Looking to create a company in Sri Lanka? If you wish to quickly, easily and inexpensively run your own business, sole proprietorship registration in Sri Lanka is your best option. A sole proprietorship (individual business) is the simplest form of business structure, owned and managed by a single individual. The process of individual business registration in Sri Lanka refers to establishing a sole proprietorship.
People just starting out in business, as well as small business owners, freelancers and those with limited capital, will find this guide helpful. This guide walks you through:
- What sole proprietorships are
- Key characteristics and implications
- Advantages and disadvantages
- Step-by-step registration process
- Documents required for sole proprietorship registration Sri Lanka (including for specialized businesses)
- When to consider upgrading to a private limited company
- Frequently asked questions
Let’s dive in.
Understanding Sole Proprietorships in Sri Lanka
Ownership & Profit
A sole proprietorship belongs to just one person, allowing them to retain 100% of profit. This is a key advantage of sole proprietorship Sri Lanka.
Unlimited Liability
All debts and actions in the business fall on the owner personally. When your company can’t pay its creditors or suppliers, they may have the right to use your personal things like your car or home to settle what you owe. Managing this risk is very difficult and is considered one of the main disadvantages of sole proprietorship Sri Lanka.
Taxation
One’s business finances and personal finances are not kept apart. The income you make from your business is taxed as your personal income.
Lifespan & Continuity
The business will continue as long as its owner is living and involved. If the owner passes away or becomes unable to work, the company ends which can hurt both the continuity and image of the business.
Capital Raising
The amount the owner can save is what the business uses. Banks can refuse to offer loans unless the person offers large collateral up front. This makes sole trader registration Sri Lanka challenging when planning business expansion.
Transfer of Ownership
Difficult to transfer ownership. The business usually needs to be sold as a whole.
Why Register Your Sole Proprietorship Business Name?
When is it Mandatory?
If your business name is different from your full legal name (e.g., “John’s Electronics” instead of “John Perera”), you must complete business name registration Sri Lanka with the relevant Provincial Council.
It’s a Name Registration, Not a Legal Entity
Registration does not create a separate legal entity. It only legalizes the use of your business name.
Benefits of Registering Your Business Name:
- Provides identity and legal recognition
- Secures your right to the business name
- Helps build customer trust
- May assist in getting business loans or bank accounts
(See below for the business name registration sole proprietorship application form)
The Pros & Cons
Easy to startup & close down
A sole proprietorship form of business is easy to form. With a small amount of capital, you can start the business. Just like formation, it is also easy to shut down the business.
All the profits belong to the owner
The profits earned belong to the sole proprietor alone and he bears the risk of losses as well
Independent decision-making
The owners can take decisions quickly. It’s not all sunshine and glory however, there is quite a bit of downside to registering a sole proprietorship as opposed to a Private Limited entity.
On to the cons:
Unlimited liability
In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities.
This restricts the sole proprietor from taking risks while deciding to start or expand the business.
Difficulties in raising capital
The financial strength of an individual is limited. It is difficult to raise capital from external parties such as banks, due to the higher level of risk involved in sole proprietorships and due to the unlimited liability of its owner.
Lack of Continuity
The business operations of a sole proprietorship will be discontinued due to the death of its owner.
Individual decisions of the owner can be unsuccessful
There is a possibility that the individual decisions taken based only on the knowledge and experience of an individual can become unsuccessful compared to collective decisions.
Registering a Sole Proprietorship and why?
If a Sole Proprietorship is conducted under a different name other than the full name of its owner, it is mandatory to register the name of the business.
Example: –
If John Doe conducts his business under the name of ‘John Stores’, the business name is required to be registered.
This is only a registration of the business name and hence will not provide a legal Personality for the business.
Legal procedure
If a Sole Proprietorship is conducted in a name other than the full name of its Owner, it is required to register. The Registrar of the respective Provincial Council is The authorized officer to register business names. The application form required for registration can be collected from the office of the Divisional Secretariat. The Registration fee will be determined by the respective Provincial Council within the Authority given to them. Further, it is required to submit an application to register the business name within 14 days of commencing a Sole Proprietorship.
The following procedure will be followed when registering a Sole Proprietorship.
1. Obtain the relevant application form from the respective Divisional Secretariat Office.
The following two documents are required to submit for this purpose.
– An application form to register the business name of a Sole Proprietorship.
– An application form to obtain the required report from Grama Niladharee on the registration of the business name.
2. Hand over the certified report of the Grama Niladharee and the duly completed application form along with the registration fee to the Divisional Secretary.
3. After considering the above documents, the Divisional Secretary will issue the Certificate of Registration of Business Name. It is required to display this certificate at the business place.
Why you should register your business name
The following advantages can be achieved by registering the business name of a Sole Proprietorship.
Provides identity and recognition
A business can be separately identified from other businesses by using the business name.
Provides ownership of the business name
Since the business name is registered under the name of the owner, this ensures the ownership of the business name.
Easier to obtain loans
There is a higher trust in businesses that have registered their business names. So lenders prefer to supply loans to such businesses.
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Pulling the trigger
We know this is a big decision that you have to make, Sole Proprietorships don’t require hefty fees & ongoing fees to run. It feels like a much better choice than registering a private limited company when you’re just starting out. Altogether, you’ll end up spending over Rs. 50,000 every year with every government tax, fee & paperwork that you’d be going through. That being said, we still firmly believe that a business positioned for success & growth should be registered as a Private Limited entity. Of course, if you’re trying to register a small homegrown business that isn’t necessarily the case.
If you are interested in registering a Private Limited Company, you can read our post on – How to register a private limited company in Sri Lanka.
If you want us to register your Sole Proprietorship for you, please contact us.
