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Business Organization
APS JAYATUNGA
LLB(HONS) & ATTORNEY AT LAW
Types of Business Organization
Sole Traders
Partnership
Joint Venture Private Sector
Companies
Clubs & Societies
Government Departments
Government Corporations
Government Companies Public sector
Business Acquired by the government
The factors taken into consideration when a type of business organization is distinguished from others.
Ownership 2.Capital 3.Decision making
Registration 5.Legal personality 6.Liability
Going concern 8.Tax payments9.Accounting & audit
Business Organizations of the Private Sector
Sole trader ship-It is a type of business organization where an individual makes the capital contribution and conducts the business on his own decision making, within minimum of legal procedures. The main reason in starting a business as well as in running a business in case of sole trader ship, it is possible to carry on without adhering to strict legal rules and regulations.
The Features of a Sole Trader Ship
The ownership is with one person
Could commence with minimum of legal procedures. Registration is not compulsory. However if the business is carried on under the name of another person, it should be registered under the Business Names Registration Ordinance (Business Names Ordinance of 1918).
The capital is supplied by the owner out of his savings or funds obtained from other sources.
Decision making by the owner himself. He has the control over the business.
The Features of a Sole Trader Ship
The profit and loss are borne by the owner himself. There is no sharing of profit with other persons. The earnings of profits depend on his decision.
There is no legal personality. That is in front of law the business is not treated as a person.
There is no continuity. That is on the death of the owner or on his full debility business could get terminated.
Accounting or auditing is not compulsory.
No taxes could be paid in the name of the business. The owner could personally pay the taxes.
The Features of a Sole Trader Ship
Although there are no special Acts affecting to sole trader ship the following acts which are common to businesses are effective regarding, sole trader ship too.
1. Consumer Protection Act 2.Employees Provident Fund Act
3. Shops and Offices Employees' Act 4.Employees Trust Fund Act
5. Labour Laws
Advantages of Sole Trader ship
Commencement is easy. That is with a minimum of Capital and with minimum of rules and regulations, business could be started.
Profit could be enjoyed individually.
Quick independent decisions could be made.
Registration is not compulsory.
The business could be terminated at any time one wishes.
Accounting and auditing are not compulsory.
The possibility of obtaining the services of ones' family members
Disadvantages of Sole Trader ship
1. Liability is unlimited 2. Lack of capital.
3. Losses have to be borne alone. 4. No continuity
5. No legal personality. 6. Difficulty in making correct decisions.
7. Difficulty in expanding the business. 8. Lack of managerial knowledge.
Partnerships
As per Partnership Ordinance of 1890, a partnership is a relationship which subsists among persons carrying on a business in common with the motive of making Profit.
Accordingly the following features are surfaced in a partnership.
The aim of making profits
Collective relationship
To act in unison (To act for a common aim)
Rules and Regulations Affecting Partnerships
Unlike in the case of sole trader ship with regard to partnerships there are a few rules and regulations which are directly influencing them.
Partnership Ordinance1890
Fraud Prevention Ordinance 1840
Limited Partnership Ordinance of 1907 (Not applicable to Sri Lanka)
Business Names Ordinance of 1918
Other rules and regulations (Case Decision Garner Vs. Murrey)
Partnerships
Fraud Prevention Ordinance of 1840 If in any partnership starting capital were to be
Rupees One Thousand (Rs. 1,000/-) or more it has been emphasized that it should be carried out on a written agreement. In this instance although it could be carried out without written agreement it would not be possible to get any relief from court in the absence of a written agreement.
Commencement of a Partnership
As partnership is a relationship between a few persons it could be started up in any of the following ways.
By verbal agreement among partners By coming in to a written agreement By implying or by the behavior of partners
Partnership Agreement
A partnership agreement is a written or verbal agreement which takes into consideration all the facts relating to carrying on the partnership business. This agreement could be maintained either as a written Agreement or a verbal agreement. If the agreement were to be a written agreement the following facts should be included in it. (By the Fraud Protection Ordinance of 1840 if the starting capital of any partnership were to be more than Rs. 1,000/=it should be compulsorily conducted on a written agreement).
The name of the partnership.
The name and addresses of partners.
The objectives of the partnerships.
The main business activities of the partnership.
The principal place of business of the partnership
Partnership Agreement
The duration of the partnership.
How the partners should contribute to the capital.
How the profit and losses are shared.
Whether interest is getting accumulated to capital or not.
Whether interest is due on drawings or not
Payment of interest on loans granted by the partners to the partnership.
The steps to be taken when a new partner joins the partnership.
The duties and the rights of partners.
Payment of salaries to the partners.
Settlement of disputes.
Method of dissolution of the partnership
Section 24 of Partnership Ordinance of 1890
In the following two main situations section 24 applies to a partnership.
1. In situations where the partnership is carried. On without an agreement.
2. In situations where there is a partnership agreement but existing when it is silent regarding certain facts (when it is not mentioned in the partnership/ agreement).
Section 24 of Partnership Ordinance of 1890
Contents of Section 24 of the Partnership Ordinance
The partners should equally contribute towards the capital.
The profit and loss should be equally distributed.
All the partners should participate in the activities of the partnership and they should not draw a salary for the same.
If a partner be sides his capital contribution was to give a loan to the partnership he should have a right to get an interest of at least 5%.
If a partner were to incur privately an expenditure on the partnership, it could be reimbursed from the partnership.
The accounting books of the partnership could be checked by all the partners at any time.
That the partnership's accounting books should be maintained and kept at the head office
Types of Partners
1.General Partner I Active Partner-He actively participate in the affairs of the partnership. His debility or death would result in the termination of the partnership. He has the right to actively participate in the managerial activities of the partnership. He has unlimited responsibility regarding his business activities.
2. Dormant I Sleeping Partner-He invests capital, but does not participate in the managerial activities of the business.
3. Silent Partner-He is a partner who has invested capital to a business and enjoys profit and loss but does not get involved in managerial activities.
4. Secret Partner-He is a partner who invests capital in his business with unlimited liabilities, enjoys profit and loss and participates in managerial activities. Public is not aware that he is a partner
Types of Partners
5. Nominal Partner-He does not contribute to the capital of the business. He invests his popular name or the goodwill only. Liability is unlimited and enjoys profit and loss. Does not participate in managerial activity.
Eg: Famous sportsman (Sanath Jayasooriya), Famous Actors (SharookKahn)
6. Limited Partner-His liability is limited only to the amount of capital he has invested.
7. Quasi Partner-He is a partner who has retired from his partnership .But he invests his capital in the business and makes profits. He is entitled to a variable interest or an additional profit based on the profits Earned by the business.
8. First Partner-The partner whose name appears first in the documents of registration of the agreement and other publications. Usually problems such as tax payments are addressed to the first partner.
Comparison of Different Types of Partners
Variable factor Active partner
Dormant partner
Silent Partner
Secret partner
Nominal Partner
Quasi Partner
Limited partner
First partner
1. Capital Investment2. Liabilities3. Participating in
managerial Activity4. Is public aware as a
partner 5. Receiving profit and
loss6. Receiving salaries7. Receiving an additional
interest or profit (or verifying interest)
Unlimited
Nil
Unlimited
NilNil
Nil
Nil
Unlimited
Nil
Nil
Nil
Unlimited
Nil
Nil
Unlimited
Nil
Nil
Nil
Unlimited
Nil
Nil
Unlimited
Nil
Nil
Nil
Unlimited
Nil
Nil
Duties of Partners
Every Partner should contribute to the capital.
Profit and loss should be shared on agreed ratio.
No Partner should make secret profits from the activities of the Partnership.
Should not derive a salary or a wage, by participating in Partnership Activity.
Should not get engaged in competitive business with the partnership business.
Should maintain the confidence of the Partnership as well as the confidence among the partners.
Should not behave in a way damaging the goodwill of the partnership.
Should be jointly and severally, liable for the activities of the partnership.
The liability of all the partners is unlimited on the loans taken by the partnership.
Rights of Partners
The right to share profits in the agreed ratio.
The rights of all other partners to share secret profits, when a single partner receives such profits.
The right to participate in the affairs of the partnership.
The right to check up the books of the partnership.
The right to get at least a minimum of 5% interest on moneys invested be sides the capital that has been invested.
Right of reimbursement of expenditure incurred personally or the partnership.
The right to enter into agreements on behalf of the partnership.
The right to recruit staff on behalf of the partnership
Dissolution of Partnerships
1. Voluntary Dissolution
A partnership is dissolved voluntarily, under the following circumstances.
On the death or bankruptcy of the partner.
By completion of the purpose for which the partnership was formed.
After achieving objectives of the partnership.
By the consent of all the partners.
At the expiry of the period of agreement.
Dissolution of Partnerships
2. Dissolution by Court
A partner becoming a lunatic.
A full debility of a partner who cannot any way get engaged in the affairs of the partnership.
When a partnership makes continuous losses it may be dissolved by considering a request made by a partner.
When a partner is violating the partnership agreement over and over again.
When a partner is convicted by a court and imprisoned.
Misbehavior of a partner.
When the court decides that the liquidation of the partnership is justifiable.
When it is illegal to continue the partnership further.
The Advantages of a Partnership
Easy to start (compared with a company).
Could collect more capital (compared with the sole trader ship).
Liability is divided among many persons.
As decisions are made collectively, better decisions could be implemented.
The ability to get competent persons to join as partners.
Possibility of expanding the business.
Not required to submit accounts to the government(as in a company)
The Disadvantages of a Partnership
As the liabilities are unlimited even the personal property of a partner is bound under the liability.
Absence of a legal personality.
Inability to collect adequate capital (relative to limited liability companies).
Disagreements among partners, bankruptcy, debility and partners leaving the partnership are Obstructions to the continuity of the partnership.
The inability to raise capital from outside parties.
No proper control of resources as accounting and audit.
Difficulty of implementing the decisions at one’s own discretion.
Difficulty of transferring the rights of a partner to another party without the consent of the other partners.
As the maximum number is 20 persons, ownership and capital will be restricted.
Joint Ventures
A joint venture could be defined as a relationship built up for a short period of time for the purpose of achieving a definite purpose. Usually in this instance a name of a business is not used. Once the expected purpose is achieved the joint venture too gets terminated. It is a temporary type of business organization.
The Differences between a Joint Venture and a Partnership
Partnership Joint Venture
1. Long term type of business organizations
2. Normally it operates with in agreement
3. Usually business operates take place
under a business name.4. Normal book keeping is maintained
(no special system of accounting)
1. Short term type of business organizations
2. Not bound by an agreement
3. Such business name is not found
4. Accounting is done under a special system
Limited Partnerships With in Sri Lanka, permission is not given to start this type of
partnership. In this type of business there too are bound. But with regard to limited partners their liability is limited only to the capital they have invested.
The Features of a Limited Partnership
There are partners with both limited and unlimited liabilities.
In a limited partnership there should be at least be one unlimited partner and a minimum of one Limited partner.
The limited partners’ cannot participate in the management activities of the partnership.
The limited partners have no capacity to enter into agreements (on behalf of the partnership).
There is no possibility of drawings on the capital without the approval of the other partners.
Comparison of Sole Trader ship and a Partnership
Verifying Factor Sole Trader ship Partnership
1. Capital contributed2. Legal Influences3. Registration4. Liability5. Legal Personality6. Book Keeping7. Distribution of profits
8. Decision9. Dissolution
10. Continuity
By proprietorNo effect from any law or actNot compulsoryUnlimitedNilNot CompulsoryNil By the proprietorBy the proprietor Nil
By the partnersPartnership Ordinance of 1980.Not CompulsoryUnlimitedNilNot CompulsoryProfits should be distributed among partners, on the agreed ratio By the PartnersCould be dissolved voluntarily or by court.Nil
Companies
Incorporated Companies
The Companies Act No.7 of 2007 shall apply, to all Incorporated Companies in Sri Lanka.
Definition of Incorporated Company
In terms of the Companies Act No. 07 of 2007, an incorporated Company is defined as follows.
"It is an incorporated or unlimited liability institute having registered under the Companies Act and functions according to the provisions of same being treated as a person before the law."
Table of Classification of Companies
In terms of the Companies Act No.07 of 2007, the Companies are mainly of three forms.
1. Limited Companies-It is a Company where the liability of the shareholders is limited only up to the quantity specified in the Articles of Association, based on the number of shares subscribed by them.
2. Unlimited Companies-The liability of the shareholders of these companies is not limited to the number of shares held as specified in the Articles. In addition, they are bound for the settlement of company's liabilities without any limit.
3. Companies Limited by Guarantee-These Companies do not issue shares and in case of settlement of company's debts or liabilities shareholder are liable up to the extent specifically mentioned in the articles of association.
Features of a Company Limited by Guarantee
Does not issue shares
Binds up to the value of fixed guarantee as shown in the Articles, in case of settlement of liabilities.
There should be an Articles of Association which specifically states the following.
Objectives of the Company
In the event of the winding up of the company the amount each member should contribute to the assets for the settlement of liabilities should be indicated.
It is possible to register as a "Company limited by guarantee" without inserting the word "limited" to the name of the Company.
Private Limited Company A Private Limited Company should be interpreted as an incorporated organization which
cannot sell in public by issuing a corporate statement its shares or securities to the public, where the maximum number of shareholders is limited to 50 and liability is limited, which has a legal personality and it has to be registered under the Companies Act
Features of a Private Limited Company
Maximum of shareholders is limited to 50.
Shares or other securities cannot be issued to the public.
Should be subject to statutory control and to the shareholders control as well.
The management of all the activities should be by a Board of Directors.
Liability is limited.
Has a legal personality.
Minimum number of directors is 01.No limit in regard to the maximum.
Could refrain from following certain provisions of the Companies Acton a written unanimous Consent of the shareholders.
It is compulsory to maintain Accounts.
When mentioning the name of the Company, the word "Private Limited" should be stated.
Shares cannot be transferred without the consent of other shareholders.
A Public Limited Company
A Public Limited Company is one which can offer shares or securities to the Public which can purchase them openly. The shares are freely transferable and there is no limitation as to the minimum number of shareholders to be one. It has a legal personality and has limited liability. It is incorporated under the Companies Act.
Features of Public Limited Company
Minimum number of shareholders of 01.As regards the maximum there is no limit.
Shares or other securities could be offered to the public to purchase openly (Shares or Securities could be sold to the public openly).
Shares can be transferred freely.
Subject to statutory control and the control of shareholders.
Has a legal personality.
A Public Limited Company Liability is limited.
Board of Directors minimum of 02, no maximum limit.
After examination of the capacity to payback loans, dividends or any other payments could be made.
It is compulsory to maintain Accounts and render statements of Accounts to the Registrar of Companies.
When indicating the Company's name the word "The Public Company" should be indicated.
Could be registered in the Share Market as a quoted Company.
Any large sale business could be undertaken.
There is Continuous existence.
.Taxes could be paid in the name of the company.
Accounting and Auditing is compulsory.
Could be dissolved voluntarily or under the supervision of the judiciary or by the judiciary.
Disadvantages of a Public Company The initial cost of establishment is excessive.
Should a bide by the rules and regulations of the Companies Act.
Having the losses within the business itself.
Possibility of acquisition by another company (possibility of becoming a subsidiary).
Difficulties in Management
Private Limited companies Public Limited Companies
1. The maximum numbers of
members is 502. No authority to sell shares or
securities publicly.3. Minimum numbers of directors 014. Shares transferable freely5. Cannot be registered in a share
market as quoted company6. Distribution of profit could be
made without checking the payment of loans.
7. Not compulsory to render the annual report along with the statement of accounts
1. No limit in the case of maximum membership.2. Shares or other securities could be sold out publicly.3. Minimum numbers of directors 024. Shares could be transferable freely5. Can be registered in the share market as a quoted
Company.6. Distribution of profit could be made without checking the
payment of loans.7. It is compulsory to render the annual report along with the
statement of accounts
Registration as a Limited Company All Limited Companies should be registered at the office of the
Registrar of Companies under the Companies ActNo.07 or 2007 and for that the following documents should be submitted.
The Promoters of the Company should sign and hand over the form duly issued by the Registrar of Companies.
Company's Articles of Association.
Statement of shareholders regarding the name of the Company.
The Statement of Consent obtained from Directors regarding the willingness to work as Directors.
The Statement of Consent obtained from the first Secretary to function as the Secretary
Matters included in the scheduled application issued by the Registrar of Companies
The Promoters (the original members) of the Company should duly fill the required forms and hand over to the Registrar of Companies. This is known as Form No.1. The details included therein are:-
The name of the proposed Company.
Whether Limited, Unlimited or a Company limited by Guarantee.
Registered address of the Company.
Names, Addresses and Identity Card No’s .of persons who have consented to work as inceptive Directors.
Names of two inceptive shareholders.
Name/Names, Addresses and Identity Card Nos. of person or persons those who have Consented to work as the inceptive secretary.
Applied shareholders Names, Addresses and Identity Card Nos. etc.
Articles of Association
The most important document which should be forwarded to the Registrar of Companies duly signed by the promoters is the Articles of Association. This is equivalent to the agreement between the shareholders and the Company. This relates to the internal administration of the Company. Some of the provisions could be amended on a special motion being passed.
The Companies Act. No. 07 of 2007 states that the Articles of Association should have the following provisions.
Objectives of the company.
Rights and duties of the shareholders of the company.
The management and administration of the company.
Articles of Association
The contents are as follows:(only a few)
Objectives of the Company.
Provisions on the issue of shares.
Rights and duties of shareholders.
Provisions relating o the payments of dividends.
Provisions relating to the Company meetings.
Provisions regarding voting and the quorum.
Provisions on the appointment and removal of Company Directors, Duties and responsibilities of the Director.
Powers of Directors.
Accounting and Auditing.
Provisions on dissolution of Company.
Provision regarding the use of name of a Limited Company
There are several provisions governing the naming of a limited company listed in the Companies Act.No. 07 of 2007.
In all companies except Quoted Companies, the word "Ltd" should be included at the end of the name of the Company.
If it is a Private Company the word "Private" should be inserted before the word Company. If it is a Public Company the word "Public" should be used before the name of the company.
Equivalent names to the existing company names or misleading names should not be used.
Without the written approval of the Minister of Trade the words "Chamber of Commerce, President, Sri Lanka, State, Society, Cooperative, Corporation." Should not be used.
N.B: Name of the Company could be changed with the prior approval of the Registrar of Companies by passing a special resolution by the company.
Certificate of Incorporation
This is the document issued by the Registrar of Companies indicating than an institution has been registered as a company. This is equivalent to a Birth Certificate of a person. Legal personality is confirmed after the receipt of this certificate.
The following information is included in the Certificate of Incorporation.
The Name and the Registration Number of the Company.
The Date of Registration of the Company.
Whether the relevant Company is a Limited Company, Unlimited Company, or a Company
Limited by guarantee.
Whether the Company is a Private or a Public Company.
Whether the Company is an off shore Company.
Prospectus
Prospectus is an offer to the Public to participate or to purchase the shares of a Company or any debentures by issuing a Corporate Statement, Notice, Circular, Advertisement, or any other Invitation. Though it has been stated in such a Corporate Statement notice, Circular or in any other invitation that it is not an offer, it should be ignored and those too get included.
Sections from 36 to 44 of the Companies Act deal with the prospectus and all corporate statements Issued should include there in specifically the information given in part 1of the schedule four of the Companies Act and also what is specifically mentioned in the Schedule II should be shown in the prospectus.
Main Topics to be included in a Prospectus
Businesses activities expected to be attended to by the Company during the first five years.
Deferred shares if any.
Details of directors.
Specific number of shares the Directors should take.
Particulars of minimum participation.
Period of opening and closing of participation list.
Manner of applying for shares and how payment should be made.
Amount to be paid at the time of application for shares and allotment of shares.
Details of auditing of Company.
Particulars of subsidiary Companies administered.
Particulars of Assets and Liabilities.
Minimum Subscription
According to the opinion of the Directors, the amount of capital referred to in the prospectus is the minimum amount of capital to be obtained from the issue of the share capital which is known as the minimum subscription. Unless this minimum amount is received on application no share capital offered by the company to the public should be allotted.( This is state ting Section 45 of the Companies Act.)
The following expenditure could be settled by using minimum subscription.
Purchase of fixed assets.
Settlement of initial expenditure.
Settlement of debts for the above purpose.
To provide for working capital.
shares
Underwriting of Shares-If the public has not participated for the minimum amount of share (minimum subscription ) of the total Shares issued by a Public Limited Company, the agreement entered into with a financial institution for The purchase of that amount of shares is known as underwriting. In order to escape from the risk of Unavailability of minimum subscription, share underwriting is very important. The company which Issues shares to a Financial Company pays" share underwriting" commission as benefits. Licensed Commercial Banks in Sri Lanka, Licensed specialized Banks and Merchant Banks are the financial companies engaged in share underwriting.
shares
Nature of Shares -Nature of shares and types of shares are given in Section 49 of the Companies Act. The shares issued By the company accordingly are considered as a movable property, of the company.
By the Company's Articles of Association the following rights are conferred on the relevant shareholder who owns a share of the company.
The right to exercise one vote for one share at a vote taken for adopting a resolution
Right to have an equivalent quota in the profits payable by the company.
Right to have an equivalent quota in the distribution of excess assets in liquidation
shares
Different Types of Shares
Different classes of shares can be issued by a Company. The following are included among them.
Ordinary shares
Preference shares
Special shares.
Shares with voting rights
Shares without voting rights
It would be seen that as per decision of the Board of Directors as indicated above, various rights, privileges, and shares with liabilities could be issued as required by the Company.
shares
Shares issued accordingly could be of the following nature.
Ordinary/ Equity shares
Preference shares
Special shares
Shares with limited or conditional voting rights
Shares with non voting rights
Redeemable shares
Ordinary Shares-Shares which give the actual stake of a company are called' Ordinary Shares'. There are no fixed profits for them and the due profits to them will be decided upon by the Board of Directors. In the years of high profit higher dividends are paid and in the years of less profit lesser dividends are paid, and the year in which there is no profit the declaration of allotment of profit is at risk. These shares are entitled to controlling powers.
shares
Preference Shares-Preference shares are those for which a definite percentage of dividends are stipulated at the time of issue. Even if there are no profits, dividends have to be paid. At the time of paying up the capital priority is given over that of ordinary shares and normally it represents the loan capital. Does not directly involve with administrative functions.
Deferred I Founders Shares-The shares issued to the persons who initiated the establishment of the Company are called by this name. At the dissolution of the company payments will be made last and released.
Non-Voting Shares-Those who hold these shares have no right of voting at the annual general meetings, but all features of ordinary shares could be seen.
Cumulative Preference Shares-Cumulative preference shares are issued with the provision that the stipulated dividends which are not paid during a year due to low profits are payable as arrears during a subsequent year or in a year in which profits are made along with the dividends of the relevant year.
shares Non-Cumulative Preference Shares-Non-cumulative preference shares
are a special kind of preference shares which are not entitled to unpaid dividends of a previous year as arrears to be paid in a subsequent year.
Participative Preference Shares-These are a kind of preference shares issued with the entitlement to some portion of the balance profit after making payments of dividends proposed for ordinary and preference shares.
Cumulative Participating Preference Shares-In the case of these shares, while unpaid arrears of dividends of a low profit year could be obtained in a subsequent year, an extra dividend could be obtained in addition to the normal dividend during year of excessive profits.
Redeemable Preference Shares-Preference shares obtained on the basis of redemption after the expiry of a particular period are called redeemable Preference Shares.
Non-Redeemable Preference Shares-Non redeemable Preferential Shares are those that cannot be redeemed after the expiry of a particular period.
Stated Capital
The stated capital of a company is the sum total of money received by and receivable to a company in respect of
The issue of shares
Invitation to subscribe
It is possible to reduce the stated capital by an amount required, bypassing a special resolution.
