Sole proprietorship & Partnership business

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Sole Proprietorships

• A sole proprietorship business is a business
  entity that is owned and controlled by a single
  owner who doesnt have partners.This is the
  typical example for a SME.

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Registration of a sole proprietorship business

• The respective legal source is Businessnames
  registration ordinance of number of 6 of 1918.
• According to that,s when the name of the business
  doesnt include the full name of the
  owner(withrespect to a sole proprietorship) or
  full names of the owners(with respect to
  parnership),then the name of the business must be
  registered in the respective regional
  office(Provincial council/Urban council/Municipal
  council/Regional office).

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• ?The term Limited cant be used as a part of
  the name of a sole propretorship business.
• ?However,if the sole proprietorship business has
  the full name of the proprietor,then according to
  the legal source,registration is not compulsory.
• However,practically sole proprietors are willing
  their businesses to be registeredas they get the
  following benefits by doing it.
• To obtain bank loan
• To build customer confidence
• To receive benefits from the government
• To get various standard certificates

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1.Past savings 2.Using the proceeds by selling
the assets 3.Support provided by family
members,relations friends 4.Borrowing from an
external parties
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The Legal sources pertinent to a Sole
proprietorship business

• Laws related to consumers
• ?Consumers Affairs Authority act
• ?Consumer credit act
• ?SLSI act
• ?Measurement standards
• Laws related to employees
• ?EPF act
• ?ETF act
• ?Office and Shop act
• Laws related to competition
• ?Central environmental act
• ?Intellectual property act

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Meaning of Unlimited Liability of Sole proprietor

• Here the sole proprietor of the business is
  liable for the borrowings of the business from
  external parties not only to the amount of
  capital that he invested in the business but also
  to the entire amount that the business has
  borrowed from external parties.
• This is a risky feature of a sole proprietor may
  have to sacrifice his personal properties in
  settling the external debts of the business.

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This says that the sole proprietorship business
doesnt have continuous existence as the business
may have to shut down if something happen to the
owner and if there is no one to take the
responsibilities of the business.
Sole proprietorship business doesnt have
perpectual succession
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• Advantages of sole Proprietorship

• Disadvantages of Sole Proprietorship

• Relatively east to commence
• Profits are required not to be shared as the
  proprietor doesnt have partners
• Administration is relatively easy
• Relatively lower degree of legal influence
• Can make independence and implement them quickly
• Confidencial business information can be secured
• Can maintain close direct contacts with
  customers
• Can use personal talents of the proprietor for
  the success of the business
• Maximum personal controbution of the proprietor
  is provided

• Unlimited liability to the proprietor
• Not a separate legal existence
• Losses can not be shared, it has to be tolarated
  individually
• Difficult to expand
• No prepectual succession for the business
• Difficult to make correct decesions

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• A sole Proprietorship business doesnt have a
  legal personality and hence the name of the
  proprietor must be used for the following
  requirements.
• To sue against another party
• To be used by another party
• To acquire assets
• To pay taxes
• To enter into contracts
• To recruit employees,appoint agents etc.

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Disadvantages of Sole Proprietorship
Advantages of Sole Proprietorship
?Profits are required not to be shared as the proprietor doesnt have partners. ?Unlimited liability to the proprietor.
?Administration is relatively easy. ?Not a separate legal existence
?Can make independenceimplement them quickly. ?Losses can not be shared,it has to be tolarated individually
?Confidencial business information can be secured. ?Difficult to expand.
?Can maintain close and direct contacts with customers. ?No prepectual succession for the business.
?Can use personal talents of the proprietor for the success of the business. ?Difficult to make correct decesion.
?Maximum personal contribution of the proprietor is provided.

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Ownership There is only one owner There are no partners
Capital Equity capital is completely provided by the owner The owner borrows from external parties for various purpose of the business
Decision making All the decisions are independently made and implement by the proprietor himself
Legal Personality Doesnt have a legal personality
Liability Unlimited liability to the proprietor
Risk Higher risk involved due to the absence of legal personality,the existence unlimited
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Perpectual succession Doesnt have a perpectual succession
Profit The proprietor individually enjoy the profit and bare losses without sharing
Registration Its not compulsory when the name of the business different from the owner of the business should be registered under the respectly under prvincial council with accordance
Accounting Accounting is not compulsory Incomplete informal recors are maintain
Taxes When the profit exceeds the tax free income,taxes must be paid in the name of the proprietor

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PARTNERSHIP
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Partnership

• A Partnership is an association of persons who
  agree to operate a business together to earn a
  profit.
• Partnership is a relation between persons who
  have agreed to share the profits of a business
  carried on by all or any of them acting for all.
• A partnership is the relation which subsists
  between persons carrying on a business in common
  with a view of profit.

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• Conditions must be satisfied in order to prove
  the existence of partnership business-
• ?There must be persons(more than one)
  (2-20 partners)
• ?There must be an agreement
• (an implied/an oral/a written)
• ?There should be a business (manufacturing,co
  nstruction,buying and selling,service)
• ?There must be view of profit.
• ?Mutual agency among partners(Every partner
  is both an agent and a principle for himself
  and other partners)

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Types of Partnership

• General partnership businesses

• Limited partnership businesses

• In this type of partnerships,the liability of all
  partners is unlimited and hence known as
  Unlimited partnerships
• Partnerships of this type are controlled by the
  Partnership ordinance of 1980.
• This is the type of partnerships that is popular
  in modern global and sri Lankan business context.

• This is a partnership business where there are
  partners with limited liability but there should
  be at least one partner whose liability is
  unlimited.
• Partnerships of this type are controlled by the
  Limited partnership ordinance of 1907.
• This type of partnerships doesnt exist in modern
  global and Sri Lankan business context.

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Partnership Agreement
Partnership By Written agreement
Partnership By Oral agreement
Partnership agreement by Implication
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Partners imply to an external party,that there is
a partnership among partners,but they dont have
any formal agreement.
Partners only have a verbal/oral agreement among
each other.
We can use Implied verbal agreements when
the capital is less than Rs.1000 ,If the
capital equal or exceed Rs.1000 we should use
written agreement.
In this method of agreement,partners generate a
written agreement to which all have agreed and
signed.
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• Content of a typical partnership agreement
• ?The name of the partnership business
• ?The names addresses of partnership business
• ?The objectives of the partnership business
• ?The main business activity of partnership
• ?The nature of the business
• ?The principal location of the partnership
  business
• ?The term of the business
• ?Capital contribution by partners
• ?Sharing profits and losses among partners
• ?Other important specification
• ?Settlement of disputes
• ?Method of dissolution of the business

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1890 Partnership Ordinance
This is the main legal source that is applicable
for general/unlimited partnerships of Sri Lanka
Sentences Relevance
1-4 The nature of a partnership business
5-18 Nature of the relationships between external parties and partners
19-31 Inter-relationships among partners
32-44 Dissolution of partnership business
45-50 Additional sentences
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Content of the section 24

• The profit loss of the partnership must be
  equally distributed/shared among partners.
• All the partners have the right to participate in
  the activities of the partnership and they should
  not draw a salary for what they do.
• Partners are not entiled to receive an interest
  on the capital that they have invested in the
  business.
• If a partner besides his cap
• ital contribution has given a loan to the
  partnership, he has the right to get interest of
  5 per annum.
• If a partner were to incur privately an
  expenditure on the partnership, it could be
  reimbursed from the partnership.

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• The accounting books of the business could be
  checked by all partners all time.
• The accounting books of the partnership business
  must be maintained and kept at the head office of
  the business.
• The admission of a new partner must be approved
  by all existing partners.
• Although the ordinary decisions could be made
  with the consent of the majority but when more
  important decisions are made that should be
  approved by all partners.

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Main legal sources that effect partnership
business
Basic Dimension Interpretation
1890 Partnership Ordinance This is the main legal source that affets general partnership in which the liability of all partners is unlimited.
1907 Limited Partnership Ordinance This is the regulatory source that affets limited partnerships in which there is at least one partner whose liability is unlimited where as the liability of all other partners is limited
1918 Business Names Registration Ordinance This legal source says that when the business has been given a name which is different from the full name of the owners then the name of the business must be registered with the respective provincial council.
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2007 no 07 companies act Seletion 519 specified that the maximum number of a partners of a partnership business has to be 20(not more than 20)
1840 Prevention of Frauds Ordinance This regulatory source says that when ever the initial capital exceeds Rs.1000 there has to be a written agreement for the partnership business
Garner vs. Murray Judgement This judgement mentions that the liability of a bankrupted partner must be shared by other partners according to their latest capital balance ratios.
Pate Vs Pate Judgment This judgement has specified that when there is no written agreement partners can not sue against each other.
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Basics of a Partnership business
Ownership The partnership business is owned by all the partners who invested capital in the business
Capital Capital is introduced by the partners both at the inception of business and when the business requires additional funds to operate
Management The activities of partnership business are managed by the partners
Legal personality Partnership business doesnt have a legal personality and as a result the name of the partnership business cant be used in legal matters instead the names of the partners must be used.
Liability Usually the liability of all partners of on general partnership business is unlimited .However there can be limited partnership businesses with the partners of limited liability a long withat least one partners whose liability is unlimited.
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PerPectual succession Partnership businesses dont have a continuous existence
Risk Partners in a partnership business acknowledge higher risk as the profit is not quranteed and experiencing unlimited liability position.
Profit sharing When there is an agreement usually there is aprofit sharing ratio.However when there is not any agreed ratio profits must be equally shared among the part ners.
Registration According to name registration ordinance a partnership business has to be registered in the respective regional/provincial council,When it has been giving a name that differs from full name of the partners
Accounting Accounting is not copulsory,however accounting information is maintained to enumerate the profit and to share it.
Taxes Partnership businesses pay taxes to the government based upon the profits shared to the partners and payment is made as personal income taxes