Extreme Commerce Incubator
Understanding legalities of Baba-Bacha partnerships
If you are partnering up with overseas baba and you are concerned about legalities and your protection, here are few points for you to consider.
1. Both of you can prepare a contract of partnership on stamp paper and sign it together. Now this is considered a legal binding/contract between both partners. If there is dispute, you can always reach out to your lawyers in Pakistan and overseas Baba can even get into Immigration ECL (Exit Control List) if court gives judgement in your favor. However you must understand the legal process may take few years and lawyers from both ends will be putting up the argument and assuming the case has gone for trial if not settled before trial. But yes, this stamp paper is your protection and your legal contract.
2. If you are BC student and your partner is also a BC member then yes, EC can become an arbiter between both partners and EC’s decision is going to be final decision as per law because even if you take this matter to court, the court will only ask you to refer to your Arbiter since Arbiter is a legal entity and Arbiter’s decision is considered final decision already. However EC does this only for BC members and not for outside members as we cannot afford headache of managing disputes all the time, we have limited resources so we just keep it for BC students only. BC students will get in touch with EC team to guide them on process.
3. You can also get yourself added as a director in UK, US or Canadian business entity wherever is the ID from. The only complications we get here is that you will need a tax ID in that country. In case of US you can always get ITIN number. In case of Canada and UK you can always get yourself added in the business based on your passport as a share holder/legal owner. However you won’t have control over bank account because in order to get added as signatory in bank account, your physical presence is needed in the country. This means, if your partner decided to ditch you one day, they can but now you have 2 legal avenues, one in Pakistan and the other in Uk/US/Canada etc since you are share holder of the business too. The other complication is related to salaries. If you withdraw your salary officially from this business, usually there is withholding tax applied on whatever amount you withdraw, usually it could be around 30% depending on the country you dealing with. So dividend, salary or whatever you withdrawing in your name will require you to have withholding tax applied on your withdrawls. Some people also make arrangements such as becoming a service provider in Pakistan providing services and getting renumeration against provided services. You will have to discuss this with your accountant as I am not the accountant.
4. In case of dispute, you now have 2 legal avenues in 2 countries. However within EC BC students, it is easier to resolve since I am personally handling both sides myself. So far I have seen 5% - 10% disputes out of 100% partnerships. These disputes are not too difficult to handle. The nasty ones are usually under 2-3% max which are difficult to handle. However those with EC contract with EC being arbiter are easier for me to handle as my say is the final say, you like or not. However still sometimes the abusive party does take advance. I dealt with horrible abusive billi in past who victimized the other student, however we had to negotiate and go through it.
5. Once you both are partners, you both need to inject capital in this business. Capital must be legally transferred from Pakistan through bank wire to your partner’s UK LTD (for example) so you are acquiring the shares legally and there is a document prepared by your accountant called “Share transfer agreement” or “Share buy/sell agreement” which indicates that you have taken over 30% or 50% of this business entity against this amount. Now in case if you are unable to transfer this amount by bank wire due to state bank limitations then you may want to declare this amount as a loan in accounting system. So the company accountant will create paperwork and show that you owe this much money to the business. Now let say you make payment to supplier in Faisalabad already against inventory purchase. Now your UK accountant may create a ledger entry in accounting system declaring that you made this payment to supplier in Pakistan and here is the invoice attached. So basically you lend the money to company and he will now adjust that money against the loan you owed to company. Let the accountant take care of this part. In case if you can’t do this also then you may owe this loan for a long time and may adjust against some other future expense or adjust against your wage. People do a lot of things but I won’t encourage you to do what people do usually as we want it super straight and clean accounts at our end because we don’t want any trouble with IRS, HMRC, Revenue Canada or FBR later because we are naik log after all.