Investopedia defines a corporation, synonymous with a company in Pakistan, as: "A legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. The most important aspect of a corporation is limited liability. That is, shareholders have the right to participate in the profits, through dividends and/or the appreciation of stock, but are not held personally liable for the company's debts".
In business and legal parlance, up until a few years ago, a "company" was deemed an "artificial legal person". Albeit this definition seems to have disappeared from capitalism's lexicon, probably to mitigate this very risk that someday a genuine legal person might have an epiphany that the artificial legal person is better off than him.
In the first instance, the primary privileges enjoyed by Artificial Legal Persons, denied to a genuine legal person, have become so entrenched and accepted as rational, that pointing them out is risking ridicule. For instance a banking license is only given to an artificial legal person and perchance should it sink the deposits of genuine legal persons through irresponsible lending, while it can be sued, it can't obviously go to jail. That is the brilliance of the limited liability concept. But why should banking sector be singled out; all businesses built on monopoly rent extracted from national resources are doled out to artificial legal persons and when these have been exploited, or misappropriated, the artificial legal person simply can cease to exist. This indeed was a brilliant invention by the capitalist elite to appropriate wealthy resources without the personal risks of doing business. "Karwah karwah thu thu, meetha meetha hup hup"!
Borrowing money is a nightmare for a genuine legal person and unless the Banks are one hundred percent confident that the former has at least five times the wealth compared to the amount requested, the loan is likely not to be approved. And heavens forbid, should a genuine legal person default or for genuine cause be unable to pay his mortgage, jail and abject humiliation is an obvious consequence. In the case of an artificial legal person, while it can be sued under a travesty of law for defaulting on debt, but the worst scenario is that it can only be liquidated; or cease to exist until it can be reborn in a different garb as another artificial legal person distinct from the previous deceased one, and borrow again. And for the record it is much easier for an artificial legal person to borrow from another artificial legal person, after all kinship is a universal practise.
Some will argue that in cases of default and mismanagement, the management of the artificial legal person does bear the brunt of legal action. While this assertion is ab initio comical, the few cases where this happens are the exceptions to the rule; big fish generally never get caught. On the other hand, if there was no artificial legal person to insulate the shareholders, in all likelihood the latter would be more diligent in ensuring that the business is managed within the spirit and substance of legal and moral values.
Did anyone know that genuine foreign legal persons, in general, cannot own immovable property in Pakistan? But as soon and these genuine legal persons incorporate a domestic legal artificial person, which they can easily do by classifying it as foreign direct investment, they can buy most any land in Pakistan. Imagine the immense power of the artificial legal person.
And the story does not end here. After all these privileges, the narrative, developed by the economic pundits for their capitalist masters in the west, and imported into every developing nation, is that since the artificial legal person does an immense service to the country, hence it should pay lower taxes. The role which artificial legal persons have played in the economic development of Pakistan since independence is debatable at best. The argument that if artificial legal persons had not been there to stimulate growth then the economy might have been worse off, can obviously neither be proved or disproved, but hey how bad could it have been from where it already is.
Anyway, artificial legal persons not only pay taxes at lower rates after deducting all expenses, which include unconstrained entertainment and fabulous perquisites for its management, they get other incentives such as accelerated depreciation and carry forward of losses and numerous other exemptions and waiver. In some cases their entire income is exempted.
So why a genuine legal person can't be allowed to claim his food expenses as a genuine expense to earn his salary income, after all he would die otherwise. And if he did not get rest at home, he wouldn't be able to work either, so rent should be a deductible expense. On purchase of a car in which to get to work, genuine legal persons should also get to claim depreciation and that too at accelerated rates. And most importantly, get credit for investing in his children, the future of Pakistan. Finally considering the current scenario, where making ends meet is impossible for the common man, losses should be allowed to be carried forward for six years. Even in the case of indirect taxes, a genuine legal person should also have the right to claiming input taxes, exemptions and refunds, similar to those given to artificial legal persons. If nothing else, the rate of tax should be equal to the rate paid on income distributed by the artificial legal person to its shareholders; why the discrimination between genuine legal persons simply because of association with artificial legal persons.
Remarkably, it is the genuine legal person who votes to elect the government, which then legislate all these benefits for artificial legal persons ignoring their genuine voters. Although pretty soon, the way things are moving, artificial legal persons will not be content with simply giving campaign donations, they will demand the right of the deciding vote.
In lieu of the above, as a genuine legal person I need legal advice on how to file a case in the courts to incorporate myself as an artificial legal person distinct from me and capable of enjoying rights and privileges which individuals, genuine legal persons, can't even dream off.
(The writer is a chartered accountant based in Islamabad)
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