Are you looking to start a business in Sri Lanka as a partnership? Or you may be deciding what is the best way to register your business in Sri Lanka. This guide is designed to help you learn everything you need to know about forming a partnership and getting your business up and running in Sri Lanka.
Partnerships are one of the most common types of businesses in Sri Lanka. According to the Partnership Act of 1890 which forms the basis of partnership law in Sri Lanka, a partnership is defined as:
“Partnership is the relation which subsists between partners carrying on business in common with a view of profit.”
This means a partnership is a legally accepted form of relationship between two or more parties. The partners of the business are personally liable for losses. This means If the business suffers a loss, they have to pay from their own personal finances. They would also share the profits collectively.
It is important to note that registration of partnerships is not mandatory in Sri Lanka. However, if you do choose to register, it is important to understand the various advantages of registering as a partnership as well as disadvantages to make an informed decision.
|Simple formation procedure||Limited span of time in business, as the business ceases to exist if one partner dies|
|Ease of accessing funds through bank loans and venture capital funds||Tax will be incurred not from the business but the individual partners depending on the rate of income|
|Includes a combination of skills and a variety of levels in expertise, due to partners being directly involved in the management||Potential for conflict and disagreements among partners|
|Shared responsibilities and less burden||The business is not a seperate legal entity, therefore the burden of liability extends to each partners personally|
|Better decision making||An unlawful or illicit act or decision taken by one partner could affect all others|
|Ability to work towards a common goal||Partners are personally responsible for debts of the partnership business, unless it is a private limited company|
You may be considering entering into a partnership to ensure you have one or more people to share the operational burdens and responsibilities. However, this also means you will have less control on direction and operations of the business.
A partnership is just one of the many ways you can register a business in Sri Lanka. Two of the other types of registrations for businesses are,
Understanding the differences between these types of registrations and partnerships will help you make a decision on what type of business suits you best.
|Basis for comparison||Partnership||Sole proprietorship|
|Type of business||A business form in which two or more persons agree to carry on business and share profits & losses mutually is known as a Partnership.||Only one person is the owner as well as operator of the business is known as Sole Proprietorship|
|Owner||Individually known as partners and collectively known as firm||Known as sole trader or sole proprietor|
|Incorporation||Essential for it to form a legal entity, however it’s not compulsory||Not Compulsory|
|Minimum number of members||Two||One|
|Maximum number of members||Fifty||One|
|Liability||Shared among the partners according to the financial stakes involved||Borne by the proprietor|
|Lifetime||Depends on the desire and capacity of the partners||Lifetime of the proprietor|
|Profit/Loss||Shared in the agreed ratio||Proprietor is solely responsible for the profits & losses|
|Level of secrecy||Business secrets are open to each and every partner||Business secrets are not open to any person except the proprietor|
|Financing||Scope for raising capital is comparatively high||Scope for raising capital is limited|
|Basis for comparison||Partnership||Company|
|Type of business||A business form in which two or more persons agree to carry on business and share profits & losses mutually is known as partnership||Any voluntary association of persons registered as a company and formed for the purpose of any common object is called a company|
|Governing statutes||The Sri Lankan Partnership Act||No 7 of 2007 of Sri Lankan Companies Act|
|Incorporation||Not compulsory||Compulsory registration|
|Legal position||A partnership has no legal existence distinct from its members and the partners are liable for the acts of the firm||A company is a corporate body and a legal person having a legal personality distinct from its members|
|Lifetime||The duration of a partnership ends with the death or insolvency or insanity of any one partner||The existence of a company is not affected by the change of membership or death or insolvency of its members, therefore its lifetime is uncertain|
|Liability||The liability of partners is unlimited, they are jointly and severally liable for all the debts of the partnership firm||The maximum liability of the shareholders, in case of a limited company, is limited to the face value of the shares purchased by them. In case of companies limited by guarantee, the liability of the shareholders will be up to the amount guaranteed by them|
|Transferability of Shares||A partner cannot transfer his share without the consent of all other partners||Shares of a company are freely transferable unless restricted by the Articles|
|Number of Members||Minimum two, maximum fifty||A private company should have a minimum of 2 members and can have a maximum of 50 members. A public company should have a minimum of 7 members and there is no maximum limit|
|Audit||Accounts are not needed to be audited||Accounts are needed to be audited by a qualified auditor|
|Implied Agency||A partner is an agent of the firm and of all other partners in dealing with third parties||A shareholder is not regarded as its agent in dealing with third parties|
|Management||The management is in the hands of the partners themselves||The management of a company is in the hands of a group of elected representatives of the shareholders. Even this group finds it difficult to administer the day-to-day affairs of the company. It is carried on mostly by salaried people. Such people cannot be expected to take active part in the management as the owners|
|Issue of Debentures (A certificate issues for a fixed loan amount by the company)||A partnership firm cannot issue debentures||Can borrow money from the public through the issue of debentures|
|Level of secrecy||The firm is not needed to prepare and file documents such as the company is required to. Secrets are not leaked out and outsiders cannot know the in and outs of the firm||The companies have to file their documents, returns, reports, balance sheet, profit and loss account etc. with the Department of Inland Revenue. Some of them are open to the public. Therefore, the level of secrecy is almost at the level of transparency|
|Capital Formation||Only the partners can invest in a partnership||Even people with limited resources can become the shareholders of a large company|
|Dissolution||As the partnership is formed by an agreement it can be dissolved at any time by another agreement||A company can only be dissolved as laid down by law|
If you are just starting out and do not want to incur a registration cost, you might be best served by registering as a sole proprietorship. However, it is strongly recommended that you take steps to register as a private limited company in Sri Lanka as it provides you with additional protections not granted to either sole proprietorships or partnerships.
Thinking of setting up your own partnership business? Talk to us!
The Partnership agreement is where the terms and conditions agreed on by the partners at the start of a partnership is laid out. This agreement can be oral, written or implied and legally binding.
A partnership agreement is important for the following reasons.
It is recommended to always enter into a written agreement, as proving the existence of an oral agreement in the event of a dispute could be a difficult process.
Make sure you obtain the right legal advice and involve a lawyer who is experienced in drafting partnership agreements.
A partnership agreement should contain:
Step 1 – Obtain the application form from the divisional secretariat and complete it with valid and accurate information.
Step 2 – Submit the relevant documents alongside the application.
Iif the land is owned by a family member, a consent letter should be provided by them, stating you are permitted to run the business in their (family member’s) land & a copy of NIC of the family member.
Depending on the nature of the business, the documents you are required to alongside the application may differ. The requirements are as follows:
Step 3 – Obtain the report issued by the Grama Niladhari of the division where your business is based.
When meeting the Grama Niladhari, you are supposed to submit the documents below depending on the ownership of the land where your business is located and get them certified.
Step 4 – Submit all the documents to the divisional secretariat
For more information on the instructions related to the registration of partnership businesses, you can visit the Department of Provincial Business Name Registration website.
Dissolving a partnership in Sri Lanka is a fairly simple process especially if there is a partnership agreement. Any partner of the firm can dissolve the partnership by providing notice to other partners, according to the relevant clauses laid out in the partnership deed.
Alternatively, they can also enter into a separate agreement to dissolve the partnership.
Starting a partnership may sound challenging but if you plan properly and take the necessary steps, you can successfully complete the process by yourself with ease.
If you need further help in deciding whether a partnership business is what works for you, or if you would like to register as a private limited company to get a host of benefits, you can contact us for a free consultation.
Share this post
Have more questions?