Nov Wed 2020

Team Simplebooks

Business Registration in Sri Lanka – The Definitive Guide

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As a local entrepreneur, one of the most important things you need to do is register your business in Sri Lanka. 

And when it comes to business registration, there are two very basic questions every owner has to ask themselves:

1. What type of business am I going to register as?

2. How do I register?

It can be very confusing to make the right decision. 

This is especially true when you’re a new entrepreneur that’s not completely aware of your options. 

Every business type has its own pros and cons; and it’s very important to make an informed decision. 

That’s exactly why we’ll be talking about:

  1.  The types of businesses you can register as
  1. How to register each business type

In addition to the main discussion, we’ll also be linking other useful resources to help you get started. 

Useful link: How to start a business in Sri Lanka 

Types of business registrations in Sri Lanka

We’re going to take a look at:

  1. Sole Proprietorship
  2. Partnership
  3. Private Limited Company 
  4. Public Limited Company
  5. Company Limited Guarantee 

You can register as any one of these depending on the nature of your business. 

Let’s first take a look at them in brief:

Sole Proprietorships and Partnerships are “unincorporated” companies. 

This means that the business and the owner are one “entity” or “person” in the eyes of the law. 

The business owners are fully responsible for everything that happens in the organization.

Private Limited Companies, Public Limited Companies and Companies Limited by Guarantee are all “incorporated” companies. 

This means that the business and the owners are separate entities in the eyes of the law. 

The owners are fully responsible for anything that the business does.

But how do you choose which business type to register as?

That’s exactly what we will be talking about next. 

How-to: Choose the right business registration type for your business idea

There are a few factors you need to consider before choosing a business structure for your idea.

Afterall, the structure you choose will have unique financial, legal and operational implications.

For example: 

A Private Limited Company has to have it’s finances audited while a Sole Proprietorship only needs to have it’s financials certified by a chartered accountant

So, what do you need to be considerate about when choosing a business structure?
Let’s take a look. 

  1. The number of owners or partners

You need to choose a business type that’s compatible with the number of owners/partners that are going to be involved. 

If you’re planning on starting the business by yourself, a Sole Proprietorship would be ideal for you.

However, if your business is going to:

  1. Have more than one owner 
  2. Raise capital from other parties;

you should register as a Private Limited Company  or a Public Limited Company.

Here are the limitations for each business type:

Business typeNumber of owners 
Sole Proprietorship 1 owner
Partnership2 – 20 partners 
Private Limited Company  Upto 50 shareholders 
Public limited company Minimum 7 shareholders and 2 Directors 
Company Limited by Guarantee Minimum 2 members 
  1. Capital investment

Every business owner needs capital investments to start their business. 

There’s a lot of different ways you can raise money as well. 

You can invest your own savings, get partners involved or raise it from third parties. 

Depending on how you’re going to raise capital, the type of business you need to register changes too.  

So you need to choose a business structure based on how you’re going to raise capital. 

For example:

Funding for a Sole Proprietorship comes through personal accounts. 

Companies with shares like Private or Public Limited Companies  can sell them for additional funding. 

  1. Industry

Another factor you’ll have to consider is the type of industry you are entering into. 

Every industry is different. Each one has unique practises and are governed by different government regulations.

For example:

If your business is relatively high risk, you would want to register it as a Limited Company.

This will offer legal protection to you and your shareholders. 

  1. Liability

Every business structure has different levels of liability. 

You have to consider how much:

  1. Protection
  2. Liability 

each business type will offer. 

For example:

The owners’ personal assets are separate from the business in a Limited Company. This gives the owner a higher level of protection. 

However, in a Sole Proprietorship and partnership, the owner and the business are considered as one entity. Here, the owner has unlimited liability.

If the business accrues significant debts or gets sued at some point, the owner’s personal assets are at risk. 

  1. Taxes

The taxes you pay depend on the structure of your business. 

For example:

The owner is personally liable to pay the taxes in a Sole Proprietorship. 

This is only advantageous if the profits are low.

You might even end up paying higher taxes than a Private Limited Company  once your profits are high enough.

How-to: Register a business in Sri Lanka 

We’ve briefly looked at the different business types in Sri Lanka so far.  

Now, let’s look at how to register these businesses. 

1. Sole Proprietorship

A Sole Proprietorship is a common unincorporated business type in Sri Lanka.

These businesses are usually owned by one person – the owner. 

The most important thing you need to know about a Sole Proprietorship is that it has no separate legal identity of its own. 

This means that the law looks at the business and its owners as a single entity. 

In a Sole Proprietorship: 

  1. Every decision regarding the business is taken by the owner. 
  2. There is no separation between personal and business income. The business’s income is considered as the owner’s income. 
  3. The business’s profit is taxed as personal income. 

Why register as a Sole Proprietorship in Sri Lanka

You can register as a Sole Proprietorship if you’re starting a small business by yourself. 

There are a few pros and cons to registering as a Sole Proprietorship:

Pros Cons
Easy to start Unlimited liability 
Control and flexibility Difficult to raise capital
Privacy Lack of continuity 
Profit retention Unstable taxes

Let’s take a look at these pros and cons in detail:

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Pros to Sole Proprietorship business registration

  1. Easy to start 

It’s very easy to set up and operate the business. 

You also only need a small amount of capital to get started. 

  1. Control and flexibility

Being the sole owner has its advantages.

You can make decisions on your own and take action quickly. 

In a competitive and evolving market, the ability to make and implement decisions quickly is crucial. 

  1. Privacy 

Sole Proprietorships aren’t overly regulated. 

This is usually because of the size of the business. 

Unlike say – a Public Limited Company, Sole Proprietorships have very few reporting requirements.

  1. Retain Profits 

As the owner, your business’s profits belong to you.

You can also retain ownership of the assets that you use. 

Cons to Sole Proprietorship business registration

  1. Unlimited liability 

Here’s the problem with Sole Proprietorships – they have unlimited liability. 

But what exactly does this mean?

Well, your business doesn’t have a separate legal identity of its own. 

You and the business are one entity in the eyes of law. 

This means that if the business incurs debts or gets sued, you will have to settle everything under your name. 

As the owner, your personal assets are ultimately at risk if anything goes wrong. 

  1. Difficulty in raising capital

Incorporated can raise capital from outside investors.

Sole Proprietors cannot. 

Since you’re the sole owner of your company, there’s no incentive for outside investors to invest. 

In addition, obtaining bank loans can also prove to be tough.

Banks associate Sole Proprietorships with a higher level of risk. 

There’s two reasons for this:

  • Unlimited liability of the owner
  • Lack of accounting transparency 
  • Lack of continuity

The law sees the sole trader and the business as one. 

If in case the sole trader passes away, the business cannot continue. It has to be shut down. 

  1. Unstable taxes 

When you’re a sole trader, you’re personally responsible for paying your business’s taxes. 

This works for your favor when the business is making smaller profits. 

However, once the company starts making any significant profits; you can even end up paying more than a limited company. 

How-to: Register a Sole Proprietorship business in Sri Lanka 

Sole Proprietorship business registration in Sri Lanka is a 3 step process. 

Let’s take a brief look:

Step 01: Collect and fill out the relevant application forms

Step 02: Obtain a report from the Grama Niladhari

Step 03: Submit the application forms, reports and relevant documents

If you’re looking for a detailed guide, take a look at our step-by-step guide on how to register a Sole Proprietorship business in Sri Lanka

Useful links:

2. Partnership

This is another unincorporated business type.

If you don’t want to start a business on your own, striking a Partnershipmight be a good option. 

Here are a few things you need to keep in mind about Partnerships:

  1. You can only have 2-20 members as partners. 
  2. A Partnership is governed by a contract. This is known as a Partnership Agreement. The duties and responsibilities of each partner are defined in this agreement. 
  3. Your Partnership Agreement has to be drafted by a lawyer. 
  4. Legal and financial liability are shared among the partners equally. 
  5. Every partner is personally liable for the company’s debts. 
  6. Profits are equally distributed among the partners. However, the Partnership Agreement  can determine the specifics of profit sharing.

Why register as a Partnership business in Sri Lanka

There are a few pros and cons to to registering as a Sole Proprietorship:

ProsCons
Easy to set up Unlimited liability 
Shared control and managementLack of continuity 
Shared responsibility Partner conflicts 
Easier to raise capital Joint liability 

Pros to Partnership business registration

  1. Easy to set-up

Registering a Partnership is similar to registering a Sole Proprietorship. 

The process is fairly simple and you only need a small amount of capital to get started. 

  1. Shared control and management 

The partners share equal responsibilities when it comes to managing the business. 

Each partner also contributes different skills and expertise when it comes to making decisions. 

  1. Shared responsibility. 

In a Sole Proprietorship, the owner is responsible for everything. 

In a Partnership, that responsibility is shared by everyone. 

This creates an effective and organized system of running the business. 

  1. Easier to raise capital 

Since the business can have multiple partners, the company has more sources of raising capital.

Cons to Partnership business registration

  1. Unlimited liability

The business still does not have a separate legal entity. 

Because of this, each partner is responsible for any liabilities the business incurs.

Their personal assets are still at risk. 

  1. Lack of continuity 

Similar to a Sole Proprietorship, the business will cease to exist if one of the partners dies. 

In addition, if there’s a change in ownership, a new Partnership agreement needs to be signed. 

  1. Partner conflicts 

Since Partnerships  rely on joint administration, partner conflicts can cause a dent in the effective management of the business. 

  1. Joint liability 

Each of the partners are liable jointly and individually.

Any harm done by one partner will affect the others. 

They will also be equally responsible for any harm caused by one individual.  

How-to: Register a Partnership business in Sri Lanka 

Partnership business registration in Sri Lanka is similar to registering a Sole Proprietorship. 

Step 01: Collect and fill out the relevant application forms

Step 02: Obtain a report from the Grama Niladhari

Step 03: Submit the application form, reports and relevant documents

Read our Partnership business registration guide for a step-by-step walkthrough of the entire registration process. 

Useful link: Everything you need to know about Partnership Agreements

3. Private Limited Company  

A Private Limited Company is ideal for small businesses. This is especially useful if you’re starting a new company. 

Here are a few things you need to keep in mind about this business type:

  1. You need a minimum of 2 members to start a Private Limited Company . One Shareholder and one Director. 
  2. Number of shareholders is limited to 50.
  3. You can’t publicly trade your shares in the stock market.

The most important aspect of a Private Limited Company  is that it has limited liability. 

This means that the company has a legal identity of its own – unlike Sole Proprietorships and Partnerships. 

Why register as a Private Limited Company  in Sri Lanka

There are a few pros and cons to to registering as a Sole Proprietorship:

ProsCons
Limited liability Higher level of compliance
Professional status Strict accounting and book-keeping practices 
ProtectionRestricted access to raising capital
Comparatively less reporting obligations Limited transferability of shares 

Pros to Private Limited Company registration

  1. Limited liability

Like we mentioned earlier, a Private Limited Company has a separate legal identity of its own. 

This means that the law views the owners and the company as two separate entities. 

If the organization incurs and debts or gets sued, the owners will not be fully responsible. 

  1. Professional status 

When you register as a Limited Company, you sign up for practises like audits. 

These practices intrinsically bring about a certain level of transparency to your business. 

As a result, trading as a Private Limited Company naturally creates a more professional status.

This is why Private Limited Companies are held at a higher regard than other businesses like Sole Proprietorships.

  1. Protection 

Incorporating the company ensures that the name you created is protected.

  1. Comparatively less reporting obligations 

A Private Company’s obligation to disclose financial information is less than a Public Company. 

Cons to Private Limited Company registration

  1. Higher level of compliance

Sole Proprietorships and Partnerships are “unincorporated” companies. Their business structures are often simple and they have little legal requirements. 

Private Limited Companies are “incorporated” companies. These tend to have complex business structures. 

In addition, they have a lot more legal requirements in comparison to “unincorporated” companies. 

For example:

You have to adhere to strict practises like filing annual returns and performing annual audits. 

  1. Accounting and Bookkeeping

You need to follow strict accounting procedures when it comes to every transaction made.

  1. Restricted access to raising capital 

Private Limited Companies can’t sell their shares on the stock markets like Public Limited Companies. 

Instead, they can raise capital from its shareholders.

However, a Private Limited Company can only have 50 shareholders at a time. 

This might limit your ability to attract outside investors. 

  1. Limited transferability of shares 

Shares can be bought, sold and transferred. 

There’s just one catch. 

In a Private Limited Company your shares have to be:

  1. Offered to existing shareholders at a determined price

OR

  1. Approved by the board of directors

before they can be sold or transferred to a new owner.

How-to: Register a Private Limited Company 

You need to follow four main steps when registering a Private Company:

Step 01 – Get your business name approved 

Step 02 – Submit company registration forms 

Step 03 – Submit Articles of Association

Step 04 – Give public notice of incorporation

If you’re thinking about registering a Private Limited Company, take a look at our step-by-step guide on company registration

Useful links:

4. Public Limited Company

Public Limited Companies list and trade their shares at the stock exchange. 

This means that the general public has a claim to the company’s assets and profits. 

This is the main difference between a Private Limited Company  and a public limited company. 

They also don’t have a limit to the number of shareholders that can invest. 

However, they need to have a minimum of 7 shareholders and 2 directors

Why register as a public limited company

There are a few pros and cons to to registering as a Sole Proprietorship:

ProsCons
Limited liabilityInitial cost of going public is high
Raising capitalHigh transparency 
Transferability of sharesSubjective market value 
 Strict regulations on management 

Pros to Public Limited Company registration

  1. Limited liability 

Like Private Limited Companies, you’re only responsible for the value of shares you own. 

  1. Raising capital

This is the biggest advantage of owning a public limited company. 

You’re not restrained when it comes to raising capital. 

Since you can publicly trade on the stock market, outside parties can invest in your company by purchasing its shares. 

This means that the company is able to raise a large amount of capital.

  1. Transferability of shares 

Transferring shares in a Public Company is easier than in a Private Company and isn’t bound by the same restrictions.

Cons to Public Limited Company registration

  1. Choosing to go public is very expensive. 
  1. Public Limited Companies  also need to be extremely transparent.
  2. Your share value is based on the value of the company. This is determined by how the market views you. 
  3. There are very strict regulations around running and managing a public limited company.

5. Company Limited by Guarantee 

A Company Limited by Guarantee is a little more unique than the business types we explored earlier. 

It’s owned by individuals known as ‘Guarantors’.

These companies don’t issue shares like a Public Company.

The members of a Company Limited by Guarantee commit contribute to the assets of the company if it goes into liquidation according to the terms set out in its articles. 

You can also only set up a Company Limited by Guarantee for a specific purpose. 

According to the Companies Act; this purpose can be to promote commerce, art, science, religion, charity, sport or any other useful objective.

A Company Limited by Guarantee can only use its profits to promote its objectives. 

It cannot make any payment of dividends/bonus to its members. 

This company type is formed for the benefit of the public. If you are looking to start a business to promote only the objectives of the business and not make profits for yourself, this is the kind of company you should register as.

An example of a Company Limited by Guarantee would be an NGO or an INGO like the United Nations. 

These are non-profit organisations that are set up for specific purposes like protecting the rights of women and children. Any profits they make would be used only to achieve the purpose of protecting the rights of women and children.

Two or more persons have to apply to the Registrar of Companies to form a Company Limited by Guarantee. 

Why register as a Company Limited by Guarantee

There are a few pros and cons to to registering as a Sole Proprietorship:

ProsCons
Separate legal entityStrict registration criteria 
Limited liabilityHigh registration cost 
Trustworthiness Strict operational criteria 
Tax Concessions  

Pros

  1. Separate legal entity 

Once you register, the company has a separate legal entity from you. 

This means that you and your personal assets are separate from the organization. 

The company is responsible for its own debts and mishaps. 

  1. Limited liability

Since it has a separate legal entity, the guarantors are only responsible to pay the company debts to the value specified in the article. 

  1. Trustworthiness 

If you’re an NGO, being registered gives you a certain level of credibility. 

This will further help you build trusting relationships with donors and sponsors. 

  1. Tax Concessions 

On a case by case basis, NGOs will receive tax concessions from the government. 

Cons

  1. Strict registration criteria 

You can only set up a Company Limited by Guarantee if it meets the requirements set by the Companies Act.

  1. High registration cost 

The initial cost to register a Company Limited by Guarantee is over Rs 60,000. 

Compared to a Private Limited Company or a Public Limited Company, the cost is pretty high. 

  1. Strict operational criteria 

There are strict guidelines under law (statutory requirements) you need to follow when setting up a Company Limited by Guarantee. If you fail to meet these,the ROC will not grant you your license.

How-to: Register a Company Limited by Guarantee

Since the registration process of a Company Limited by Guarantee is stricter than most, it has a few more steps. 

Step 01: Company name check

Step 02 :Company name approval 

Step 03: Draft Objectives and Articles of Association

Step 04: Publish Objectives and Articles of Association

Step 05: Submit forms 05, 18 and 19

Step 06: Submit approved Articles of Association

Step 07: Give public notice of incorporation

If you want a detailed guide on how to register your Company Limited by Guarantee or NGO, you should take a look at our blog.

Useful link: How to register an NGO in Sri Lanka

Register your business with Simplebooks. 

Hi, we’re Simplebooks and we’re a registered company secretary. 

We’ve helped over 1,500 business owners register their businesses in Sri Lanka. 

If you’re unsure about what business type you should register as or how to register your business, we could guide you through the entire process. 

Contact us for a free consultation!

FAQs 

How do I register a business in Sri Lanka?

You need to first decide which business type you want to register for.

Each business type has a different registration method. 

Read our comprehensive guide on how to register your business type in Sri Lanka

How do I register an online business in Sri Lanka?

The process to register an online business is the same as registering any other business. 

You have to register through the eROC

If you want a step by step guide on how to register your company, read our blog on online company registration

How do I register a Sole Proprietorship business in Sri Lanka?

Step 01: Collect and fill out the relevant application forms

Step 02: Obtain a report from the Grama Niladhari

Step 03: Submit the application forms, reports and relevant documents

If you’re looking for a detailed guide, take a look at our step-by-step guide on how to register a Sole Proprietorship business in Sri Lanka

How to register a small business in Sri Lanka?

You first need to decide on what type of business you’re going to register as. 

For small businesses, registering as a Sole Proprietorship, Partnership or Private Limited Company   is smart. 

Read our blog for instructions on how to register these businesses.

How to register a Partnership business in Sri Lanka?

Step 01: Collect and fill out the relevant application forms

Step 02: Obtain a report from the Grama Niladhari

Step 03: Submit the application form, reports and relevant documents. Read our Partnership business registration guide for a step-by-step walkthrough of the entire registration process.

How do I register a business in Sri Lanka?

You need to first decide which business type you want to register for.
Each business type has a different registration method. 

How do I register an online business in Sri Lanka?

The process to register an online business is the same as registering any other business. 
You have to register through the eROC
If you want a step by step guide on how to register your company, read our blog on online company registration. 

How do I register a Sole Proprietorship business in Sri Lanka?

Step 01: Collect and fill out the relevant application forms
Step 02: Obtain a report from the Grama Niladhari
Step 03: Submit the application forms, reports and relevant documents
If you’re looking for a detailed guide, take a look at our step-by-step guide on how to register a Sole Proprietorship business in Sri Lanka

How to register a small business in Sri Lanka?

You first need to decide on what type of business you’re going to register as. 
For small businesses, registering as a Sole Proprietorship, Partnership or Private Limited Company is smart. 
Read our blog for instructions on how to register these businesses.

How to register a Partnership business in Sri Lanka?

Step 01: Collect and fill out the relevant application forms
Step 02: Obtain a report from the Grama Niladhari
Step 03: Submit the application form, reports and relevant documents. Read our Partnership business registration guide for a step-by-step walkthrough of the entire registration process.

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