A partnership business commonly form by gathering 2 or more
people for a common business goal. Most of the time these people may have
common business ideas that they wish to put forward or offering their service
through their skills and knowledge might make a good business team.
According to the Sri Lankan Law the maximum number of
members that can be represent as partners are 20. According to the law it is
not necessary to register the company unless the partners are using different
name except from the names of the partners.
Mr. per era and Fernando can also start the Limited
Liability (Private) company as there are two partners in action. According to
the 1982 Act number 17 a limited Liability Company is a type of business that
can have maximum number of 50 members but cannot trade shares to the public to
raise the capital. This company type need to be registered according to the
Company act of 1982.
These are the fundamental laws of the 2 types of the
business in Sri Lanka. Let consider the strong and weakness of the 2 types of
business. Most of the time the strong and weakness of the 2 types of business
are depend on the attitude expectations and the wishes of the partners who are
going to start the business. Some fact for one party may be a strong but for
one party it may not. And vice- versa.
In partnership business the partners are the main body of
the business. They are considered as the owners, managers or as proprietor. Of
the business. Hence partners are the business. But when considering the limited
company, the situation is totally different. Not like partnerships limited
companies do not have owners they do have shareholders and the business is
considered as a separate legal entity from the shareholders.
If Fernando and per era are willing to work in their
business, there are also different actions in employment state in two different
types of business. The partners are self- employed or the partners are free not
to be an employee in partnerships. a director is an office holder according to
the limited company law. This does not automatically make a director as an
employee in terms of employment law. For tax and other government purposes
company officers are generally taxed as employee.
When the partnership company meet with a loss the partners
can offset their trading losses against their other incomes. But in the limited
companies the company can offset it trading losses against its other incomes,
but not against the shareholders income as an individual.
When discussing about the extraction of profits the partners
in a partnership business can withdraw cash from the business without tax
effects. The government placed many rules and regulations of extractions of
profits in limited companies. There are many types of taxes from each and every
different extraction of profit in the business.
One of the main function of a business in maintaining the
accounts. The partners prepare annual accounts for their personal tax return
(self-Assessment). They can be in a very basic format and the accounts are not
submitted to government authorities unless the business or partners are subject
to an investigation. In limited companies the responsible person of companies
need to prepare annual accounts under the provisions of the company Act. The
Government. Requires the full accounts with every detail every year. This can
be a time consuming a costly for the company. But both the company type needed
to be prepared in accordance with accounting standards.
When following the account standards and methods, there are
clear differences in both the types of companies. Many differences can be seen
in the income statement, Balance sheet and equity statement etc. When comparing
both partnership and limited companies more than one capital account can be
seen in partnership accounts. The number of capital account depend on the
number of partners in the partnership concern. In limited company’s
shareholders funds are clearly comprises many categories like share capital,
retained earnings, other revenue and capital reserves. Profit and loss is distributed
to the partners’ capital account according to the agreed ratio in partnership
accounts. Unlike a partnership which has taxation on the individual partners, a
limited company is imposed tax as it is a separate legal entity. The income
statement of the partnership shows a clearly how the net profit and loss is
distributed to the partners. Limited company also show a statement of changes
in equity where changes in share capital, profit, revenue and other capital
reserves during the year.
When the partners
are willing to sell the business or assets in the partnership the
partners are personally taxed on any gain under the government rules. When
limited company business or its assets are sold there is a Hight tax charge on
shareholders. The company pay corporation tax on any profit that it makes on
disposal. In partnership when partner dies the business will get ceases. But in
limited companies although a shareholder dies the company continues as it is a
separate legal entity.
From the above information we can understand that forming
and maintaining a limited company is very difficult while comparing to the
partnerships. There are many rules to be followed strictly when running a
limited company. But the recognition of the stakeholders for the limited companies
are pretty high compare to partnerships.