Is a partnership taxed less than a private limited company?

The Income Tax Ordinance, 2001 taxes a partnership firm and a private limited company in different ways, and neither is lower at every level of profit. A firm pays progressive slab rates once, and its partners’ shares are then exempt. A company pays a flat rate, and any profit it pays out as dividend is taxed a second time in the shareholder’s hands. This page compares the two for tax year 2027 (1 July 2026 to 30 June 2027) using the Ordinance as amended to 30 June 2026. It does not recommend either structure.

What does the law say about each structure?

Partnership firm (AOP). Section 92(1) makes an AOP liable to tax separately from its members. Where the AOP has paid tax, an amount a member receives as a member out of the AOP’s income is exempt, subject to the provisos. The firm’s rate comes from clause (1) of Division I of Part I of the First Schedule, the same table used by non-salaried individuals. Section 4AB, printed at the end of section 4, adds a surcharge of ten percent of that Division I tax where taxable income exceeds Rs. 10 million.

Private limited company. Section 94(1) makes a company liable to tax separately from its shareholders. Section 94(2) says a dividend it pays is taxable under section 5. Section 5 taxes every person who receives a dividend from a company, on the gross amount of the dividend, at the rate in Division III of Part I of the First Schedule. The section 4AB surcharge applies to individuals and AOPs only, not to companies.

What are the rates for tax year 2027?

Structure	Rule	Rate
Partnership firm	Division I, clause (1)	0% up to Rs. 600,000, then 15%, 20%, 30%, 40% and 45% on successive bands; the 45% band starts above Rs. 5,600,000
Partnership firm, surcharge	Section 4AB	10% of the Division I tax where taxable income exceeds Rs. 10 million
Company (any other company)	Division II	29%
Small company	Division II	20%
Dividend to shareholder, general case	Division III, clause (b)	15%
Dividend where the company pays no tax because of exemption, carried forward losses or tax credits	Division III, clause (d)	25%

For a professional firm prohibited from incorporating by law or its regulator’s rules, a proviso to the clause (1) table reduces the 45% band to 40%. Such a firm cannot choose a company, so the comparison does not arise for it.

Worked example (illustrative figures)

Three made-up businesses in Lahore, each with the same taxable profit under either structure. The company is an “any other company” at 29%, and in the dividend column it pays out all its after-tax profit to individual shareholders at 15%.

Profit Rs. 3,000,000

• Firm: serial 4 of the table. Rs. 170,000 + 30% of (Rs. 3,000,000 minus Rs. 1,600,000) = Rs. 170,000 + Rs. 420,000 = Rs. 590,000.
• Company: 29% of Rs. 3,000,000 = Rs. 870,000. After-tax profit Rs. 2,130,000. Dividend tax 15% = Rs. 319,500. Total Rs. 1,189,500.

Profit Rs. 10,000,000

• Firm: serial 6. Rs. 1,610,000 + 45% of Rs. 4,400,000 = Rs. 1,610,000 + Rs. 1,980,000 = Rs. 3,590,000. Taxable income does not exceed Rs. 10 million, so no surcharge. Total Rs. 3,590,000.
• Company: 29% = Rs. 2,900,000. After-tax profit Rs. 7,100,000. Dividend tax 15% = Rs. 1,065,000. Total Rs. 3,965,000.

Profit Rs. 20,000,000

• Firm: Rs. 1,610,000 + 45% of Rs. 14,400,000 = Rs. 1,610,000 + Rs. 6,480,000 = Rs. 8,090,000. Surcharge 10% = Rs. 809,000. Total Rs. 8,899,000.
• Company: 29% = Rs. 5,800,000. After-tax profit Rs. 14,200,000. Dividend tax 15% = Rs. 2,130,000. Total Rs. 7,930,000.

Profit	Firm total	Company, no dividend	Company plus full dividend
Rs. 3,000,000	Rs. 590,000	Rs. 870,000	Rs. 1,189,500
Rs. 10,000,000	Rs. 3,590,000	Rs. 2,900,000	Rs. 3,965,000
Rs. 20,000,000	Rs. 8,899,000	Rs. 5,800,000	Rs. 7,930,000

In these figures the firm pays less at the two lower profits when the company distributes everything, and more at the highest. How much the company pays out changes the answer.

What if …?

What if the company qualifies as a small company? Division II sets 20% instead of 29%. The definition has conditions that this page does not set out.

What if a partner is a company? The first proviso to section 92(1) excludes the company’s share from the AOP’s income and taxes it at the company rate.

What if the firm’s turnover is large? The second proviso to section 92(1) removes the exemption for members’ shares where turnover is three hundred million rupees or above and audited accounts are not filed with the return.

Common mistakes

• Comparing 45% with 29% and stopping there. The 45% applies only to the band above Rs. 5,600,000, and the company figure ignores dividend tax.
• Forgetting the surcharge. Section 4AB applies to AOPs above Rs. 10 million, not to companies.
• Forgetting other charges. Super tax on high earning persons and minimum tax on turnover can apply to both structures and are left out of the examples above.
• Treating tax as the only factor. Liability, compliance and funding differences between a firm and a company are outside this corpus.

What to check in the official text

Check the Division I clause (1) table, the Division II company table and the Division III dividend rates in the First Schedule of the official PDF, since the site text does not reproduce rate tables. Read sections 4 (including section 4AB), 5, 92 and 94.