2. FORMS OF BUSINESS ENTITIES AND RELATED LEGAL REQUIREMENTS
CHAPTER 9
FORMS OF BUSINESS ENTITIES AND RELATED LEGAL REQUIREMENTS

3. Objectives The objectives of this chapter are:
To identify the types of business entities
To give an understanding of the importance of registering a business
To explain procedures of business registration
To discuss legal aspects of business formation

4. Learning Outcomes
At the end of this chapter, students should be able to:
identify and understand types of business entities and business formation in Malaysia
understand the advantages and disadvantages of the various types of business entities
understand legal aspects of business formation

5. Introduction
In Malaysia, the authority that manages and governs the establishment and registration of a business is The Companies Commission of Malaysia or commonly known as Suruhanjaya Syarikat Malaysia (SSM).
SSM is a statutory body under the Ministry of Domestic Trade, Cooperatives and Consumer Affairs.
Through the SSM Act 2001, the Registrar of Companies (ROC) and Registrar of Businesses (ROB) were merged together under one management to make it more systematic and efficient.

6. The Definition of Business
A business can be defined as:
‘All forms of activities such as trade, craft, occupation, profession or other activity which seeks to gain profit’.
[Section 2, Registration of Businesses Act 1956]

7. Forms of Business Entities
In Malaysia, there are three common types of business entities:
Sole proprietorship
Partnership
Private limited company

8. Sole Proprietorship Characteristics of Sole Proprietorship
Sole proprietorship is established, owned, funded and managed by only one person.
Normally, it is run by one person and he may hire a few workers to help him with the business.
Sole proprietorship is allotted under the Business Registration Act 1956 where this type of business is easily established and forms the highest number of registered businesses in Malaysia. The registration fee for a sole proprietor is only RM60.
Examples of sole proprietorship: Mini markets, restaurants, convenient stores, burger kiosks, etc.

9. Advantages and Disadvantages of Sole Proprietorship

10. Partnership Characteristics of Partnership
A business that is registered under partnership has to have at least two persons and not more than 20 persons as partners.
Generally, its legal responsibility to external parties is similar to sole proprietorship.
However, the internal relationship between partners depends on the terms of the partnership agreement made between them.

11. Partnership Agreement
Partnership Agreement is a contract agreement between partners/parties.
It shows that partners/parties have an intention to create a contract.
The Business Registration Act 1956 does not specify that the formation of a partnership business requires a written agreement between partners.
However, it is advisable for partners to have a Partnership Agreement in order to avoid or minimize dispute between partners.

12. Partnership Agreement (cont.)
In the absence of a partnership agreement, the provisions of the Partnership Act 1961 will be applicable. Section 26 and 27 of the Act stipulates that:
profit or losses are to be shared equally
no interest is payable on a partner’s capital
each partner is entitled to actively participate in the management of the business
no partner is entitled to a salary for participating in the partnership business
partners have the right to be paid based on their contribution to the business

13. Partnership Agreement (cont.)
Daily normal things in business can be decided by the majority of the partners, but any changes that regularly occur need to be made with consensus from all partners.
A partner may withdraw after getting the consent of the other partners.
The introduction of new partner must have the unanimous consent of all existing partners.
All business accounts books need to be kept at the main business premise. Partners are allowed to check through the books and they have the right to keep a copy of the books.

14. Advantages and Disadvantages of Partnership

15. Private Limited Company
A private limited company is a company incorporated under the Companies Act 1965.
The private listed companies are companies whose liabilities of its members are limited to the amount of shares held in the company. The following are a private limited company’s characteristics:
It is recognized as a legal entity that is separate from founding members. Therefore, it can acquire and own property, it can sue and be sued in court of law. The life span of the company is not dependent upon the death or resignation of any of its members.
The total number of members in a company must be at least two and it must not be more than fifty persons.

16. Private Limited Company (cont.)
Financial liability of members of the company is limited to the amount of shares being held or subscribed by the members.
Personal assets of members are not part of the company’s assets, therefore they are not affected regardless of what happens to the company (unless the members become loan guarantors to the company’s borrowing).
companies limited by shares must carry the words ‘Sendirian Berhad (Sdn Bhd)’ behind their names according to Section 22(4) of the Companies Act. 
The establishment of a private limited company is quite difficult compared to sole proprietorship or partnership.
There are many legal requirements and procedures that must be complied with as outlined in the Companies Act 1965.

17. Private Limited Company (cont.)

18. Private Limited Company (cont.)

19. Business Legal Requirements
Business legal and regulatory requirements are based on the laws of the country. The following are the hierarchy and legal scope of the laws that affect business activities in the country:
The Constitution of Country.
The article of the Malaysian constitution is the supreme law of the nation. It outlines the fundamental basis of the formation of Malaysia, the power and right of the various vested interests in the country and the basic individual right as a citizen of the country.

20. Business Legal Requirements (cont.)
Federal Laws that are passed by act of Parliament. These laws are normally governed and enforced by various Ministries under the Federal Government. Examples of related ministries and agencies are:
Ministry of International Trade and Industry (MITI)
Manufacturing Licence
Ministry of Housing and Local Government Malaysia
Developer’s license
Ministry of Home Affairs
Immigration Department of Malaysia
Ministry of Finance
Royal Malaysian Customs
Sales Tax Licence
Ministry of Domestic Trade and Consumer Affairs
Business registration

21. Business Legal Requirements (cont.)
State enactments that are passed by the state legislative council in matters that are under state control like land, timber concession, water resources, mining, etc. Examples of related departmentresponsible are:
Land Office
Land administration matters
Forestry department
Forestry and timber concession

22. Business Legal Requirements (cont.)
By-laws that are approved by the local authority in matters that the local authority is given the power by the Federal and the State Government especially with regard to management and development of a local authority. Examples of related departments are:
Local authority such as Kuala Lumpur City Hall
License for business, etc.
Development permit and issuance of certificate of fitness, etc.

23. Business Legal Requirements (cont.)
Generally, the scope of business law is very wide, one has to be familiar with the laws that have immediate impact to his business such as:
Registration of Businesses Act 1956,
Company’s Act 1965,
Employment Act1955,
Children and Young Persons’ Act 1966,
Occupational Safety and Health Act 1994,
Factory and Machinery’s Act 1974
Industrial Relations Act 1967,
EPF Act 1991, SOCSO Act 1969,
Trade Union Act 1959,

24. Business Legal Requirements (cont.)
There are also laws that govern his relationship with external parties such as:
Contract Laws
Sale of Goods Act
Agency Laws
Intellectual Properties Act