The Nature and Formation

of A Business

Kavidi Wickramasingha
E 201115
Business Law
2023/25
Content
• Introduction of legal structure
• Types of business organization
• Introduction of the different types of organization
• Starting up a business organization and the registration requirement
• How business organizations are managed and funded
• The application of company law in forming different business organizations
and companies, raising capital, and liquidating.
• A history and understanding of relevant case law, indicating the importance of
both common law and legislation to the development of company law and
business formation and practice
• The advantages and disadvantages of the formation of different types of
business organizations.
Introduction of the legal structure
• Incorporated

An incorporated business exists as a legal

entity separate from its owners or managers.
An advantage of this independent legal entity
is that the owners are usually not responsible
for the debts of the business.

• Unincorporated

An unincorporated business does not have its

own legal entity and thus, sole proprietors
have full personal liability for debts.

(legal nature, 2024) , Image- (Simple book, 2020)

 Different types of business organization
• Private sector

The private sector refers to the part of the economy that isn’t controlled by the state. It includes any for-
profit business run by individuals or companies. The private sector aims to make money and employs more
workers than the public sector.

Sole trader, partnership, company, co-operative, franchise

• Public sector

The public sector refers to all publicly funded or publicly owned bodies, even though they may not be part
of the obvious government apparatus. Expansible for serving the public and ensuring that people can rely
upon its services when they need them. Regulated by laws that safeguard public interest, and ensure public
funds are spent responsibly.
Different types of business organization
• Voluntary Organization

Organizations in the voluntary sector typically have no formal government intervention and exist primarily
to serve and enhance society. Funds produced or generated by volunteer sector organizations are invested in
the community or the organization itself, in contrast to the commercial sector which is focused on making
profits and returning to owners.

• Charities

Charities organizations are a kind of business that fits within the Non-profit organization category.
Charitable organizations offer relief for the poor, distressed, or underserved, and those with religious,
educational, or scientific affiliations. These are things like preventing or relieving poverty or advancing the
arts, culture, heritage, or science.
 Classification of company
• In accordance with the Companies Act
2016, companies are classified into a few
types. There are limited companies which
can be divided into company limited by
shares or company limited by guarantee,
there are unlimited company, public or
private company, and related company
which consists of holding and subsidiary
company.
Starting up a business organization and the registration requirement
Organization The registration requirement
Sole trader The structure of sole proprietors is similar in most countries. If register as a sole proprietor, will
be subject to personal income tax. This is the easiest and fastest business to set up a company in
Sri Lanka. As a sole proprietor, you can also to hire others.

Partnership A registered partnership is similar to a sole proprietorship but with split ownership. All
shareholders are subject to the legal and tax obligations of the company. Partners are subject to
personal income tax rates as partnerships are not taxed as a separate legal entity.

Companies Limited Liability Company (LLC)- Limited liability companies are the most common form of
company incorporation in Sri Lanka. The need a director and two shareholders. No minimum
stock capital is required. The company secretary must be an individual residing in Sri Lanka.

Public Limited company (PLC)- Even a joint-stock company does not require a minimum stock
capital. This type of company in Sri Lanka requires two shareholders and two directors. Directors
are required to submit an annual report and audited accounting and financial statements. Shares
may be issued on the stock exchange.

(multiplier, 2024)
 The advantages and disadvantages of the formation of different types of business
organizations.
Organization Advantages Disadvantages
Sole Trader • Simplest, and least costly business entity to form • The owner has unlimited personal liability
and operate. for all business debt.
• Complete control and flexibility. • If the business is sued, the owner is
• The business does not pay separate taxes. All personally liable.
income passes directly to the owner and is taxed at • The owner’s personal assets could be in
the owner’s personal tax rate. jeopardy.
• The owner dies, the business terminates or
becomes defunct.

Partnership • Limited partnerships and limited liability • Partners may have unlimited personal
partnerships offer some degree of liability liability for debts and losses, except in the
protection for partners. case of limited liability partnerships and
• Partnerships are easy to maintain because they do limited partnerships.
not require annual meetings or minutes of • If a partnership is created without a written
meetings. agreement or a partnership agreement is
poorly drafted, there could be significant
disputes that may lead to costly litigation.

(Williams, 2019)
The advantages and disadvantages of the formation of
different types of business organizations.
Organization Advantages Disadvantages
Limited liability • LLCs can choose to be taxed as a sole • LLCs are typically not suitable for
proprietorship (a pass-through entity) or a companies that want to seek venture capital
partnership. or pursue an initial public offering in the
• Owners have limited liability. They are not future.
responsible for the liabilities or debts of the • Some professional groups may not be
company. permitted to operate an LLC.
• LLCs offer a great deal of flexibility in how the • Transferring an interest or accepting new
LLC is managed. members can be difficult, depending on the
• An LLC can be converted into a corporation if terms of the operating agreement.
the company exceeds the limits of the LLC.

Corporation • Corporations have an unlimited life span. • Corporations are subject to double taxation.
Shares may be transferred, purchased, and A corporation must file a corporate tax
sold. return and pay taxes based on its profits
• Owners are protected from personal liability based on the corporate tax rate.
for the company’s obligations and debts. • Setting up and managing a corporation is
• Corporations have several options for raising more difficult and expensive. The periodic
capital. filings and annual fees for corporations can
• Corporations are the preferred business entity be burdensome and costly for some
for public companies. businesses.

(Williams, 2019)
The management of a company
 The management of company
Role Responsibility

Chief Executive officer - Develop and implement company strategy in consultation with the board.
- Overseeing the overall operations of the company.
- Acting as the main point of communication between the board and the rest of the
company.
- Making key organizational decisions and managing the company's resources.

Chair person - Lead the Board of Directors and ensure its effective functioning.
- Facilitate board meetings and ensure directors receive accurate, timely and clear
information.
- Acting as a liaison between the board and management.

Board of directors - Setting the strategic direction of the company.

- Supervise management and ensure effective use of company resources.
- Ensuring that the company meets its legal and ethical obligations.
- Approving major business decisions such as mergers and acquisitions.

Company secretary - Ensuring company compliance with legal and regulatory requirements.
- Maintaining company records such as meeting minutes and shareholder register.
- Advising the Board on governance matters.
 Business organizations managed and funded
Organization Managed Funded
Sole Trader Sole • Personal savings.
proprietor/Owner • Borrowings from banks, relations and friends.
• Ploughing back of profits to expand the business.
• Inherited capital.

Partnership The members of • Contributions from members.

partnership • Benefits from credit facilities.
• Re-investment of profits.
• Borrowing from financial institutions.

Private limited They are managed by • In the early stages, personal resources and those from friends and
company a board of directors, family.
who are accountable • Bank loans.
to the shareholders. • Angel investors.
• Issuing of shares and debentures.

Nigerian, 2024
 Organization Managed Funded
Public limited company They are managed by board of • Selling shares to the general
directors. public.
• Loans.
• Retained profits.

Co-operative society The cooperative manager is • Membership fees.

responsible for running the • Common or preferred stocks.
business, subject to the direction • Bonds.
and review of the board of • Borrowing from banks or
directors, which, in turn, is other sources.
accountable to the membership of • Members’ savings kept in the
the cooperative society. business in the form of
reserves.

Nigerian, 2024
The application of company law in forming different business organizations
and companies, raising capital, and liquidating.
Forming different business organizations and companies
Types of Business Organizations:
Sole Proprietorship: A sole proprietorship is a business owned only by one person. It is easy to set-up and is least
costly among all forms of ownership. The sole proprietorship form is usually adopted by a small business entity.
Partnership: A business conducted by two or more persons sharing profits, losses and management
responsibilities.
Limited Liability Partnership (LLP): A hybrid between a partnership and a corporation in which the partners have
limited liability.
Private Limited Company (Ltd): A private company with limited liability for shareholders.
Public Limited Company (PLC): A company that can be traded publicly and has more stringent regulatory
requirements.

Incorporation Process:
Registration: Company law requires businesses to register with the relevant government authority providing
details such as company name, address, directors and shareholders.
Compliance Requirements: Ensure compliance with statutory requirements such as having a registered office,
appointing directors and adhering to corporate governance norms.
The application of company law in forming different business organizations and companies, raising capital,
and liquidating.
Raising capital Liquidation

Equity Financing: Voluntary Liquidation:

Issuance of shares: Company law governs the issue of Shareholders' Resolution: A company can initiate voluntary
shares, the rights of shareholders and the types of shares liquidation by passing a resolution approved by its
(common or preferred) that can be issued. shareholders.
Public Offerings: For public companies, laws regulate initial Appointment of Liquidator: A liquidator is appointed to
public offerings (IPOs), ensuring transparency and protecting wind up the company's affairs, sell its assets, pay creditors
investors. and distribute remaining assets to shareholders.
Private placement: Companies can raise capital through Dissolution: After completing the winding up process, the
private placements, where shares are sold to a select group of company is formally dissolved and deregistered.
investors, usually institutions.

Debt Financing: Mandatory liquidation:

Issuance of bonds and debentures: Companies can issue Court Order: A court order can force a company into
debt securities such as bonds and debentures. Corporate law liquidation, usually due to bankruptcy.
regulates the terms of issuance, bondholders' rights and Role of Liquidators and Administrators: These professionals
repayment obligations. manage the liquidation process, ensure compliance with legal
Loans and credit facilities: The company law regulates the requirements and protect the interests of creditors and
borrowing activities of companies, including borrowing from shareholders.
financial institutions and the terms of such loans.
A history and understanding of relevant case law, indicating the importance of both common law and legislation to the development of company law and business formation and practice

- Common law foundations

Common law, developed through court decisions, has played a key role in the evolution of company law.
Historically, courts addressed disputes and established legal principles that became the foundation of modern
corporate law.
E.g.:- Salomon v A Salomon & Co Ltd (1897)

Ashbury Railway Carriage and Iron Co Ltd v Riche (1875)

Royal British Bank v Turquand (1856)

- Importance of business building and practice

The dual impact of common law and legislation ensures a robust and adaptable legal framework for business
formation and practice. Common law principles provide the foundational principles that guide judicial reasoning
and statutory interpretation. Legislation provides detailed and specific rules that address contemporary business
needs and challenges. Together they promote a stable and predictable environment for business, encouraging
investment and innovation. They also ensure that businesses operate within a framework of accountability and
transparency, protect stakeholder interests and foster public trust.
A history and understanding of relevant case law, indicating the importance of both common law and legislation to the development of company law and business formation and practice

Interaction of Common Law and Legislation

• The interaction between common law and legislation is crucial for the comprehensive development
of company law. Court decisions interpret and apply legislative provisions, providing clarity and
consistency to the law.
Foss v Harbottle (1843): This case reinforced the principle of corporate personality and established the
rule that only the company could be sued for wrongs committed by itself. However, exceptions to this
rule, such as derivative actions, have been codified in modern statutes to protect minority
shareholders.
Caparo Industries plc v Dickman (1990): This case refined the test for negligence protection,
particularly in the context of auditors' responsibilities to third parties. The principles derived from
this case influenced legislative reforms aimed at clarifying and enhancing corporate accountability.
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