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About SMEs

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Small & Medium Enterprises

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SMEs (Small and midsize enterprises are businesses that maintain revenues, assets or a number of employees below a certain threshold. Every country and economic organization has its own definition of what is considered a small and medium-sized enterprise. In the United States, there is no distinct way to identify SMEs, but in the European Union, a small-sized enterprise is a company with fewer than 50 employees, while a medium-sized enterprise is one with fewer than 250 employees).

SME in Pakistan

SME in Pakistan (In the industrial development of a country the importance of the SME sector cannot be overemphasized. SMEs constitute nearly 90% of all the enterprises in Pakistan; employ 80% of the non-agricultural labor force; and their share in the annual GDP is 40%, approximately. However, unlike large enterprises in the formal sector, a small and medium enterprise is constrained by financial and other resources. This inherent characteristic of an SME makes it imperative that there should be a mechanism through which it may get support in different functions of business including technical upgradation, marketing, financial and human resource training & development).

There are different types of firms, amongst these three types of businesses that SMEs usually adopt are; sole proprietor, partnership and private limited company.

Sole Proprietorship

A sole proprietorship also known as a sole trader/sole owner is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business

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Partnership

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes

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Private Limited Company

Private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed

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Sole Proprietorship

A sole proprietorship also known as a sole trader/sole owner is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. All profits and all losses accrue to the sole owner (proprietor / trader). All assets of the business are owned by the owner (proprietor / Sole trader) and all debts of the business are his/her debts and he/she must pay them from their personal resources. This means that the owner has unlimited liability. It is a “sole” proprietorship in the sense that the owner has no partners (partnership).

This is the most straightforward structure for a business. Basically it means the business decisions are being made by one person. Of course, it doesn’t necessarily mean that the business has only one worker. The sole trader can employ others to do any or all of the work in the business. A sole proprietor may do business with a trade name other than his or her legal name. This also allows the proprietor to open a business account with banking institutions.

Partnership

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners. However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a company. Sometimes companies also form partnerships. Two or more companies can form a legal partnership in Pakistan to achieve common objectives through alignment of resources in pursuit of long term goals. Such partnering can be used as alternative to traditional mergers and acquisitions.

Like most countries in the world, First step for expansion for sole proprietors and sometimes the first step for businesses is the formation of a partnership in Pakistan. Partnerships may have small to medium sized business set-ups. Partnerships are normally formed where there is a desire to have some structural flexibility along with some formality of relationship between partners. A partnership may be registered with the Registrar of Firms of an area where the office of the firm is situated or proposed to be situated.

Private Limited Company

Private limited company is a voluntary association of not less than two and not more than fifty members, whose liability is limited, the transfer of whose shares is limited to its members and who is not allowed to invite the general public to subscribe to its shares or debentures. It has an independent legal existence. The Companies Act contains the provisions regarding the legal formalities for setting up of a private limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories.

It is relatively less cumbersome to organize and operate it as it has been exempted from many regulations and restrictions to which a public limited company is subjected to. The liability of its members is limited. The shares allotted to its members are also not freely transferable between them. These companies are not allowed to invite public to subscribe to its shares and debentures. It enjoys continuity of existence i.e. it continues 5to exist even if all its members die or desert it. The minimum paid up capital at the time of incorporation of a private limited company has to be Rs. 100,000. There is no upper limit on having the authorized capital and the paid up capital. Capital can be increased any time.