Understanding Partnerships in Sri Lanka

A partnership is defined as the business relationship between two or more parties who operate together for profit. Partners share both profits and losses, and personal liability is a key feature. They are governed by the Partnership Act of 1890. This article explores the concept of partnerships, their advantages and disadvantages, and helps you decide if it’s the right choice for your business. The collective expertise of our team has been instrumental in contributing significantly to the development of this article.

Advantages of Registering as a Partnership

• Simple Formation: Easy to establish.
• Access to Funds: Easier access to bank loans and venture capital.
• Diverse Expertise: Partners bring various skills and expertise.
• Shared Responsibilities: Partners share the workload.
• Better Decision Making: Collective decision-making for a common goal.

Disadvantages of Registering as a Partnership

• Limited Lifespan: Business ceases if a partner dies.
• Taxation: Tax incurred at the individual partner level.
• Conflict Potential: Possibility of disagreements among partners.
• Personal Liability: No separation of legal entity; personal liability.
• Risk of Others’ Actions: One partner’s actions can affect all.

Choosing the Right Business Type

Consider your options:

• Partnership vs. Sole Proprietorship: Differences in ownership, liability, and secrecy.
• Partnership vs. Private Limited Company: Variances in incorporation, liability, and management.

1. Registering a Private Limited Company
2. Sole Proprietorship Guide

Sole Proprietorship vs. Partnership vs Private Limited Company

Sole Proprietorship

• Type of Business – Sole proprietor
• Owner – Sole trader or proprietor
• Incorporation – Not compulsory
• Minimum Members – One
• Liability – Borne by the proprietor
• Lifetime – Lifetime of the proprietor
• Profit/Loss – Proprietor solely responsible
• Secrecy – Secrets not open to others
• Financing – Limited capital raising scope

Partnership

• Type of Business – Two or more partners
• Owner – Individually partners, collectively firm
• Incorporation – Not compulsory, forms legal entity
• Minimum Members – Minimum two, maximum fifty
• Liability – Shared among partners Borne by the proprietor
• Lifetime – Depends on partners’ desire and capacity
• Profit/Loss – Shared in agreed ratio
• Secrecy – Business secrets open to all partners
• Financing – Scope for raising capital relatively high

Company

• Type of business – Registered association
• Governing statutes – Sri Lankan Companies Act No. 7
• Incorporation – Compulsory Registration
• Legal position – Distinct Legal Personality
• Lifetime – Continuous Existence
• Liability – Shareholders’ Liability Limited
• Transferability of Shares – Shares freely transferable
• Number of Members – Private: 2-50 members
• Audit – Mandatory audits by Qualified Auditor
• Implied Agency – Shareholders not regarded as agents
• Management – Managed by elected representatives
• Issue of Debentures – Can issue debentures to raise capital
• Level of secrecy – Extensive document filings
• Capital Formation – Diverse shareholders possible
• Dissolution – Dissolution as per legal requirements

Drafting a Partnership Agreement

A partnership agreement is a crucial document that outlines the terms and conditions agreed upon by partners at the beginning of a partnership. Whether oral, written, or implied, this agreement holds legal weight and serves several vital purposes.

Why a Partnership Agreement Matters

1. Conflict Resolution: It provides a framework to resolve disputes or conflicts among partners by referencing the agreement’s terms.
2. Smooth Business Operations: Facilitates the seamless operation of the partnership business.
3. Rights, Duties, and Liabilities: Clearly defines the rights, duties, and liabilities of each partner.
4. Profit Sharing: Establishes the profit and loss sharing ratios between partners.
5. Role Clarity: Specifies individual partner roles and responsibilities.

Choosing a Written Agreement

It’s advisable to enter into a written partnership agreement as proving the existence of an oral agreement during disputes can be challenging. Seek legal counsel from an experienced lawyer when drafting your partnership agreement.

Key Components of a Partnership Agreement

Your partnership agreement should include:

1. Basic Information: Details about the business and its partners.
2. Capital Investment: Information on each partner’s capital contributions.
3. Profit and Loss Sharing: Clearly defined profit and loss sharing arrangements.
4. Partnership Objective: The nature and objectives of the partnership.
5. Drawings Limitations: Limitations on partners’ drawings.
6. Interest on Capital and Drawings: Terms regarding interest on capital and drawings.
7. Salaries, Commissions, and Payments: Any compensation arrangements for partners and their respective duties and rights.
8. Additional Capital and Dissolution: Conditions for investing additional capital and procedures for partnership dissolution.
9. Admission, Retirement, and Death: Actions to be taken when admitting a new partner, the retirement of an existing partner, or the death of a partner.
10. Profit Sharing Ratio: The agreed-upon ratio for sharing profits.
11. Contribution of Capital: Details on capital contributions.
12. Dispute Resolution: Procedures for resolving disputes.

Registering as a Partnership

Step 1: Obtain the application form from the divisional secretariat and fill it out with accurate information.

Step 2: Submit the required documents along with the application, which may include:

• Photocopy of the NIC (National Identity Card)
• Deed of the land if operating from owned land
• Lease agreement if the business operates on rented land
• Consent letter from a family member if using their land
• Trade permit
• Copy of the partnership agreement

The specific documents required may vary depending on your business type.

Step 3: Obtain a report from the Grama Niladhari of your business’s division, certifying the documents related to land ownership or rental.

Step 4: Submit all documents to the divisional secretariat.

For more detailed instructions on registering partnership businesses, visit the Department of Provincial Business Name Registration website.

Dissolving a Partnership

Dissolving a partnership in Sri Lanka is relatively straightforward, especially with a partnership agreement in place. Any partner can initiate the dissolution process by providing notice to others, following the clauses outlined in the partnership deed. Alternatively, partners can enter into a separate agreement to dissolve the partnership.

Starting a partnership may seem daunting, but with careful planning and following the right steps, you can smoothly navigate the process independently.

If you require additional guidance in determining if a partnership is the right choice for your business, or if you are considering registering as a private limited company to access various advantages, please don’t hesitate to reach out to us. We offer a complimentary consultation to assist you in making an informed decision.