LEGAL STRUCTURES

One of the most important choices you will make when forming your new business is which
legal structure to choose from. Also called a business ownership structure or business form,
choices include Limited Liability Companies (LLCs), partnerships, sole proprietorships,
corporations, non-profits, and co-operatives. The type of business entity you choose will depend
on several factors such as liability, taxation and record keeping; but the key is to find the best fit
for your organization. The following resources will help you decide which legal structure is best
for your business by examining the pros and cons of each, relevant investor issues and more.

SOLE PROPRIETORSHIP

What Is a Sole Proprietorship?

A sole proprietorship—also referred to as a sole trader or a proprietorship—is an
unincorporated business that has just one owner who pays personal income tax on
profits earned from the business.

A sole proprietorship is the easiest type of business to establish or take apart, due to a
lack of government regulation. As such, these types of businesses are very popular
among sole owners of businesses, individual self-contractors, and consultants. Many
sole proprietors do business under their own names because creating a separate
business or trade name isn't necessary.

Advantages of a Sole Proprietorship

 Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive
business structure to establish.
 Complete control. Because you are the sole owner of the business, you have complete
control over all decisions.
 Simplified tax preparation. Your business is not taxed separately, so it‘s easy to fulfill
the tax reporting requirements.

Disadvantages of a Sole Proprietorship

 Unlimited personal liability. Because there is no legal separation between you and your
business, you can be held personally liable for the debts and obligations of the business.
This risk extends to any liabilities incurred because of employee actions.
 Hard to raise money. Sole proprietors often face challenges when trying to raise money.
Because you can‘t sell stock in the business, investors won't often invest. Banks are also
hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it
comes to repayment if the business fails.
 Heavy burden. The flipside of complete control is the burden and pressure it can impose.
You alone are ultimately responsible for the successes and failures of your business.
PARTNERSHIP

A partnership is when 2 or more people operate a business as co-owners and share income. All
co-owners (i.e. partners) act on behalf of each other in the business.
Partnerships can be a good choice for businesses with multiple owners, professional
groups , and groups who want to test their business idea before forming a more formal
business.

Advantages of partnerships
 Partnerships are easier and less expensive than companies to set up.
 Partners may carry on business under a trading (business) name.
 Partnerships combine the resources and expertise of people.
 Partnerships are simple to administer. Profits and losses are shared between
partners according to his/her share (as specified in the 'partnership
agreement').
 Unlike companies, partnerships do not have to disclose their profits to the
public (i.e. greater privacy).
 Changing the legal structure is relatively simple (i.e. changing from a
partnership into a company at a later stage).

Disadvantages of partnerships
 All partners together are personally responsible for business debts. Each
partner is individually liable for debts incurred by the other partners. This is
known as being 'jointly and severally' liable (i.e. unlimited liability).
 All partners have a right to participate in the management of the partnership
(unless otherwise agreed).
 Partners cannot transfer their ownership to someone outside the partnership
unless the other partner(s) agree.
 Personal differences may interfere with business.
What Is a Company?
A company is a natural legal entity formed by the association and group of people to
work together towards achieving a common objective. It can be a commercial or an
industrial enterprise. Different types of companies are taxed differently; therefore, the
taxation of the company defines its type. Some of the main definitions of the company
are as follows;

According to the definition of a company by the Indian Act 2013;

‗‗A registered association which is an artificial legal person, having an independent
legal, entity with perpetual succession, a common seal for its signatures, a common
capital comprised of transferable shares and carrying limited liability.‘‘

According to the US legal definition;

‗‗A company can be a corporation, partnership, association, joint-stock company, trust
fund, or organized group of persons, whether incorporated or not, and (in official
capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent,
for any of the foregoing.‘‘

According to the British definition;

‗‗A company is a body corporate or an incorporated business organization registered
under the companies act. It can be limited or unlimited company, private or a public
company, company limited by guarantee or a company having share capital, or a
community interest company.‘‘

The line of business the company is in will generally determine which business
structure it chooses such as a partnership, proprietorship, or corporation. These
structures also denote the ownership structure of the company.

They can also be distinguished between private and public companies. Both have
different ownership structures, regulations, and financial reporting requirements.

KEY TAKEAWAYS

 A company is a legal entity formed by a group of individuals to engage in

and operate a business enterprise in a commercial or industrial capacity.
 A company's business line depends on its structure, which can range from a
partnership to a proprietorship, or even a corporation.
 Companies may be either public or private; the former issues equity to
shareholders on an exchange, while the latter is
 -owned and not regulated.
 A company is generally organized to earn a profit from business activities.
 Companies are an important contributor to the health of an economy as they
employ individuals and attract disposable income to spur growth.
Types of Companies
We can categorize companies based on various types like; liability, taxes, shares
members and control. Some of those classifications are given below with examples;

Classification of Companies based on Liabilities

Companies Limited by Shares
As the name implies, the liability of the company is limited to the share price of each
shareholder. Personal assets of the shareholders won‘t be disturbed; their
responsibilities are limited to their debt of the company up to their share price only.

Companies limited by shares can be public or private.

Companies Limited by Guarantee

Companies limited by guarantee doesn‘t issue shares or have shareholder. They‘re
usually non-profit organizations. If in the case of profit, the company distributes it
among its members if it‘s not a charitable organization. If the company goes bankrupt,
then their liability is limited to the amount they have pre-decided in the memorandum
of the company. Guarantors are the members of the companies limited by guarantee.

Unlimited Companies
As the name implies the liability of the shareholders is not limited to the share price
they own, it goes beyond. They may lose their assets if the company is unable to pay
debt to its creditors. We don‘t see many unlimited companies because it involves a lot
of risks.

Classification of Companies based on Members

One Person Company
One person company is an Indian concept where one person can create a company
without having partners, board of directors or shareholders. In OPC, you‘ll have all
the advantages of sole proprietorship like; you don‘t have to share profit with others,
take the risk on your own without requiring approval from others. Your liabilities are
limited like a company.

OPC has some differences with private limited companies like; you should mention
the name of a person in the memorandum of association, who‘d take the charge after
your passing. The minimum capital for starting the OPC is 100,000.

ARADO Farms, VISHRUT Biotech, and HCARE Holistic Enterprise are some of the
well known one-person companies.
Private Company
A private company is a form of company that doesn‘t offer its shares to the public like
in the public companies. The numbers of shares are limited to the close members only.
However, members can transfer their shares to anyone but they can‘t offer it to the
general public.

A private company also goes by the name of unlisted or unquoted company. Some
people think that private companies are small because they aren‘t public.

Some of the big companies like Dell (hardware and tech equipment), Virginia Atlantic
(airline), PricewaterhouseCoopers (business supplier and Service Company), Mars
(food and drink) and John Lewis Partnership (retail). These are all are the private
companies that are doing their business across the world.

Public Company
Public companies are those that advertise their stock and shares to the general public.
People can freely trade the stock of the public company without any restrictions. The
shares of listed companies are traded in the stock exchange market.

In England, a public company must have a minimum of two directors and

shareholders respectively. It‘s then it would fall into the category of public companies.
It should have a total share value of £50,000.

When investors buy the stock of the company, then they become the equity owners of
the company. Some companies are private in the beginning, later they become the
public companies after fulfilling all the mandatory legal requirements.

Classification of Companies based on Control

Government Companies
The economy of a country plays a very important role in managing the GDP and
index. Government companies are those that hold 51% of the share capital of the
company. The remaining 49% of the share, the company offers it to the public and
private individuals.

Mixed Ownership Company is also the name used for the government companies.
Where we see the management and chain of hierarchy of government and technical
skill of the private sector, it‘s a great mixture of both public and private sectors.

Heavy Industry Taxila, Industrial Development Bank, Faisalabad Electric Supply

Company, and Karachi Urban Transport Corporation, PTCL, Oil, and Gas
Development Company are some of the examples of Government Companies.
Holding and Subsidiary Companies
Holding and Subsidiary companies are two companies; where holding is a parent
company that controls the business operation of the subsidiary company. By control I
mean the holding company has a complete over the selection and election of board of
directors, it holds all the shareholders of the subsidiary company. The subsidiary
company can make its decision once it‘s become independent.

Subsidiary companies can be profit or non-profit organizations. The subsidiary

company of West‘s Encyclopaedia of American Law is 2008, Thompson and
Thompson, and The Global Tutor are some of the examples of Holding and
Subsidiary companies.

Associate Companies
An associate company is the business valuation firm in which one company owns a
significant voting share of another company. The voting share usually ranges from 20
to 50%, if it is more than 50%, then it would be subsidiary company. If it‘s less than
50%, then the owner doesn‘t have to consolidate the financial statement of associate.
If it is more than 50%, then it has to consolidate the financial statement, where the
associate would consider the balance sheet as an asset.

Conclusion
Establishing a public or a private company is a very long process and it requires a lot
of paperwork. But the company helps you to raise capital, perhaps you won‘t be able
to raise without it. Before going to take the step of a company, it‘s better to know the
different types of companies and what type of company would be best for you.

Advantages and Disadvantages of a Company

The benefits of starting a company include income diversification, a strong
correlation between effort and reward, creative freedom, and flexibility. Another
advantage of companies is that they create jobs. If an individual starts a company
and it grows, most often they have to hire employees. This increases the number of
jobs available in a nation, employs people, reduces unemployment, and brings
wealth into the economy.

There is often a tremendous amount of personal satisfaction garnered from starting

your own company. This involves following your dreams and passions and leaving
a legacy.
The disadvantages of starting a company include increased financial responsibility,
increased legal liability, long hours, health risks due to stress, responsibility for
employees and administrative staff, regulations, and tax issues.

There is a tremendous amount of risk in starting a company, from the time invested
and, therefore, opportunity cost from not working a salaried job, to financial risk.
Failure is of course one of the biggest disadvantages; however, many successful
entrepreneurs attest that their first businesses failed and that the experience was an
important learning tool.

Types of Companies
In the United States, tax law as administered by the Internal Revenue Service (IRS) and
individual states dictates how companies are classified.1 Examples of company types in the U.S.
include the following:

 Partnerships are formal arrangements in which two or more parties cooperate to manage and
operate a business.
 Corporations are legal entities that are separate and distinct from their owners and provide the
same rights and responsibilities as a person
 Associations are vague and often misunderstood legal entities based on any group of individuals
who join together for business, social, or other purposes as a continuing entity. (This may or may
not be taxable depending on structure and purpose.)2
 Funds are businesses engaged in the investing of pooled capital of investors.
 Trusts are fiduciary arrangements in which a third party holds assets on behalf of beneficiaries.

A company may also be described as an organized group of persons—incorporated or

unincorporated—engaged in an enterprise.

Cooperative
A cooperative is a business or organization owned by and operated for the benefit of those
using its services. Profits and earnings generated by the cooperative are distributed among
the members, also known as user-owners. Typically, an elected board of directors and
officers run the cooperative while regular members have voting power to control the
direction of the cooperative. Members can become part of the cooperative by purchasing
shares, though the amount of shares they hold does not affect the weight of their vote.

What is a co-operative?
As a registered legal entity, a co-operative differs from a company in that it requires at least five
shareholders, each of whom hold equal voting rights. Co-operatives apply the concepts of
sharing, democracy and delegation in order to benefit all members. Generally, all members are
expected to participate and share the responsibility of running the organisation.
Co-operatives are regulated by Consumer Affairs Victoria (CAV).

If you're unsure whether a co-operative is the right business structure for your business, use
our step-by-step guide to help you decide.

Advantages of a co-operative
Advantages of co-operatives are:

Equal votes
All shareholders have an equal vote at general meetings regardless of their shareholding or
involvement in the co-operative.

Lower debt risk

Shareholders, directors, managers and employees have no responsibility for debts of the co-
operative unless those debts are caused recklessly, negligently or fraudulently.

Age of members
Members, other than directors, can be under 18, though these members cannot stand for office
and do not have the right to vote.

Support
The Co-operative Federation of Victoria Ltd and Consumer Affairs Victoria (CAV) can provide
you with assistance when establishing a cooperative.

More control
A co-operative is member owned and controlled, rather than controlled by investors. All
members and shareholders have to be active in the co-operative.

Disadvantages of a co-operative
Disadvantages of co-operatives are:

Number of members
There must be a minimum of five members.

Limited profit distribution

There is usually a limited distribution of surplus (profits) to members/shareholders, and some co-
operatives may prohibit the distribution of any surplus to members/shareholders.

Difficulty attracting members

As co-operatives are formed to provide a service to their members rather than a return on
investment, it may be difficult to attract potential members/shareholders whose primary interest
is a financial return.

One vote only

Even though some shareholders may have a greater involvement or investment than others, they
still only get one vote.
Ongoing educational requirements
Co-operatives require ongoing cooperative education programs for members.

Trust business structure

Coronavirus (COVID-19): Restructuring your business
Small business owners who restructure by transferring assets from a sole trader, partnership or
discretionary trust into a company structure may be eligible for a duty exemption on the transfer.

A trust is a relationship where a trustee (an individual or a company) carries on business for the
benefit of other people (the beneficiaries). For instance, a trustee may carry on a business for the
benefit of a particular family and distribute the yearly profit to them.

A trust is not a separate legal entity. A trust may be discretionary (i.e. the trustee decides how
profit will be distributed among beneficiaries) or have fixed interests (i.e. it will benefit certain
people in predetermined proportions). Commonly, the trustee is a company (a corporate trustee);
often this business structure is more tax effective.

Advantages of a trust
 A trust provides asset protection and limits liability in relation to the business.
 Trusts separate the control of an asset from the owner of the asset and so may be useful for
protecting the income or assets of a young person or a family unit.
 Trusts are very flexible for tax purposes. A discretionary trust provides flexibility in the
distribution of income and capital gains among beneficiaries.
 Beneficiaries of a trust are generally not liable for the trust debts, unlike sole traders or
partnerships.
 Beneficiaries of a trust pay tax on income they receive from a trust at their own marginal rates.

Disadvantages of a trust
 Establishing a trust costs significantly more than establishing sole traders and partnerships.
 A trust is a complex legal structure, which must be set up by a solicitor or accountant.
 The trustee has a strict obligation to hold and manage the property for the exclusive benefit of the
beneficiaries.
 Operation of the business is limited to the conditions outlined in the trust deed.
 As with companies, there are extensive regulations that trusts must comply with.
 Losses derived in a trust are not distributable and cannot be offset by beneficiaries against other
income they may have.
 Unlike a company, a trust cannot retain profits for expansion without being subject to penalty
rates of tax.
Compare business structures
Compare the general traits of these business structures, but remember that ownership rules,
liability, taxes, and filing requirements for each business structure can vary by state. The
following table is intended only as a guideline. Please confer with a business tax specialist
to confirm your specific business needs.

Business
Ownership Liability Taxes
structure

Sole Self-employment tax

One person Unlimited personal liability
proprietorship
Personal tax
Self-employment tax (except
Two or more Unlimited personal liability unless for limited partners)
Partnerships
people structured as a limited partnership
Personal tax
 Business
Ownership Liability Taxes
structure

The table takes each structure and compares them against each other.
NSW Comparative Table
Entity Income Tax Capital Land Tax Asset
Gains Tax Protection

Sole Trader No income 50% discount Threshold None except

splitting. (on goodwill available. by insurance.
Must with the sale Principal Business &
substantiate of the residence non-business
business business) & exemption assets
deductions. main available. exposed.
Losses can residence
be offset exemption &
against small
profits. business
concessions
available.

Partnership No income Not part of Threshold None except

of splitting. partnership available. by insurance
Individuals Losses not income. Principal and may also
trapped in Divided residence be exposed to
partnership, between exemption partners debt
distributed to partners in available. due to joint
partners & accordance and several
can be offset with interest liability of
against other in partnership partners.
profits. Can 50% discount
vary profits (on goodwill
& losses with the sale
payable to of the
partners year business) &
to year. main
residence
exemption &
small
business
 Entity Income Tax Capital Land Tax Asset
Gains Tax Protection

concessions
available.

Company 30% flat tax. No 50% Threshold Shareholders

Dividends discount. No available. protected but
taxed. main Principal value of their
Franked residence residence shares
dividends exemption. exemption not available to
pass on tax Tax free available. their creditors
paid. gains to Related on
Restrictions company are corporations bankruptcy.
on internal taxed without may be Directors
loans. Losses imputation as assessed potentially
trapped in dividends if together. liable if
company. distributed. Relief possible trading while
Limited Small if 60% of insolvent.
splitting business shareholders
through concessions would suffer
classes of available. serious
shares. Losses hardship.
trapped in
company.

Unit Trust Taxed at unit Depends on Principal Unit holders

holders level unit holders. residence protected but
so depends 50% discount exemption not value in their
on structure applies. No available. units
of unit main Special available to
holders. residence notifications their
Good for exemption. required. creditors.
joint Small Threshold Trustee
ventures. business available to indemnified.
Losses concessions trusts created
trapped in available. prior to
trust. Losses 31/12/05 if
trapped in fixed
trust. beneficiaries
of same
family group
own 95% and
combined
taxable value
 Entity Income Tax Capital Land Tax Asset
Gains Tax Protection

less than $1m.

Business registration
Business registration is required by law. This type of registration allows the public to know
who is operating a company. By registering a business, you are ensuring no one else can
operate a company under the same structure. There are several options you can choose
from to register a business, including:

 Register the business structure and operate according to its registered name.
 File for a do business as (DBA) name.
 Trademark the business name.

During the process of creating a business structure for your company, you may run across a
business name that you wish to use for official purposes. Often, it is best to keep the LLC or
Corporation part of a business name in its legally registered name because it helps
distinguish the type of company you are operating.
Sole proprietors often find filing for a DBA provides a great avenue for operating a business
under a name rather than their own name. It also enables a company owner to use a name
other than the one that was chosen when setting up the structure of the business.
For those wanting to add protection to their companies' intellectual property on a state or
national basis, trademarking the company is generally the best route to take. In order to
trademark a company's name, however, the name must be unique enough to qualify for its
own trademark, and many businesses' names will not meet this qualification requirement.

Benefits of Registering a Business Name

One of the easiest ways to register the name of a business is to register the structure of the
company on a state level; this ensures the name of the company belongs to the owner, fully
allowing them to operate the business under the registered name. To accomplish this goal,
you will need to register the company's structure as a limited liability company (LLC), a
nonprofit, a corporation, a limited partnership (LP), etc.
The steps you will take to register the structure of a business depends on the structure you
have chosen as well as the state you are registering it in. There are rules that govern both
LLCs and LPs. You need to research these rules because they vary from one state to the
next.

PAN Registration In Nepal

The identification issued by the tax office to identify the person who wants to do any
business, to pay the tax and to get the information of the tax paid by the businessman is
called permanent account number (PAN).

intellectual Property Right

intellectual Property Right can be simplified as rights granted to the creator of his/her creation. It is a
legal right established with the sole motive of protecting the creation of the

intellect. Any sort of inventions, such as: literature, designs, music, logos, images etc. can be
copied, hence to protect and restrict misusing of the creations, Intellectual Property Rights can be
very advantageous.

Intellectual Property Rights assures the creator that their work will be safeguarded and they will
completely posses the right for usage of their creation. There are four main types of intellectual
property rights such as trademarks, copyrights, patents and trade secrets.

1. Trademarks: Trademark is one of the most familiar intellectual property rights that have been
implemented globally. It can be defined as a unique sign, symbol or a word that represents a
business or its products that are legally registered. Once the registration is done, no other
organizations or business houses can use the same sign, symbol or word forever.

2. Copyrights: A copyright is usually implemented for original work of art, music, videos, literature
etc. It does not necessarily protect the ideas but protects the tangible forms of creations of a creator.
The owner has the exclusive right to distribution, reproduce or to perform their work publically.

3. Patent: A patent right governs inventions and prohibits any other third party from making, selling
or using the invention for a certain period of time. The creator has the right to commercialize his/her
inventions to a third party on mutual agreement by selling his/her patent rights.
4. Trade Secrets: The formulas, formation, strategies or any other valuable information that are not
to be made public and restricts its’ commercial usage by others are regarded as Trade Secret.

Why are Intellectual Property Rights favorable?

Intellectual Property Rights provides a support to the creators to continue producing their things and
be assured that their creations will not be misused at any cost. For e.g. music producer will be
discouraged if his/her piece of work is copied by some third party without his knowledge.

Intellectual property rights are an asset to your business and many aspects of your business can be
fortified under Intellectual Property Rights such as your company name, logo, designs, inventions
etc. It keeps your business apart from competitors and is an essential part for your marketing and
branding purpose.

Intellectual Property is very vital for any business houses since it’s the mode of corporate
identification of their products/services. If a third party uses your ideas without permission, it can
make your business suffer and deteriorate your branding in the long run. Intellectual property theft
has significantly increased with the introduction of internet and this makes intellectual property
protection more important. Business growth can be easily hampered by competitors; hence if a
company aims to introduce something unique to the market, it is important to use patents,
trademarks or copyrights depending on your product/service to promote business growth and gain
revenue. Intellectual Property Rights not only carter to established business houses but to even
small business houses, individuals etc.

Intellectual Property Rights in Nepal

Nepal finalized a long unsettled policy of Intellectual Property Rights in the year 2017. Nepal
understands the advancement in Intellectual Property globally and targets to achieve economic
prosperity by protecting all aspects of Intellectual Property. Nepal is a land of opportunity for new
investors but for multinational companies the main issue has been the protection of their brands in
Nepal, we can easily find duplicate products of reputed brands throughout Nepal. The Department of
Industry under Ministry Of Industry (Government of Nepal) acts as a semi- judiciary in protecting
industrial property disputes. The Department is also the focal point of all international organization
including WIPO (World Intellectual Property Organization) and has recently received a membership
for Paris Convention for Industrial Property. The Copyright Act; 2059 (2002) and Patent, Design and
Trademark Act; 2022 (1965) governs the Intellectual Property Rights in Nepal.

Trilegal Nepal has a long history in all legal aspects and Intellectual Property Rights is one of the
most dominant areas of work demanded by many of our valued clients. Trilegal Nepal not only
registers your creation under Intellectual Property but also provides you with all the necessary
consultation.

PROCEDURES FOR OBTAINING SUCH RIGHTS

information is becoming easier and easier to access and distribute,
making it harder to safeguard your intellectual property or product
ideas from theft and copying. Whether you are a start -up or a
multinational company, taking steps to protect your intellectual
property should be a priority for your business.

What exactly is intellectual property?

Everyone talks about IP, but what exactly does the term encompass? Essentially,
intellectual property is any product or wo rk that resulted from original thought.
Examples are manuscripts, designs, artwork, your website content, blog posts and
articles, inventions, business names, product names, online programs or courses, or
other original confidential information that benefi ts your business.
If you come up with a great idea, design or product, you want to make sure that no one
else has the right to use it without your permission. The good news is that intellectual
property is protected by various federal and state laws.

Steps to Safeguarding Your Intellectual Property

You can protect your business‘s important content, products and ideas by following
some essential steps. Following these steps should lower your chances of dealing with
intellectual property theft, and will give you protection if someone does steal your IP.

1. Keep Business Ideas and Trade Secrets a Secret

Until you have adequately secured your intellectual property, avoiding talking about it
with others, unless they have signed a nondisclosure agreement. Yo u must be careful
who you trust with this key information, and don‘t promote your idea in any sort of
public forum, such as Kickstarter. Especially if you‘re working with partners, you
should speak with an attorney and sign tailored non -disclosure agreements.

2. Document Your Concepts and Original Content in Detail

Have detailed drawings, descriptions, plans and records that can prove you came up
with and have been working on your intellectual property. This type of proof will help
in case someone challenges you as the rightful owner of your trademarks and
copyrights. Make sure you have added dates wherever possible because first date of
use is critical in IP matters.

3. Apply for a Trademark

As soon as you have a business name and logo for your id ea, you should register those
trademarks right away.
A good and memorable trademark registered with the USPTO United States Patent and
Trademark Office will give you an advantage over competitors.
 4. Register All Your IP, Trade Secrets, and Creative Works
Along with your trademarks, work with your IP attorney to register the rest of your
assets. Write down all the details of your intellectual property so you can register
and distinguish it from potentially existing similar ideas. It‘s a good idea to consider
doing an IP audit with your attorney so you have a formal IP portfolio documented.

5. Make the Investment

Remember, before you have officially secured your intellectual property, anyone can
take your idea and create it for themselves, but your odds of beating content and idea
thieves are so much higher if your intellectual property is protected.
To sum up, you likely have much more intellectual property than you‘re aware of.
Securing your intellectual property rights does require finding a good attorney to help
you discover, document, and register it, but making that investment now will pay off
significantly when building and profiting from your IP portfolio, and it will help
safeguard what is rightfully your s if any issues arise in the future.

CONTRACT LAW

The Contract Act, 2000, used to govern all aspects related to

contracts in Nepal until the recent enactment of the Civil Code, 2017.
The new code has made a big change in the law relating to contract,
ranging from the drafting of a contract to its execution.

As per section 504 of the Civil Code, if an agreement enforceable by

law is concluded between two or more persons to do or not to do any
act, such shall be regarded as a contract.

Eligibility for contract

Section 506 of Civil Code, 2017, states that every person other than
the following listed are eligible of performing a contract:
1. One who is minor: Section 2(e) of the Civil Code, 2017, define the minor as a
child who has not attained the age of 18.

2. One who is of unsound mind

Creation of obligation
Section 493 of the Civil Code, 2017, states that if there is a legal
obligation for anyone to do or not to do any act, an obligation is
created, and non-performance of such an obligation is followed by
remedies. Further, section 494 (1)(b) of the Civil Code has listed
contract as one of the ways to create obligations that are enforceable
between contracting parties.

Photo: Pixabay
Breach of contract and its remedies
As per section 535 of the Civil Code, 2017, if any party to a contract
fails to fulfill the obligation under the contract or gives a notice to the
other party that he or she does not perform the act as mentioned
under the contract and demonstrates that he or she is incapable of
performing the act under the contract, the party shall be deemed to
have breached the contract.

In case of the breach of a contract under section 535, the party

aggrieved by it shall be entitled to recover from the party in the breach
of the contract damages for the actual loss or damage caused by the
breach or such loss or damage, as mentioned in section 537(1) of the
Civil Code.

Contract of personal guarantee

Sections 563 (1), (2), and (3) of the Civil Code, 2017, provide that if a
contract is concluded under which a third party undertakes to repay
the loan borrowed by or discharges the liability promised by a person
in case of that person’s default, a contract of guarantee shall be
deemed to be concluded. If a third party gives such a guarantee and
the person bound to repay the loan and fails to repay or discharge
such loan or liability, the person giving the guarantee (the surety) to
such loan or liability shall repay the loan or discharge the liability
according to the terms and conditions of the contract.
The terms and conditions of the guarantee shall be as determined in
the contract.

Contract of lease
As per section 610 of the Civil Code, 2017, if a contract is concluded
under which a person gives any goods in which he or she has right
and possession to another person for use and possession and enjoy
the benefits accrued therefrom in consideration for rent payable
regularly for a certain period, a contract of lease shall be deemed to
be concluded.
1. Introduction
The Labour Act, 2017 (―Labour Act―) came into effect on 04 September 2017 (2074-05-19)
replacing the Labour Act, 1992 (―Previous Act―), Industrial Trainee Training Act, 2039 and
Retirement Fund Act, 2049. The major provisions of the Labour Act are briefly set out below:
Applicability of the Labour Act

Note: The Labour Act is applicable to all entities regardless of headcounts. The Previous Act
was only applicable to entities where 10 or more employees were engaged.

Minimum remuneration/wage: The minimum remuneration was revised by the Ministry

of Labour, Employment and Social Security on 03 May of 2021. The new minimum
remuneration applicable from 16 July 2021 is NPR 15,000 per month. Overtime
remuneration must be 1.5 times the regular remuneration.

2. Types of employment
The Labour Act has categorized different types of employment as explained in the below table:
3. Term of probation
The Labour Act provides for a maximum of 6 (six) months of probation period to evaluate the
work of an employee. If the work is not found satisfactory, the term of such employee can be
terminated. The employment contract with the employee under probation, if not terminated, shall
be deemed automatically valid after the end of provided probation period.

ENVIRONMENTAL LAWS
The Act prescribes formation of an Environmental Fund in order to protect the environment,
control Pollution, protect national heritage and maintain quality of air and water.

The Parliament enacted the Environment Protection Act, 2076 (2019) (the ―Act‖) on July 19th,
2019. As a result, the earlier Environment Protection Act, 2053 (1997) (the ―1997, Act‖) is now
repealed.

1. Applicability and Scope

One of the main features of the Act in contrast to the 1997 Act, is that it mandates several
compliances to Project Developers while developing a Proposal of a Project, to ensure that the
implementation of the Project does not harm the environment.

The Act has also redefined certain terms so that the definitions are more comprehensive. For
instance, ―Pollution‖ has been redefined so as to include waste, chemical, heat, sound, electronic,
electronic magnet or radioactive radiation that significantly degrade, damage the environment or
harm the beneficial or useful purpose of the environment by changing the environment directly
or indirectly.

Further, the Act explicitly authorizes the Government of Nepal to set standards to reduce and
regulate emission, hazardous waste, Pollution emitted by vehicles, equipment, industries, hotels,
restaurants and other institutions or activities. As opposed to the 1997, Act, the Act regulates
manufacturing and distribution of harmful substances. ―Harmful substances‖ is defined to
include harmful waste transported through the borders, harmful substances as per the Basel
Convention, 1989, explosives that harm the environment and human health, product that are
flammable, perpetually lasting or corrosive in nature and leftover of the raw material that has
been processed for the first time. The Act also addresses the concern of climate change and
control of greenhouse gasses and other gasses which was not addressed under the 1997 Act. In
addition to this, it envisages provisions pertaining to carbon trading, protection of national
heritage sites, mountains and hills and waste management, there by widening the scope of
regulatory regime in Nepal.
2. Regulating Authorities

The Regulating Authorities under the Act include the following authorities:

1. Government of Nepal;
2. Environmental Examiner;
3. Environment Protection Council;
4. Department of Environment and
5. Ministry of Forests and Environment

3. Compliance that Project Developer Needs to Adhere to

The 1997 Act, mandated a project developer to only comply with Initial Environment
Examination and Environmental Impact Assessment. As per the present Act, a Project Developer
needs to comply with the following compliances while developing a Project:

3.1. Environmental Study Report – is to be prepared prior to initiation of the

Proposal, depending on the Proposal, and includes the following:

1. Summary Environmental Study (environmental study report in short)

2. Initial Environment Examination (examination of the possible impact on the environment

and measures to mitigate it) or

3. Environmental Impact Assessment (assessment of possible impact on the environment

and solutions that can be opted)

The Environment Protection Rules 2054 (the ―Rules‖), lays down the terms and conditions that
needs to be entailed in the report. It mandates mentioning the budget, social and economic
impact, cultural and physical impact, chemical and biological impact the project is likely to have.

If the Environmental Study Report does not confer with the criteria laid down in the Act, then the
Project Developer will not be allowed to submit a report up till a maximum time period of 5
(five) years. If a Proposal is implemented without a Summary Environmental Study Report, or
any act is done contrary to such an approved report, then a fine up to Rs. 5,00,000 (In words
Nepalese Rupees Five Lakh Rupees )will be levied. If a Proposal is implemented without an
Initial Environmental Report or any act is done contrary to such an approved report, then fine up
to Rs.10,00,000 (In words Nepalese Rupees Ten Lakh Rupees) will be levied.

3.2. Environmental Management Plan – stating all probable solutions which will be adopted
by the Project Developer to safeguard the environment and measures already undertaken by him
has to be submitted. If a safeguard adopted by the Project Developer is appearing to be futile, the
Project Developer will be asked to adopt a different safety measure.

3.3. Environmental Assessment Report- has to be submitted after two years of initiation of the
Proposal. This report has to entailing the impact of the project on the environment and efforts
undertaken to mitigate such impacts.

If a Proposal is implemented without an Environmental Impact Assessment then fine up to Rs.

50,00,000 (In words Nepalese Rupees Fifty Lakh Rupees) will be levied.
3.4. Supplementary Environmental Impact Assessment – is required to be done in some
Proposals which have already done environmental impact assessment once and are involved in
activities capacity building and modification of the Proposal.

4. Environmental Fund

The Act prescribes formation of an Environmental Fund in order to protect the environment,
control Pollution, protect national heritage and maintain quality of air and water. Prior,
permission from the Government of Nepal or the Ministry of Forests and Environment is
required to make any payment in the environmental fund. Environmental Fund will constitute
amounts received from the following authorities:

1. The Government of Nepal, State Government and Local Bodies.

2. Nepali nationals and institutions.
3. Foreign government or international institutions.

5. Carbon Trading

Unlike the 1997 Act, designed to combat carbon emissions, the Act empowers the Government
of Nepal to engage in carbon trading with foreign government and institutions. The concept of
carbon trading originated in Kyoto Protocol, 1997 (the ―Kyoto Protocol‖), according to which,
each country has a cap on the amount of carbon they are allowed to release. Nepal ratified the
Kyoto Protocol on December 14th, 2005. As per the Kyoto Protocol, countries that have a high
carbon emission can purchase the right to release more carbon from the countries that have lower
carbon emission.

6. Responsibility of the Government

Among other things the Act attributes responsibility to the Government of Nepal to:

1. Stop any Proposal in contravention to the Act.

2. Control and regulate Pollution in the country.
3. Initiate plans to protect the environment.
4. Prepare a yearly report on subject matter including the change in the quality of air and
water.

7. Prohibitions under the Act

Certain activities are prohibited under the Act including:

1. Any kind of Pollution that will hamper environment and living beings in it.
2. Hampering the quality of mountain and hills in Nepal is also prohibited.
3. The Act puts restriction on export of harmful substances. Harmful substances can only be
produced in Nepal after getting prior approval from the concerned Regulating Authority.

8. Complaint Mechanism

Unlike the 1997, Act, the Act envisages an elaborate complain mechanism. Anyone can make a
complaint to the Regulating Authorities about someone who is in violation or may violate the
provisions under the Act. Upon investigation if the concerned person is found to be guilty he will
have to pay reasonable compensation to the aggrieved person.

Anyone aggrieved by the decision taken by the Regulating Authorities in context to the fine
levied under the Act, can file an appeal within thirty five days to-

1. The District Court if the decision was taken by the local authorities.
2. The High Court if the decision was taken by the Central or State Government.

Anyone aggrieved by the decision taken by the Regulating Authority in context to compensation
can file an appeal within thirty five days to the High Court.

9. Punishment under the Act

The maximum limit for fine under the 1997 Act was Rs. 100,000 (In words Nepalese Rupees
One Lakh) but under the present Act, this threshold has increased. In addition to what has
already been stated hereinabove, there are different punishments prescribed for different
offences, such as:

1. For any other offences pertaining to this Act Rs.3,00,00 (In words Nepalese Rupees
Three Lakh Rupees) compensation will have to be paid. Two months‘ time period will be
given to rectify the offence or else compensation of triple the amount will have to be
paid.
2. The concerned person of institution can be black listed for a time period ranging from
one year to five years. A black listed person or institution will not be allowed to submit
any Proposals.

New rules facilitating the Act is yet to be enacted. Since there are no new rules, the Rules, under
the earlier Act, 1997 would be applicable.