What a partnership is and the law in Sri Lanka
A partnership is the relation between persons carrying on a business in common with a view of profit. Sri Lanka applies English partnership law through the Civil Law Ordinance.
What a partnership is
Under the English Partnership Act 1890, partnership is the relation which subsists between persons carrying on a business in common with a view of profit. Sri Lanka has no separate Partnership Act. Through the Civil Law Ordinance, the English law of partnership applies unless a local law says otherwise, so the principles of the 1890 Act are followed. A partnership (a firm) is not a separate legal person: the partners own the business, share its profits and are personally liable for its debts without limit.
Essential elements
- An agreement: partnership arises from contract, express or implied, not from status or birth.
- Two or more persons.
- A business: any trade, occupation or profession.
- Carried on in common: by all, or by any of them acting for all (mutual agency).
- With a view of profit: sharing profits is strong evidence of partnership, but co-ownership of property or sharing gross returns alone does not create one.
Formalities in Sri Lanka
- The Prevention of Frauds Ordinance requires a partnership agreement to be in writing and signed where the capital exceeds a set limit; this does not stop outsiders from suing the partners.
- A firm trading under a name other than the partners' own names must register the business name under the business names law of its province.
- A written partnership deed is good practice: name, business, capital, profit-sharing ratio, salaries, interest, management, admission and retirement, dissolution, settling disputes.
- The firm registers with the Inland Revenue Department, and with EPF and ETF if it employs staff.
Types of partners
| Type | Meaning |
|---|---|
| Active (working) partner | Takes part in running the business |
| Sleeping (dormant) partner | Invests and shares profits but takes no part in management; still liable for the firm's debts |
| Nominal partner | Lends his name only, without capital or profit share; liable to outsiders who relied on his name |
| Partner by estoppel (holding out) | Represents himself, or allows himself to be represented, as a partner; liable to those who gave credit on that basis |
| Incoming partner | Joins an existing firm; not liable for debts incurred before he joined, unless he agrees |
| Retiring partner | Leaves the firm; liable for debts incurred before retirement, and for later debts to those who were not given notice |
Partnership and company compared
| Point | Partnership | Company |
|---|---|---|
| Law | English partnership law through the Civil Law Ordinance | Companies Act No. 7 of 2007 |
| Legal personality | Not separate from the partners | A separate legal person (Salomon v Salomon) |
| Liability | Unlimited | Limited, in a limited company |
| Formation | By agreement | By registration with the Registrar-General of Companies |
| Transfer of interest | Needs the consent of all partners | Shares are transferable, subject to the articles |
| Continuity | May end on a partner's death | Perpetual succession |
| Management | All partners | Board of directors |
Many Sri Lankan audit firms, law firms and family shops operate as partnerships. Two friends opening a hardware shop in Kurunegala together should sign a partnership deed, register the business name, and remember that each of them is personally liable for all the firm's debts.
Short answer: “Define partnership.” The relation which subsists between persons carrying on a business in common with a view of profit (English Partnership Act 1890).
Structured question: “Explain the different types of partners.” Active, sleeping, nominal, partner by estoppel, incoming and retiring partners: meaning and liability of each.
Essay: “Explain the essential elements of a partnership and the law of partnership applicable in Sri Lanka.” Define; explain agreement, two or more persons, business, in common (mutual agency), view of profit; then the Civil Law Ordinance, Prevention of Frauds Ordinance, business names and the partnership deed; compare briefly with a company.
Partnership = A-T-B-C-P: Agreement, Two or more persons, Business, in Common, with a view of Profit.