2 A G U I D E T O BUSINESS STRUCTURES in AFGHANISTAN APRIL 2015 Sole proprietorship, Partnership, Limited Liability Corporation, and Corporation LEGAL CLINIC PROGRAM AT THE AMERICAN UNIVERSITY OF AFGHANISTAN 2 Business Structures in Afghanistan Sole Proprietorship, Partnership, Limited Liability Company, and Corporation AUAF Legal Clinic Program Clinic Director: Professor Mehdi Hakimi Authors: Abdul Waris Hakim Syal Samira Abrar Mohammad Arif Noorzai 3 Table of Contents 1. Introduction ........................................................................................................................................... 6 2. Legal Issues ........................................................................................................................................... 7 3. Summary of Research Findings ............................................................................................................ 7 3.1. Partnership ..................................................................................................................................... 7 3.2. Limited Liability Corporation ....................................................................................................... 8 3.3. Corporation .................................................................................................................................... 8 4. Research Methodology ........................................................................................................................ 10 5. Types of Business ................................................................................................................................ 10 5.1. Sole Proprietorship ...................................................................................................................... 10 5.2. Partnership ................................................................................................................................... 10 5.2.1. Partnership Formation ......................................................................................................... 11 5.2.2. Terms of Partnership ........................................................................................................... 12 5.2.3. Responsibilities of Partners ................................................................................................. 13 5.2.4. Partnership Dissolution ....................................................................................................... 14 5.2.5. Liquidation .......................................................................................................................... 15 5.2.6. Tax Implication ................................................................................................................... 15 5.2.7. Advantages of Partnership .................................................................................................. 16 5.3. Limited Liability Corporation (LLC) .......................................................................................... 16 5.3.1. LLC Formation .................................................................................................................... 17 5.3.2. Decision Making and Corporate Governance Structure ..................................................... 18 5.3.3. LLC Dissolution .................................................................................................................. 19 5.3.4. Tax Implication ................................................................................................................... 20 5.3.5. What Happens when LLC is Bust or Bankrupt ................................................................... 21 5.4. Corporation .................................................................................................................................. 23 5.4.1. Formation ............................................................................................................................ 23 5.4.2. Board of Directors ............................................................................................................... 24 5.4.3. Other Authorities of Board of Directors ............................................................................. 25 5.4.4. Board of Supervisors ........................................................................................................... 26 5.4.5. Advantages and Disadvantages of Corporations ................................................................. 28 Advantages ............................................................................................................................................. 28 Disadvantages ........................................................................................................................................ 28 5.4.6. Dissolution .......................................................................................................................... 28 4 6. Other Important Information ............................................................................................................... 29 6.1. Four Categories of Tax ................................................................................................................ 29 6.2. Implication and Possibility of Foreign Ownership of Real Property .......................................... 31 6.3. Implication and Possibility of Foreign Ownership of Business .................................................. 31 6.4. Reporting ..................................................................................................................................... 32 6.5. Employer vs. Employee’s Rights ................................................................................................ 33 6.6. License Registration .................................................................................................................... 33 7. Work Cited .......................................................................................................................................... 36 7.1. Primary Sources .......................................................................................................................... 36 7.2. Secondary Sources ...................................................................................................................... 36 10. Appendices ...................................................................................................................................... 36 10.1. Appendix A ............................................................................................................................. 36 10.2. Appendix B ............................................................................................................................. 37 5 Disclaimer The materials in this publication, and in any communication from the AUAF Legal Clinic Program, are for informational and educational purposes only and do not constitute legal advice. The AUAF Legal Clinic Program does not warrant that information contained in its publications is accurate or complete. The receipt of any information from the AUAF Legal Clinic Program, in any form, including email or other electronic source, will not create an attorney-client relationship. No user of this publication should act or refrain from acting based on information found in this publication without seeking the legal advice of counsel in the relevant jurisdiction. In offering links to websites and resources, the AUAF Legal Clinic Program neither endorses their sponsoring organizations nor vouches for the accuracy of their information. The AUAF Legal Clinic Program expressly disclaims all liability, and any implied warranties, in respect of actions taken or not taken based on any of the contents of its publication. 6 1. Introduction In Afghanistan, one of the main problems with developers of new businesses is that they do not know how to structure their businesses. Further, they do not know the advantages and disadvantages of specific types or forms of businesses. Moreover, these developers often have problems with the discrepancies between what the law says about starting a business in Afghanistan and how things work in practice. In addition, many Afghan commercial laws have recently been passed by parliament and, therefore, most of our businesspersons do not know of their responsibilities as businesspersons or which rights the law protects. Moreover, because businesspersons need to report to different institutions for registration, taxation, dispute settlement, and other business-related issues, it is difficult to understand these differing processes. For these reasons, the legal processes for starting or growing a business are difficult and vague in Afghanistan and require further research. In this paper, we will discuss the different types of businesses (as well as their ease, complexity, advantages, and disadvantages), legal standing, legal rights and responsibilities, liabilities, and ownership (both domestic and foreign). We will further explain tax implications, reporting responsibilities, employee and employer rights, dispute settlement through the ACDR and Commercial Courts, and finally, the registration and documentation processes utilized by domestic and foreign businesspersons. This report is structured as follows: First, we will focus on legal issues by stating the main areas our research will cover. Second, we will summarize our research findings and briefly