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BUSINESS ENTITIES

& FORMATIONHj. Ramli Raya

Hjh. Zanariah Zainal Abidin

Mohd. Ali Bahari Abdul Kadir

Zainal Lode

ENT/ETR300 FUNDAMENTALS OF ENTREPRENEURSHIP

BUSINESS ENTITIES & FORMATION

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FORMS OFBUSINESS ENTITIES



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Businesses in Malaysia can be registered under:

a. Business Registration Act 1956 (Amendment

1978) & Procedures Of Business Registration1957

b. Company Act 1965

c. Cooperative Act 1948

d. Parliamentary Act or State (Government)Enactment

Forms of Business Entities

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Types of Business Entities

Under Business Registration Act 1956(Amendment 1978) & Procedures Of BusinessRegistration 1957:

Sole Proprietorship Partnership

Under Company Act 1965

Limited Company by Guarantee

Limited Company by Share Private Limited Company (Sendirian Berhad)

Public Limited Company

Foreign Owned Company

Unlimited Company

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The most common forms of business entitiesregistered by small and medium enterprises(SMEs) are:

Types of Business Entities

a. Sole Proprietorship

b. Partnership

c. Private Limited Company

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Sole Proprietorship

Formed under the Business Act 1956 (Amendment1978).

This form of business structure is solely owned byone person, where management rests on thatperson whose liability is unlimited.

A sole proprietorship is the simplest businessstructure.

As for the name of the business, the name of the

owner or any other name may be used. Typically, a sole proprietorship business requires a

small amount of capital to start with, compared withother forms of business entities

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a. Easy to manage because the owner or proprietor canmake decisions by himself.

b. The owner enjoys a certain degree of flexibility since asa sole owner he can react quickly and positivelyregarding necessary changes in the business.

c. Easy to form and dissolve with minimum formalities.d. As nobody shares the rewards of the business, all profits

will go to the owner.e. Not subjected much to government rules and

regulations. For instance, the yearly financial statementthat needs to be submitted to the Inland Revenue Boarddoes not require validation by a qualified auditor.

f. The owner pays income tax based on his total individualincome

Advantages of Sole Proprietorship

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Disadvantages of Sole Proprietorship

a. Limited source of capital that could limit the businessactivity.

b. The liability of the business is unlimited. If the businessincurs debts for which the business assets are notsufficient to cover, the owner must be prepared to settle thedebt with his personal assets.

c. The future development of the business is limited anddepends on the management capability of the owner andthe condition of his health.

d. The owner is solely responsible for carrying out all thetasks, therefore, a lot of time and effort needs to be spent

in managing the business.e. The life span of the business depends upon the age of the

owner and how efficiently he manages the business. Inaddition, the business will be dissolved if the owner passesaway. If someone wishes to continue the business, it will

have to be re-registered.

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Partnership

A partnership is a legal business entity with two or morepartners. In this form of business, a person forms a partnership

with one or more persons to carry out a business with aview to making profits.

A partnership business is also incorporated under theBusiness Registration Act 1956 (Amendment 1978). A partnership is carried out by more than one person but

not exceeding 20 persons. In a partnership, partnersagree to undertake a joint business and jointly own thebusiness.

Professional businesses (legal firms, architect andaccounting firms the members could number up to 50persons).

In this form of business entity, partners carry out thebusiness, share the capital, profits and losses.

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Advantages of Partnership

a. Easy to set up with few formalities.b. Easier to secure financial assistance from financial

institutions compared with sole proprietorship.c. Equity can be increased through enlisting additional

partners.d. Business risks can be reduced and distributed amongpartners. In case of losses, each partner will share theburden.

e. The responsibility of managing and handling the

business can be divided equally among partners.f. A lot of ideas, talents and skills can be pooled togetherfor better management.

g. As in a sole proprietorship business, income tax is notimposed on the partnership itself but on the owners as

individuals.

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Disadvantages of Partnership

a. Business liabilities are unlimited, which mayinvolve personal assets of all partners of thecompany

b. The life span of the partnership business depends

on the life span of the partners. If any of thepartners passes away or is declared a bankrupt,the business is automatically dissolved, unlessthere is an agreement otherwise.

c. If no Letter of Agreement is being made, unethical

or misconduct behaviour may happen.d. Risk of personal clashes among partners

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Partnership Agreement

The Business Registration Act 1956 does notspecify that the formation of a partnership businessmust be followed by a written agreement between oramong partners. However, it is necessary for thebusiness to have some kind of Contract orPartnership Agreement to avoid anymisunderstanding that may occur among thepartners

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Some of the important elements that need to be stated in aPartnership Agreement:

a. Name of the businessb. The duration of the partnership (to prevent the

dissolution of the business). The agreement should alsostate that in the event one partner passes away orwithdraws from the partnership, the business will not bedissolved.

c. Individuals involved in managing the partnershipbusiness.

d. The accounts of the business and share capital thatshow the contribution of each partner and the right andobligations of each partner towards the capital.

e. The properties are considered as assets of thebusiness.

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Partnerships are governed by the Partnership Act1961. If partners do not have their own agreement, theprovisions of the Act will become applicable. Sections26 and 27 of the Act, among other things, stipulate thatthe following must be provided for in a partnership

agreement:.a. Profits or losses are to be shared equally.

b. No interest is payable on a partners capital.

c. Each partner is entitled to actively participate in themanagement of the business.

d. No partner is entitled to a salary for participating inthe partnership business.

e. Partners have the right to be paid based on their

contribution to the business.


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f. Daily normal things in business can bedecided by the majority of the partners, but anychanges that regularly occur need to be made withconsensus from all partners.

g. A partner may withdraw after getting the consent ofthe other partners.

h. The introduction of a new partner must have theunanimous consent of all existing partners.

i. All business accounts books need to be kept at themain business premises. Partners are allowed to

check through the books and they have the right tokeep a copy of the books.


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Registration of Sole Proprietorshipand Partnership Business

A proprietorship or partnership can be registeredwith the Business Unit of the CompaniesCommission of Malaysia (CCM).

A business is allowed up to seven days after the

start of its operation to be registered. For registration procedures ( Sole proprietorship and

Partnership business please refer

http://www.ssm.com.my/DOINGBUSINESSINMALAYSIA

/GuidelinesDoingBusinessInMalaysia.pdf

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Why applications are turned down:

The applicant does not use capital letter when fillingout the application form;

Application form is too dirty or untidy; Corrections are made using liquid eraser;

The business is already registered, but the ownerhas not taken any initiative to terminate the existing

business before applying to register a new one;


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Verification of application form has beenmade by unauthorised personnel;

The applicant does not attach a copy of the

approval letter from other respectiveagencies in the case where the business isrequired to have other licences or permits;and

Other things that may cause the Registrar ofBusiness to have doubts.


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Private Limited Company

A private limited company is one of the businessentities set up under the Companies Act 1965.

As a corporate body, it has characteristics that

differentiate it from a sole proprietorship andpartnership. This is because a private limitedcompany is a legal entity and its identity is separatefrom the identity of the companys members.

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a. Right and Responsibility A company has a specific right and responsibility. It can acquire

assets under its own name. A company can also take legal actionand face legal action under its own name

b. Life Span The life span of a company is not dependent upon the death or

resignation of its members. A company can be dissolved when itsmembers are no longer interested in continuing the business

c. Liabilities The liabilities of the members in a company are limited to the total

shares contributed to the companys capital. Personal assets arenot affected regardless of what happens to the company

d. Membership A company must have at least two members who are of Malaysian

nationality. These two members can act as a director and founderof the company. The members of the company will appoint theBoard of Directors who will manage and run the business operationsubject to the Companies Act 1965

Characteristics of Private LimitedCompany

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a. The number of members does not exceed 50 people;

b. It has specific authority to transfer ownership ofmembers shares with the approval of the companysBoard of Directors;

c. A company is not allowed to offer or sell any share ordebenture to the general public;

d. A company is not allowed to offer the general public todeposit money within a stipulated time frame; and

e. A company must use the word Sdn. Bhd. or SendirianBerhad at the end of its name.

Terms & Conditions of PrivateLimited Company

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Requirements of A Private LimitedCompany

a. Memorandum of Associationb. Articles of Associationc. The Share Capital of a Company

a. Authorised capital

b. Paid-up capitald. Members of Shareholderse. Board of Directorsf. Company Secretaryg. Auditors

h. Registered Officei. Company Seal

j. Authorisation Letter

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a. Funds are easy to acquire through the exchange of shareownership or loan from a financial institution.

b. All shareholders are legally protected by law.c. Shareholders are not burdened with the management of the

business because the responsibility to manage and run the

business is held by the Board of Directors, who are appointedby the companys shareholders.

d. The liabilities of the companys members are limited to thecapital that they contribute to the company. Shareholderspersonal assets are not affected.

e. The life span of the business is not dependent upon the ageor resignation of its members.f. It has greater potential for expansion.g. Legally, the company is one business entity by itself

Advantages of Private LimitedCompany

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Disadvantages of Private LimitedCompany

a. A Private Limited Company is subject to more rules andregulations compared with a Sole Proprietorship orPartnership. A company must always abide by the rulesand fulfil the terms set by the Companies Commission ofMalaysia.

b. The companys shares cannot be transacted through theshare market.

c. The company must pay corporate tax.d. The qualified Auditors must audit the companys yearly

financial statement and the statement must be completeand regularly updated.

e. The financial affairs of the company must be madetransparent to the general

f. The cost of setting up a company is high

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Procedures in Registering a PrivateLimited Company

The registration of a private limitedcompany must use the services of acompany secretary. The company secretary

will then forward the form together withrelevant documents to the CompaniesCommission of Malaysia in the state inwhich the operation will take place.

For further details, please refer tohttp://www.ssm.com.my/DOINGBUSINESSINMALAYSIA/GuidelinesDoingBusinessInMalaysia.pdf

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BUSINESS FORMATION



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BUSINESS FORMATION

There are four common methods of starting a new

venture:

1. Starting from scratch2. Buying an Existing Business

3. Family Business Succession

4. Acquiring a Franchise

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1. Starting From Scratch

The most popular method among start-upentrepreneurs

Entrepreneur has to make decisions on:

a. Appropriate form of businessb. Business or trade name

c. Business and product/service image

d. Suitable location of the business

e. Appropriate funding to kick-start the business

f. Proper business planning for everything thatneeds to be take into consideration.

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a. Entrepreneurs are free to make his/her owndecisions.

b. Entrepreneurs have the opportunities to try andpractice his/her own ideas.

c. Entrepreneurs are free to choose suitable businesslocation and premise, and acquiring appropriatemachine and equipments for the business.

d. Entrepreneurs are free to develop business imageand personality that suits their desire and interest.

Advantages of Starting FromScratch (cont.)

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a. Entrepreneurs need to put in a lot of efforts. Itrequires more time, energy and money in ensuringthe business kick-off.

b. Higher chances of losses due to high project

implementation cost.c. Entrepreneurs are not able to accurately estimatesales, cost and profit. ( zero business history (i.e.sales record, costing and so on)

d. A new venture usually has no track record.

Therefore, it is difficult for entrepreneurs toconvince the financial institutions in getting thefinancing

Disadvantages of Starting FromScratch (cont.)

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2. Buying an Existing Business

Entrepreneurs start a new venture buy taking overan existing business either buying the wholebusiness or partial shares in the existing business.

Entrepreneurs must investigate before buying.previous owners have reasons why they wanted tosell their business. So, it is the entrepreneursresponsibilities to investigate the business that

they want to buy as well the background of theexisting owners

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a. The time entrepreneurs spent to start the businessis faster compared to starting a new venture formscratch

b. The probability of getting the financing is greater ifthe existing business has a good track record.c. Existing market and loyal customers of existing

business.d. Established networking with suppliers, supporting

agencies and communities.

Advantages of Buying an Existing

Business (cont.)

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a. Buying existing business requires bigger amountof capital either to buy the whole business or partof the business.

b. If the existing business is not well managed by theprevious owner, entrepreneurs need to put in a lotof efforts, money and time to improve the situation.

c. Entrepreneurs have to respect and abide theagreements that have been made by the previous

owner with related parties (i.e. suppliers, agenciesetc.)

d. Conflicts could arise between the new owner andexisting employees

Disadvantages of Buying anExisting Business (cont.)

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3. Family Business Succession

Entrepreneur is the successor of the business whichwas started by the earlier family members(predecessors).

Entrepreneur did not face the difficulties of starting-up a new venture.

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Generally, there are four levels of family business:

Level 1: Business Inception

(the founder)

Level 2: Business Growth & Development

(the founder & 1st generation)

Level 3: Business Maturity

(the founder,1st generation & 2nd generation)

Level 4: Business Transition Period

(1st generation, 2nd generation & 3rd generation)

Levels of Family Business

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a. Financing debt financing versus equity financing

b. Liquidity/Cashfamilys need for cash versusbusinesss needs for cash

c. Transition period older generation versus new

generation (to let go or not to let go ownership &mgmt power)

d. Succession - finding the right successor(competent, motivated, and the most important

getting consensus from all family members)e. Emotion family interest versus business interest

f. Rivalry siblings, cousins

Challenges of Family Business

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a. Freedom and flexibility in decision making.

b. Pride of family culture, high commitment andmotivation lead to business stability.

c. Family members willingness to sacrifice their timeand money (e.g. no salary taken for 1st year ofoperation).

d. High possibility of achieving great monetarysuccess due to high commitment.

e. Family members have good exposure to businessenvironment.

Advantages of Family Business

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a. Unstructured early-stage business organization.

b. Early-stage limited financial resources.

c. Family conflicts such as siblings and/or cousinsrivalry.

d. Nepotism among family members (e.g.incompetent family member is given a bettermanagement position).

e. Traditions practiced by older generation passed onto new generation could lead to resistance tochange.

f. Difficulty in getting the right successor.

Disadvantages of Family Business

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4. Acquiring a Franchise

Another alternative of starting a new business

A franchise is a product and/or service distributionsystem which is governed by a contract

Made between two parties namely, the franchisorand the franchisee

The franchisor is a company which sells the right toanother party to operate the franchise.

The franchisee is a person who purchases the rightfrom the franchisor to operate the franchise

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Operating a franchise includes selling and marketingthe products and/or services using the trade nameand trade mark, as well as a set of systemsdeveloped and owned by the franchisor.

Acquiring a Franchise (cont.)

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The right to operate the franchise granted by thefranchisor to the franchisee involves a few paymentsmade by the franchisee agreed upon the signing of afranchise. These fees are:

Franchise Fee one-off payment made by the

franchisee to purchase the right to operate the franchise Royalty - an on-going payment made by the franchisee

to the franchisor based on the percentage of sales asagreed upon the signing of franchise contract (monthly

or yearly) Advertising and Promotional Contribution - an on-going

payment or contribution made by the franchisee tofranchisors advertising and promotional fund.

Acquiring a Franchise (cont.)

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Types of Franchise Systems

Two major types of franchise system:

Product/Trade name Franchise

Business Format Franchise

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Product/Trade name Franchise

This type of franchise system involves thefranchisee acquires sales right whichincludes the trade name, trademark, and/or

products from the franchisor upon thesigning of the so-called dealership contract,and agreed to sell the product line identifiedby the franchisor. This type of franchise

system is commonly used in theautomotive, petrol kiosk and service station,soft beverages, and tyre industries.

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Business Format Franchise

This franchise system is also named full-fledgefranchise The franchisee is granted the right tomanufacture and market the franchisors productand/or services using a complete franchisors business

set-up which comprises of intellectual properties(trade name. trade mark, etc.); marketing strategies(pricing structure guideline, promotional activities etc.),guided operational activities (franchisee is equippedwith operation manual and has to undergo a training),

premise settings and layout ( exterior and interiorlayout; ambience, colour scheme and decoration mustin-line with franchisors brand and image).

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Advantages of Franchising

To the Franchisee:a. Lower business risks as franchisee shares the

business risks with the franchisor.

b. Better market acceptance of products and/or

services offered as they are established productsand/or services of the franchisor.

c. Benefits of economies of scales

d. Guidance by the franchisors management team

e. Continuous support from the franchisor andgovernment agencies that involved in thedevelopment franchise industry.

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To the Franchisor:a. The franchisors business expansion can be

done through recruitment of new franchisees.

b. Benefits of economies of scales

c. Lower business risks as franchisor shares thebusiness risks with the franchisees.

d. Problems related human resource managementis reduced due to the fact that the franchisees

have to manage the human resource relatedmatters themselves.

e. The franchisor can put more focus on productresearch and development since businessexpansion is done through franchise system.

Advantages of Franchising

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Disadvantages of Franchising

To the Franchisee:a. Limited freedom and flexibility to manage the business

according to franchisees desire

b. The franchise right granted by the franchisor has itsprice to pay; the franchise fee, royalty and advertising& promotional contribution

c. Limited product varieties; the franchisees are allowedto market and sell only the franchisors products

d. Fear of chain-reaction; bad reputation and tarnished

image due to the fault of either the franchisor or thefranchisee would affect the whole franchise system

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To the Franchisor:a. Franchisee conformity; it is difficult to manage the

franchisees especially in ensuring the conformity of theoperational methods of all franchisees in the systemdue to the fact that they are not franchisors employees.

b. The franchisor/franchisee goal incompatibility; Thefranchisor and franchisees may have different businessobjectives as well as personal objectives that couldjeopardize the business marriage.

c. Wrong franchisee; There are franchisees who want

an easy-ride in an attempt to gain instant popularityfor the business.d. Competition through imitationof business concept and

model

Disadvantages of Franchising

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END OF MODULE 5

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