Oct Sun 2020

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Partnership Business Registration in Sri Lanka- Step by Step Guide

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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.  

What is a Partnership?

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.

What are the advantages and disadvantages of registering as a partnership business?

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.

Advantages Disadvantages 
Simple formation procedureLimited 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 fundsTax 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 managementPotential for conflict and disagreements among partners
Shared responsibilities and less burdenThe 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 goalPartners are personally responsible for debts of the partnership business, unless it is a private limited company 

Is a partnership the right type of business for you?

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, 

  • Sole Proprietorship 
  • Private Limited Company Registration

Understanding the differences between these types of registrations and partnerships will help you make a decision on what type of business suits you best.

Partnership vs Sole Proprietorship
Basis for comparisonPartnershipSole proprietorship
Type of businessA 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
OwnerIndividually known as partners and collectively known as firmKnown as sole trader or sole proprietor
IncorporationEssential for it to form a legal entity, however it’s not compulsoryNot Compulsory
Minimum number of membersTwoOne
Maximum number of membersFiftyOne
LiabilityShared among the partners according to the financial stakes involvedBorne by the proprietor 
LifetimeDepends on the desire and capacity of the partnersLifetime of the proprietor
Profit/LossShared in the agreed ratioProprietor is solely responsible for the profits & losses
Level of secrecyBusiness secrets are open to each and every partnerBusiness secrets are not open to any person except the proprietor
FinancingScope for raising capital is comparatively highScope for raising capital is limited
Partnership vs Private Limited Company
Basis for comparisonPartnershipCompany
Type of businessA business form in which two or more persons agree to carry on business and share profits & losses mutually is known as partnershipAny voluntary association of persons registered as a company and formed for the purpose of any common object is called a company
Governing statutesThe Sri Lankan Partnership ActNo 7 of 2007 of Sri Lankan Companies Act
IncorporationNot compulsoryCompulsory registration
Legal positionA partnership has no legal existence distinct from its members and the partners are liable for the acts of the firmA company is a corporate body and a legal person having a legal personality distinct from its members
LifetimeThe duration of a partnership ends with the death or insolvency or insanity of any one partnerThe existence of a company is not affected by the change of membership or death or insolvency of its members, therefore its lifetime is uncertain
LiabilityThe liability of partners is unlimited, they are jointly and severally liable for all the debts of the partnership firmThe 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 SharesA partner cannot transfer his share without the consent of all other partnersShares of a company are freely transferable unless restricted by the Articles
Number of MembersMinimum two, maximum fiftyA 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
AuditAccounts are not needed to be auditedAccounts are needed to be audited by a qualified auditor
Implied AgencyA partner is an agent of the firm and of all other partners in dealing with third partiesA shareholder is not regarded as its agent in dealing with third parties
ManagementThe management is in the hands of the partners themselvesThe 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 debenturesCan borrow money from the public through the issue of debentures
Level of secrecyThe 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 firmThe 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 FormationOnly the partners can invest in a partnershipEven people with limited resources can become the shareholders of a large company
DissolutionAs the partnership is formed by an agreement it can be dissolved at any time by another agreementA 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.

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How to draft a partnership agreement?

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.

  • Easy to solve any disagreement or conflict which may arise among the partners due to the terms laid out in the agreement
  • Ease of carrying out activities of partnership business 
  • It regulates the rights, duties, and liabilities of every partner 
  • Clarifies what the profit and loss sharing ratio between partners should be
  • It defines individual partner roles and responsibilities

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:

  • Basic information about the business and partners
  • Details about the investment of capital by the partners
  • Information on sharing profits and losses.
  • The objective of the partnership (nature)
  • Limitations on partners’ drawings 
  • Information about interest on capital and drawings. 
  • Salaries, commissions or any other amount to be payable to partners and also Duties and Rights of each partner
  • Conditions on the investment of the additional capital and the dissolution of the partnership. 
  • The action to be taken in the event of an admission of a partner, retirement of an existing partner or the death of a partner.
  • Profit sharing ratio
  • Contribution of capital
  • Dispute resolution procedure

How to register as a partnership?

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.

  • A photocopy of the NIC 
  • If the business is operated from a land owned by you, a copy of the deed of the land
  • If you run your business in a rented land, you need to present your lease agreement. 

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.

  • Trade permit (can be obtained from the nearest municipal council or divisional council to the place where your business is located) 
  • A copy of the partnership agreement

Depending on the nature of the business, the documents you are required to alongside the application may differ. The requirements are as follows:

  • Selling goods or importing/exporting: Clearly mention the types of items you are importing/exporting or manufacturing.
  • Spas or guest houses: Obtain a report from the police division relevant to the business and submit it.
  • Medicine and perfumes: Get the approval from The Medical Supplies Division (MSD), as advised by the Ministry of Health.
  • Ayurvedic medical treatment: Submit a letter from the Ayurvedic doctor stating that he/she is working and a copy of his/her identity card issued by the Ayurvedic Medical Council
  • Businesses dealing with vocational affairs: Submit photocopies of certificates that prove your professional qualifications if your business is dealing with vocational affairs
  • Beauty salons and spas: Training certificates 
  • Nurseries or care centers: The approval from the Early Childhood Development Assistant if you are running 
  • Restaurant or cafes: Approval from a public health inspector (PHI) under the supervision of the Medical Officer Of Health (MOOH).

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.

  • If you are running the business in your own house, the deed of the land
  • If the land is owned by another party, the letter of consent given by the party
  • If you are paying rent for the building where your business is running, the lease agreement under your name

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. 

How to dissolve a partnership?

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.

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Next steps

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.

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