Legal Forms of Business in Sri Lanka

Introduction A dividing line alike c on the wholeed a club, enterprise or firm is a soundly recognized organization, de sign(a) to declargon sensationself goods and services to consumers. According to the purpose of the line of work, self-will of the agate line and nature of economic contri providedion of the stock the disdain jackpot f all(prenominal) into one of the three standard welkins. in that respect ar confidential sector, world sector and non pay sector. The part of the economy concerned with providing basic regime services is called frequent sector.In nearly countries the macrocosm sector includes such services as the military, earthly concern transit, primary education and healthc ar. Their aim is to concord service to the people and less emphasis is made on profit making. macrocosm cooperation is the widely cognize fount of public sector business entity. The non-profit sector is derived with organizations that do non distri juste their surplus coin to owners or sh atomic number 18 engageers, but instead use them to help pursue their goals. Examples include charitable organizations, trade unions, and public arts organizations.In semiprivate sector, businesses are financed and controlled by individuals or private institutions, such as companies, strainingholders, or investment groups. These businesses run for private profit and they are not controlled by the state or the government. There are legion(predicate) types of business entities defined in the private sector and authorized by the level-headed systems of various countries. These sound public figures of business include Sole Proprietorship Partnership ( ordinary Partnership, hold Partnership and crossroads Venture) Corporation (C Corporation and S Corporation) particular(a) Liability friendship (Private and Public)These legal human bodys drop been derived according to their author of the large(p), Value of capital investment, Nature of ownership, Nu mber of owners, Nature of financial obligation and m all otherwise factors. Each legal form has its own advantages as well as disadvantages. When making a decision to the highest degree the type of business to form, there are several criteria you need to evaluate based on advantages and disadvantages of above mentioned legal forms. The to a greater extent or less primal fact is cost of formation of the business and cost of ongoing administration. This includes cost of record-keeping and paperwork, as well as the costs associated with administrative requirements.Legal liability is the next thing to be considered and it defines to what consummation the owner need to be insulated from legal liability. Based on the individual situation and goals of the business owner, he has to consider what the available tax implications are because it is also an important factor. Finally the owner has to think ab come out of the closet the future needs and whether the legal forms support flexi bility feature. Sri Lanka phoner Act, zero(prenominal) 7 of 2007 and Company Act, No. 17 of 1982 micturate defined Sri Lanka legal forms of organizations, which throw out be the choices for Sri Lankan business community when forming a reinvigorated business.Legal Forms of business in Sri Lanka include Sole Proprietorship restrict Liability Company (Private and Public) frequent Partnership Sole Proprietorship A mend proprietary also known as a repair trader is a type of business entity which is owned and run by one individual and where there is no legal distinction between the owner and the business. Sole proprietorships are forms of business ownership that mingle the owners rights, liabilities and responsibilities with the business rights, liabilities and responsibilities.Regardless of the state of the business, the procedures we need to fol mild to form a doctor proprietorship are fairly simple, and do not even require an attorney, accountant, or business consultant. There are no legal requirements for establishing a sole proprietorship, other than obtaining the demand local business license and permit. As the sole proprietor, owner has the broad control and responsibleness for the business and its operation and he makes all the decisions. With this type of business entity, owner has complete freedom over run(a) the business, because he is responsible for all minutes and activities overstep in the business.All assets of the business are owned by the owner and all sugar and all losses accrue to him. He is in the flesh(predicate)ly responsible for all debts of the business and moldiness pay them from his individualized resources. This performer that the owner has un special personal liability for the business. Also, owner is less burdened by government restrictions and control, and he has less to do in ground of reporting and taxes. The main advantage of a sole proprietorship is that they are easy to start up and to close. The reason i s, they are less expensive and also subject to fewer regulations compared to other types of businesses.Since the owner has full autonomy with regard to business decisions, sole proprietorship businesses are easy and inexpensive to discontinue. The second advantage is that the owner can take all the profits of the business and there is no profit sharing. This whitethorn be the or so significant motivation for around businesses to become sole proprietorship type. At the same time, all losses accrue to the owner and he does not rush the tension regarding conflicts among the partners as there are no partners.In sole proprietorship business type, the owner of the organization pays self employment taxes on the profits made. It makes tax filing oftentimes simpler and hence this can be considered as another advantage for sole proprietorship business type. Since this is not a potbelly it does not pay unified taxes. The remarkable disadvantage of the sole proprietorship is that the sole trader will likely have a hard time with raising capital since he has to make up for all the businesss funds. He whitethorn have to use his own cash or personal loan for the business.The next disadvantage is the owner of the business has un hold liability as he is responsible for the businesss debts. As the business grows, the risks ac caller-uping the business also tend to grow, and if the business is sued, owner and his personal assets are at risk. Sole proprietorship business type is actually prominent in Sri Lanka, may be because form of the business is very straightforward. As a third world country with low rate of individual income, starting up a business with low capital is a very convenient factor for any Sri Lankan business person who is thinking of having an own business.There several home plate based business running in Sri Lanka such as groceries, stationary shops, pharmacies, fashion stores and they can be categorize as sole proprietorship business, because they ar e owned by single person. Freelance writers, counterpart editors, photographers and craftspeople also have chosen to run their businesses as a sole proprietorship. Sri Lankan government has identified the enormousness of sole proprietorship businesses, in terms of their contribution to the countrys discipline.So the government is supporting(a) this business community, to develop their businesses, by providing necessary financial aids, resources, equipment and guidance. Since Sri Lana is based on an agricultural economy, we can hike up more farmers to form their own sole proprietorship businesses to incorporate on their goods, and this will reduce the terrible cause occurring from the intermediate business people. If farmers can sell their goods lookly to consumers, they may be able to get full profit and it will encourage them to develop their business. This will ultimately lead to a high development in Sri Lankas economy as well as society. bound liability Companies (LLC) A Limited Liability Company (LLC) is a type of business organization that combines some aspects of a stomach with those of a sole proprietorship or league. The primary characteristic a LLC shares with a corporation is limited liability that is personal liability of companys members for the businesss debts is limited. The primary characteristic LLC share with a league is the availability of pass-through income taxation that is LLC is not taxed as a assort entity. Forming a LLC may not be as simple as a sole-proprietorship however, the process is much less than a corporation.There are two main actions Articles of organization Have to file articles of organization with the writing table of province and pay the required fees. Articles may be brisk by a lawyer. An LLC business entity may be file as a corporation, partnership or sole proprietorship in terms of tax go past. Operating Agreement Have to develop an operating scorement which helps to define the company profit sharin g, ownership, responsibilities, and ownership changes An LLC may have one or more owners, and may have divergent classes of owners.If the LLC has a single member, it will be disregarded as separate from its owner, and will be treated as a sole proprietorship or a part of its owner, unless it elects to be taxable as a corporation. An LLC that is filed for taxation as a partnership can secure both conduit tax treatment and limited liability protection under civil law and a LLC filed for taxation as a partnership does not have the ownership restrictions. An LLC is typically managed by its members, unless the members agree to have a manager handle the LLCs business affairs. LLCs do not recognise stock and are not required to hold annual meetings or keep written minutes. oecumenically, members of an LLC that are taxed as a partnership may agree to share the profits and losses in any manner. Members of an LLC fill profits and losses in the same manner as shareholders of a corporati on. In ecumenical, all the owners and members are shielded from individual liability for debts and obligations of the LLC. The main advantage of LLC is that owners of the LLC have the liability protection of a corporation because it exists as a separate entity much like a corporation. Also members do not hold personally liable for debts unless they have signed a personal guarantee, and this is a great relief for all the members.LLC can select varying forms of distribution of profits, unlike a common partnership where the split is 50-50. consequently flexible profit distribution is another advantage of LLC. The LLC business structure requires no corporate minutes or resolutions and is easier to operate. This can be pointed out as the next advantage of LLC. All the LLC business losses, profits, and expenses move through the company to the individual members. So, it avoids the double taxation of paying corporate tax and individual tax. full generally, this work through taxation wi ll be a tax advantage.The most(prenominal) significant disadvantage of LLC is the limited life time of business. A LLC is dissolved when a member dies or undergoes nonstarter whereas corporations can withstand forever. Business owners with plans to take their company public, or issuing employee shares in the future, may be not beat served by choosing a LLC business structure, because going public is bit complicated with LLC. So this can be again a zippy disadvantage of LLC structure. Running a sole-proprietorship or partnership will have less paperwork and complexity compared to LLC.So this added complexity also can be pointed out as a disadvantage of LLC structure. There are two major types of companies operating with limited liability status in Sri Lanka. ? Private Limited Companies ? Public Limited Companies Private Limited Companies A Private Limited Company, theoretically also refer to a private company limited by guarantee, is a type of company incorporated under the laws of England in certain Commonwealth countries. Private limited companies are required to have the suffix Limited (often written Ltd or Ltd. ) or Incorporated (Inc. ) as part of their name.It has shareholders, but its shares may not be offered to the general public. This core that shares are usually sold to family, friends and business contacts. The liability of the shareholders to creditors of the company is limited to the capital originally invested that is to the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholders personal assets are thereby protected in the event of the companys insolvency, but money invested in the company will be lost. Most companies, particularly small companies, are private limited companies.One of the main advantages of Private Limited Company is, they are easy to set up because the shares are sold among family, friends and business contacts. Limited liability is another advantage of a Privat e Limited Company. The shareholders liability is limited to the value of the shares held by them. If things go wrong for the business, personal assets of a shareholder cannot be used to pay off the debts. Since boards of directors are usually the main share holders, the ownership and the control are closely connected. Therefore decisions can be taken more quickly and this can be pointed out as another advantage.A Private Limited Company has a separate legal existence. This means that properties will be owned by the company itself and all contracts would be signed on its behalf. The directors and secretary can only act as agents. Therefore the company is not dissolved on the resignation, bankruptcy or death of a director which is a spanking advantage of Private Limited Company. The company can be dissolved only by winding up, liquidation or order of the registrar of Companies or by the Court. When we think about advantages, tax benefits of Private Limited Company are also can be co nsidered.The directors of the company are required to pay income tax but the company pays corporation tax on company profits which is one rate of tax only and averages out at much less than if income tax were paid on the profits. Though Private Limited Company has many advantages, there are some disadvantages which often deter small- and medium-sized business owners from setting up private limited companies. Many Private Limited Companies are very profitable. Unfortunately, these profits can become diluted because they must be evenly distributed among all shareholders, and many Private Limited Companies have up to 50 shareholders.So this becomes the major disadvantage of Private Limited Company. The next point that can be a vital disadvantage is shareholders in a Private Limited Company are not able to sell or transfer their shares to the general public. The 50 or so shareholders that comprise a Private Limited Company must keep their shares and cannot trade them on any stock exchan ge. A Private Limited Company can be quite complex to create, meaning that lawyers and accountants almost always need to be involved in the Private Limited Company from the start.This can be costly and hence a disadvantage. The importance of Private Limited Companies in Sri Lankan economy over the last 15 years has been tremendous. The spring up of Sri Lankan economy has led to free inflow of investments along with modern cutting edge technology, which change magnitude the importance of Private Limited Companies in Sri Lankan economy considerably. Previously, the Sri Lankan trade was ruled by the government enterprises but the scene in Sri Lankan market changed as soon as the markets were unmannerlyed for investments.This saw the rise of the Sri Lankan private sector companies, which prioritized customers need and speedy service. Most of the pioneering businesses in to solar days Sri Lankan business world are categorized as Private Limited Companies. Some of the best examples ar e Richard Pieris & Company PLC (One of the largest and most successful diversified business conglomerate), Abans Group Abans Private Limited (Represent world famous brands of household items), vocaliser (Sri Lanka) PLC (Household durable company), ODEL (PVT) LTD (Sri Lankas foremost fashion gallery).Private Limited Companies are often considered the Sri Lankas version of limited liability companies. This may be because for many years, forming businesses with the family and friends has been a custom of Sri Lankans. There are many examples such as Perera and Sons (PVT) LTD (One of Sri Lankas foremost baker and caterer), H. Don Carolis & Sons (PVT) LTD (Manufacturers of fine hand crafted wooden furniture), Ebert Silva Touring Co. Ltd (pioneering Company in the move around and tourism industry) . These are consider as successful family businesses and categorized under Private Limited Company type businesses.To promote private sector domestic investments, the Sri Lanka government has recently brought the bank have-to doe with place down from 20 percent to around 10 percent for borrowings. Public Limited Companies A public limited company (legally abbreviated to plc with or without full stops) is a type of limited liability Company incorporated under the laws of England in certain Commonwealth countries and it is permitted to offer its shares to the public. This means that Shares in a public limited company, can be traded on the Stock Exchange and can be bought by members of the general public.The Capital needed to start a Public Limited Company could come from two different sources part of the money comes from a loan from the bank, and the rest comes from shares sold to the public, via the stock market. The liability of the shareholders to creditors of the company is limited to the capital originally invested that is to the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholders personal assets are thereby protected in the event of the companys insolvency, but money invested in the company will be lost. The dividend is paid out using the profits from a PLC.The profit of the public limited company is divided into percentages and is paid out to shareholders. There are many advantages of operating the business as a Public Limited Company, and of registering the company on the stock exchange. For example, equity capital obtained from an initial public offering is considered a permanent form of capital since there is no interest to be paid on the equity, and it is not repayable like debt. Funds generated by a public offering are, therefore, considered a relatively safe form of capital for a business and this can be pointed out as the main advantage of the Public Limited Company type.Going public can also allow a company the freedom and flexibility to spend capital, as it needs to finance its growth and only development, providing a solid financial base on which to build. This will be a vital motivate point for anyone who think to start a new business as Public Limited Company. Many companies use stock and stock option plans as an incentive to attract and maintain talented employees. It is increasingly common to recruit and compensate executives with a combination of salary and stock. Stock can be instrumental in attracting and keeping key personnel.Public companies are more likely to fit the attention of major newspapers, magazines and periodicals. The proper use of press releases, interviews or news stories can increase investor awareness, shareholder value, and demand for the stock, sales and revenue. Once a company becomes public it has to disclose so much data to public on regular intervals. This includes share holding pattern, quarterly and annual financial statements, profiles of directors etc. So it can be pointed out as one of the disadvantage of Public Limited Company.In a Public Limited Company decisions take time is too long and it also can be a disadvantage. This is because implementation of any key decision is subjected to the approval by the board of directors elected by share holders. Shareholders in public companies expect a steady stream of income from dividends, which might mean that the business has to concentrate on short term objectives of creating a profit and this may be a vital disadvantage because it might be better to work on longer term objectives, such as growth and investment. The most significant disadvantage Public Limited Company has is the threat of takeover.This is because they are traded publically and another company can buy up a large number of shares and they can thusly persuade other shareholders to join with them to vote in a new management team. The Sri Lankan stock market has become quite vibrant and booming, particularly as a result of the end of the war, and this was a graphic point for growth of Public Limited Companies. New companies made their public offerings and were oversubscribed during the first day itself. There is considerable demand for company shares in the market and we can see many giants companies have turned into Public Limited Companies.These companies represent banking, finance, amends, healthcare, telecommunication, food, beverage and so many other sectors. Most important examples are Commercial Bank of Ceylon Ltd (Adjudged as the best bank in Sri Lanka), Janashakthi Insurance (3rd largest general insurance company in Sri Lanka), Sri Lanka Telecom Ltd (The premier telecommunication service provider in Sri Lanka), Cargills (Ceylon) Ltd (Sri lankas largest food network) and Nawaloka Hospitals Ltd (Asias largest and most trusted healthcare hospital).The end of the war has put Sri Lanka on the radar of global companies as a country with attractive investment proposition opportunities. As the issuances of shares by resident companies to foreign investors are permitted in terms of a general permission, many resident companies have issued their shares to foreign investors. They include Lanka IOC (75% of shares owned by Indian Oil Corporation) and Millenium IT (Shares were bought by London Stock Exchange). General PartnershipsA General Partnership is the most simplistic type of legal structure designed for the situation in which two or more people are collaborating in some type of business activity. The entities involved in a partnership can be individuals, corporations, or trusts. General partnerships are usually started with good friends or family. Starting up a new business is a huge risk and gigantic leap of faith. People who open up general partnerships need to trust each other and work well together.Even if the business does not need a chain reactor of assets to start or operate, still it needs a lot of money to open up a business. General partnerships allow more than one individual to carry the financial burden. This is ideal and makes a business much easier to open. By default, the profits and losses generated by a Gener al Partnership are shared equally among its partners. However, typically a partnership agreement is created to further define the rights, responsibilities, and duties of each partner, as well as the terms of perpetuity if one of the partners withdrawals from the partnership.Financial responsibility is shared equally among the partners, with each partner jointly and severally liable for all business debts and obligations which means that the partners are jointly liable for any and all legal claims against any of the partners. The taxation of a General Partnership is calculated at the individual level. General partnerships can be less expensive to form with a limited start up cost and it has a shared financial commitment, which can be consider as main advantages of this business type.Also it requires less paperwork and formalities which encourage people to form their businesses as general partnerships. General partnerships can thrive when each partner brings a specific military unit to the business. If each partner takes on a defined role and there is general agreement on the business plan, goals, and visions from the outset, a partnership can be advantageous. Work can get done more quickly, and having several partners involved will increase the potential of acquiring resources and attracting backers. In the end, the success of such an end depends largely on the personalities of the parties involved.General partnerships offer members the advantages of shared risk and total control over the transactions of the business. One of the most significant benefits of a General Partnership is simplified tax filing, since no corporate forms or double taxation is required. As a pass-through tax entity, this form of business pays no direct tax instead its individual owners carry the tax burden However, the wide array of disadvantages of a General Partnership is what makes it arguably one of the worst organizational business structures available.Because of the lack of corpo rate structure, a General Partnership does not establish any kind of separate business entity from the partners. This means that the partners are all told unprotected from any litigation against the business, and their personal assets can be seized at any time to click the unmet obligations of the business. Even worse, each partner is liable for the actions of the others on behalf of the business. So if one of the partners was to execute an agreement without the companionship of the others, each partner would become equally obligated to the terms of that agreement.The same is true for credit obligations. If any of the partners secure credit on behalf of the business, each partner would become equally obligated to the terms of that debt. In addition, without a Partnership Agreement, there is no guarantee of perpetuity for a General Partnership if one of the partners dies, becomes disabled, or withdrawals from the business. For these and other reasons, general partnership agreement s should be drawn up carefully with legal counsel, and signed by all partners.Additionally, there should be a means in place of dissolving the partnership in the case of death, disability, or if one partner should want out of the business for any other reason, personal or professional. Sri Lanka, as a country with low individual income, general partnership would be an idle business type because it gives you pool of resources and financial encouragement to start a new business. Since family businesses are very famous in Sri Lanka, anyone can get together with his family and friends to form the business.Since each partner has a vital contribution to the business, skills and abilities of them will guide the business to success. There are several businesses in Sri Lanka, prosecute in all types of sectors such as grocery, pharmacy, restaurant, book shop and laundry which can be categorized into general partnership business type. Sri Lankan government has identified the importance of gen eral partnership businesses, in terms of their contribution to the countrys development. So the government is encouraging this business community, to develop their businesses, by providing necessary financial aids, resources, equipment and guidance.