting and formal meeting requirements; Assignment of percentage ownership; Profit or loss allocation; Dissolution terms and Non-compete and confidentiality agreements. These may be further elaborated upon depending on your specifications, however, it is always advisable to engage a lawyer so that no essential components are left out, that may haunt a party once the contract comes to an end. A joint Venture Agreement comes to an end when the project is completed. [18]

INVESTMENT AGREEMENTS

An investment contract is a legal document between two parties where one party invests money with the intent of receiving a return. Investment contracts are regulated by section 66 of the Companies Act, 2017. There are multiple types of investment contracts but the ones most frequently drafted consist of the following; Stock Purchase Agreement; Non-statutory Stock Option Agreement; Statutory Stock Option Agreement; Convertible Debt Agreement; Restricted Stock Agreement; Deferred Compensation and Royalty, Commission, or Percent of Revenue.

The key terms which are to be included in an investment agreement are; the Shareholder, Investors, Investment, and Recitals Agreements with all the terms and conditions agreed upon i.e. Milestones, Warranties, Restrictions and finally, the confidential assertions. [19]

LICENSING AGREEMENTS

A licensing agreement is a written contract that gives you permission to use another party's property under a certain set of conditions. The two parties involved in this agreement include the licensor (the one allowing permission) and a licensee (the one gaining permission).

Licensing agreements under business contracts are generally used for intellectual property, such as patents, trademarks, and copyright materials. It should be noted that a licensing agreement doesn't give you ownership over another entity's property, it does however, allow you to use it as long as you are following the parameters outlined in the agreement.

The most common types of licensing agreements include; Trade secret licenses (Outlines how, where, and when you can use an entity's trade secrets); Trademark licenses (Outlines how you may use a trademark); Patent licenses (Outlines your right to sell, use, make, distribute, and export a product that's patented) and Copyright licenses (Outlines your right to reproduce and sell a copyrighted asset. [20]

FRANCHISE AGREEMENTS

A franchise agreement is a legal agreement between a company or business (franchisor) and a franchisee, outlining the rights and obligations of both parties. Details of a franchise agreement may include; the duration of the agreement; Location of operations; Procedures; Franchisee’s fees and investment; Use of trademarks and patents; Renewal and termination of the agreement. [21]

INBOUND AGREEMENTS

An Inbound Agreement is a business contract which occurs when a licensor agrees to transfer IP rights to a licensee, allowing them to use certain or all aspects of the IP for their use. In an inbound deal, the licensee pays certain fees to use a different brand’s IP or name for their products or services. [22]

MEMORANDUM OF UNDERSTANDING

An MOU is a written business agreement between parties declaring consensus towards a common agenda and achieving mutual goals. It establishes a business relationship between two or more parties. Some of the issues that an MOU can address include: Specified activities, Funding, Duration of the MOU and Roles of involved parties. [23]

CONCLUSION

Business contracts are extremely tricky to draft and can have major implications on the running of a business if essential components are left out. It is therefore essential that Corporate Lawyers are hired in order to prepare a document that fully protects your business or your interests. Our experienced lawyers at Zaman & Co. can guide you through the process by asking the right questions to ensure that the key elements are covered; drafting each contract clearly using explicit language tailored to your business. Our lawyers can also review your contracts ensuring that you fully understand the terms and conditions, ensuring that the agreement does not leave gaps/loopholes that may adversely affect you in the future.

BIBLIOGRAPHY

[1]Mccord and Hemphill . n.d. Our bend Lawyer . Accessed August 15 , 2023 . https://ourbendlawyer.com/guide-business-formation/.

[2] Pathway Lending . n.d. PathwayWBC. Accessed August 15 , 2023 . https://www.pathwaylending.org/news-and-blog/news/business-legal-structures/.

[3] Peek, Sean. n.d. US Chamber of Commerce. Accessed August 18, 2023. https://www.uschamber.com/co/start/startup/general-partnerships

[4] Cornell Law School. n.d. Legal Information Institute. Accessed August 18, 2023. https://www.law.cornell.edu/wex/general_partner.

[5] GeeksforGeeks. n.d. Types of Partnerships. Accessed August 22, 2023. https://www.geeksforgeeks.org/types-of-partnership/.

[6] Cornell Law School. n.d. Legal Information Institute. Accessed August 18, 2023. https://www.law.cornell.edu/wex/limited_partner

[7] Cornell Law School . n.d. Legal Information Institute . Accessed August 18, 2023. https://www.law.cornell.edu/wex/limited _liability_partner.

[8] The Gazzette of Pakistan . 2017. "secp ." SECP . May 31. Accessed August 22, 2023 . https://www.secp.gov.pk/document/companies-act-2017/?wpdmdl=28472.

[9] Government of Pakistan . 2003 . "MA Law ." MA Law . December 2. Accessed August 22, 2023 .https://www.malaw.org.pk/guidelines_regulations/Single%20Member%20Companies%20Rules,%202003.pdf.

[10] Government of Pakistan . 2003 . "MA Law ." MA Law . December 2. Accessed August 22, 2023.https://www.malaw.org.pk/guidelines_regulations/Single%20Member%20Companies%20Rules,%202003.pdf.

[11] Government of Pakistan . 2003 . "MA Law ." MA Law . December 2. Accessed August 22, 2023.https://www.malaw.org.pk/guidelines_regulations/Single%20Member%20Companies%20Rules,%202003.pdf.

[12] Chowdhury, S.K.Roy, and H.K.Saharay. 1990 . Dutt on Contract . Calcutta, New Dehli : Eastern Law House

[13] Law Depot. 2023 . Law Depot . June 26. Accessed August 22, 2023 . https://www.lawdepot.com/contracts/partnership-agreement/?loc=US#:~:text=A%20Partnership%20Agreement%20is%20a,and%20profit%20and%20loss%20distribution.

[14]KPPB Law . n.d. KPPB Law . Accessed August 22, 2023 . https://www.kppblaw.com/corporate-governance/corporate-stakeholder-agreements/.

[15]Fatima, Khizra. 2023 . LinkedIn. July 19 . Accessed August 23, 2023 . https://www.linkedin.com/pulse/shareholders-stakeholders-agreement-khizra-fatima/.

[16]Ironclad. n.d. Ironclad. Accessed August 28, 2023. https://ironcladapp.com/journal/contracts/indemnity-agreement/#:~:text=An%20indemnity%20agreement%20is%20a,for%20an%20indemnity%20agreement.%E2%80%8C

[17] Hargrave, Marshall. 2023. Ivestopedia. March 28. Accessed August 29, 2023. https://www.investopedia.com/terms/j/jointventure.asp#:~:text=A%20joint%20venture%20(JV)%20is,and%20costs%20associated%20with%20it.