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CHAPTER FOUR

Different Forms
of Business Ownership
LEARNING OUTCOMES

In this chapter, you will learn to:


 Discuss the legal aspects involved in registering a
business in Malaysia.
 Explain the advantages and disadvantages of three
major forms of business ownership: sole proprietorship,
partnership and corporation.
 Describe the advantages and disadvantages of setting
up a franchise business.
 Discuss the setting up of joint ventures.
REGISTERING A BUSINESS IN
MALAYSIA

• A business can be any form of trade, commerce,


craftsmanship, occupation, profession or other activities
that is carried out for the purpose of maximizing profit.
• Before deciding to start a business it should be
registered according to the choice of business, and
necessary licenses and permits need to be obtained.
• Any business would need to be registered with the
Companies Commission of Malaysia (SSM) under the
Companies Act 1965 and the Registration of
Businesses Act 1956.
DIFFERENT FORMS OF BUSINESS

Three most common forms of setting up a


business:
• Sole proprietorship/sole trader
• Partnership
• Corporation
SOLE PROPRIETORSHIP

• Sole proprietorship is considered to be the


simplest form of business organization.
• Does not need to be operated by one person
solely—can have large numbers of employees.
• Represents the largest number of businesses in
most countries and typically the smallest in size.
SOLE PROPRIETORSHIP
How to start a business?
1. Registration of a new business to be done within 30 days from the date
of commencement of the business.
2. Registration can be done at any SSM counter or through the e-
Lodgement services
3. Complete the Business Registration Form (Form A). Refer to
Guidelines For New Business Registration
Business may be registered using personal name or using a trade name.
i.Personal Name - Business name using personal name as stated in the
identity card is not required to apply for business name approval.
ii.Trade Name - Complete business name approval form (Form
PNA.42). Refer to Guidelines for Business Name Application.
4. Business Registration can be made for a period of one (1) year and not
more than five (5) years.
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SOLE PROPRIETORSHIP

• Who can submit Form A?


• The owner/one of the partners

• Fee?
• Trade Name – RM60 per year
Personal Name - RM30 per year
Branch (s) - RM5 per year for each branch
SOLE PROPRIETORSHIP

Activity Fee
Trade Name – RM60 per year
Personal Name -RM30 per year
New Registration
Branch (s)-RM5 per year for
each branch
RM20
Business Updates Branch(s) - RM5 per year for
each branch
Trade Name – RM60 per year
Personal Name -RM30 per year
Business Renewal
Branch (s)-RM5 per year for
each branch

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ADVANTAGES OF A SOLE
PROPRIETORSHIP

• Total independence in making decisions


• Sole ownership of profits
• Only pay personal income tax and not business
tax
• Cheap set-up cost
DISADVANTAGES OF A SOLE
PROPRIETORSHIP

• Entirely responsible for debts and risk


• Unlimited personal liability
• Limited access of capital
• Limited skills and capabilities
• Feeling of isolation
• Short life of business
PARTNERSHIP

• Business owned by two or more persons in a common


view of sharing the profits and losses of the business.
• Partners are joint owners of the business and therefore
will share the profits and risks.
• The law does not require a partnership agreement but it
would be wise to develop one that spells out the exact
status and responsibility of each partner.
• In the absence of a formal partnership agreement, the
provision of Partnership Act 1961 shall be applied.
CONTENTS OF A PARTNERSHIP
AGREEMENT

• Name of the partnership


• Purpose of the business
• Location of the principal business
• Duration of the partnership
• Names of the partners and their address(es)
• The capital to be contributed by each partner
• The ratio in which profits/losses are to be shared
CONTENTS OF A PARTNERSHIP
AGREEMENT (cont.)

• The rate of interest, if any, to be paid on capital before


the profits are shared.
• Salaries to be paid to partners.
• Arrangements for admission of new partner(s).
• The procedures to be carried out when a partner
retires or dies.
TYPES OF PARTNERSHIP

There are two types of partners:


GENERAL PARTNER
• One partner must be a general partner—responsible
for the debts of the enterprise and has unlimited
liabilities.

• Takes an active role in managing the business.


TYPES OF PARTNERSHIP (cont.)

LIMITED PARTNER
• Not liable for the partnership debts.
• Personal properties will not be affected to cover the
partnership unpaid liabilities—limited to the capital they
have put in.
• Can lose the capital but they are not required to pay
partnership debts.
• Not allowed to take part in the management of the
partnership.
Partnerships
• Advantages: • Disadvantages:
• More talent and • Unlimited liability for
money general partner(s)
• More fundraising • Disagreements
capability among partners
• Relatively easy to • Lack of continuity
form
• Limited liability for
limited partners
• Tax benefits
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CORPORATION

• Considered the most complex form of business in


comparison to sole proprietorship and partnership.
• It is an artificial legal entity—a legal entity separate
from its constituent members.
• It is formed by several persons who are able to own
property, draw contracts and employ people.
• All companies in Malaysia are governed by the
Companies Act 1965.
CORPORATIONS –Limited Company
(SDN BHD or BHD)

• Sendirian Berhad (SDN BHD) is a private limited


company, where it prohibits any invitation to the public
to subscribe to any of its shares, deposit money with the
company for investment or subscription. Minimum
members in a private limited company is TWO (2) and
maximum is FIFTY (50).
• Berhad (BHD) is a public limited company where its
shares can be offered to the public for fixed periods and
any other forms of subscription. The minimum amount
of members’ (shareholders) are TWO (2) and maximum
of unlimited amount of members.
Private limited companies (Sdn Bhd)

• Private limited companies are great, but they


cost a lot, especially for small business owners.
• Search online, and you’ll find companies
offering to help set up a private limited company
for about RM 1,500.
• And it costs at least RM 2,500 per year to
maintain (for mandatory expenses like secretary
fees, auditor fees and accounting fees).

*Company secretary
CHARACTERISTICS OF A
CORPORATION

• The company has separate rights and responsibilities whereby


it is independent from its members and shareholders.
• The members’ liabilities are limited to the amount of shares
subscribed – shareholders are not liable if the corporation were
to incur bankruptcy.
• The company’s operation is governed by the Companies
Commission.
• There are various taxes that must be paid by a company that is
corporate profits and individual salaries and dividends.
• Companies must publish financial reports checked by
authorized auditors.
ADVANTAGES OF A
CORPORATION

• Limited liability
• Easy to raise capital through sale of shares
• Able to transfer ownership
• Relative permanence of existence
• Able to delegate authority
DISADVANTAGES OF A
CORPORATION

• Activities limited by law


• Costly incorporation process
• Double taxation
• Loss of control by the founder
• Extensive governmental regulations and reports
required
Starting a Limited Liability
Partnership (LLP)
• Limited Liability Partnership (LLP) is an alternative business vehicle
regulated under the Limited Liability Partnerships Act 2012 which
combines the characteristics of a company and a conventional
partnership.
• Who is it for?
• The LLP business structure is designed for all lawful business purposes
with a view to make profit.
• LLP may also be formed by professionals such as Lawyers, Chartered
Accountants and Company Secretaries for the purpose of carrying on
their professional practice.
• The LLP concept will also support start ups, small and medium
enterprises (SMEs) to grow their businesses without having to worry too
much on their personal liabilities, personal assets and strict compliance
requirements.
Starting a Limited Liability
Partnership (LLP)..Cont..

• On the other hand, you can set up an LLP for the price below:
• Company name reservation: RM 30 (Update 14th Dec 2015:
Company name reservation is not mandatory)
• Registration fees: RM 500
• Certificate fees: RM 21.20, including GST (Update 14th Dec
2015: This used to cost RM 47.70. Details in Step 14 below)
(The RM 500 registration fees don’t include your LLP
certificate. As to why someone would register a company
without wanting a certificate beats me, but anyway…)
• Total: RM 521.20
• And it’ll cost you this much to maintain it yearly: Annual
declaration: RM 200
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Starting a Limited Liability
Partnership (LLP)..Cont..
• It’s a lot cheaper because you don’t need to do things like have an
Annual General Meeting, hire a company secretary, and submit audited
financial reports.
• But why not form a sole proprietorship or partnership instead? They
cost much cheaper. Only RM 60 per year to start and maintain (RM 30
if you’re not creative and use your own name).
• Because an LLP is a separate legal entity from its partners. It declares
its tax separately from its partners (important, because it can help
optimize the tax you pay). And then the most important point of all:
like a private limited company, an LLP offers limited liability to its
partners.
• Meaning even if the LLP is sued and goes bankrupt one day,
creditors cannot come after your personal assets. But in a conventional
sole proprietorship or partnership — they can and they will.
How to register an LLP?

• An LLP has to be registered via the MyLLP


portal.
• Please be informed that the Compliance Officer of
the LLP is required to be registered as the user of
the MyLLP portal. https://myllp.com.my/

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FRANCHISING

• An alternative way of starting a business from scratch.


• A system where companies (franchisee) are granted the right to
operate a business according to a special contract with a parent
organization (franchisor).
• Need to pay certain amount of fees and royalties to the parent
company.
• The Malaysian franchise system is incorporated under the
Franchise Act 1998.
• To operate a franchise business, one has to be registered with
the Registrar of Franchise, Ministry of Entrepreneurial and
Cooperative Development.
• (www.kpdnhep.gov.my › ... › Franchise Development Division )
Example

• McDonald's looking to franchise more new outlets in


Melaka, Johor and Penang !
Youngsters and family in these states really LOVE McD !
If you have an interest:
Franchise fee - RM71, 000.
Security Deposit - RM50, 000.
Initial Investment - Between RM1.5 million and RM4.5
million.
Royalty - 5% of gross sale.
Advertising fee - 5% of gross sale.
ADVANTAGES OF FRANCHISING

• Provide training and support


• Possess brand name appeal
• Standardized quality of goods and services
• Possess proven track record
• Financial assistance
DISADVANTAGES OF
FRANCHISING

• Initial high cost


• Stifles creativity
• Lack of franchise commitment
JOINT VENTURE

• A joint venture (JV) is similar to a partnership but it is limited


for a period of time or a single project. (Sony-Ericcson)
• It is an entity formed between two or more parties to
undertake economic activity together—seen as a very viable
business alternative, companies can complement their skills in
achieving the business objective.
• Both parties would agree to create a new entity by
contributing in terms of equity and the revenues, expenses and
control of the enterprise would be shared.
• JV is considered to be a good way for companies to partner
without having to merge.
BENEFITS OF JOINT VENTURES

• Partners save money and reduce their risks through


capital and resource sharing.
• Joint ventures also give smaller companies the chance
to work with larger ones to develop, manufacture, and
market new products.
• Provides companies of all sizes the opportunity to
increase sales, gain access to wider markets, and
enhance technological capabilities through R&D
underwritten by more than one party.

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• 1) In a franchise agreement, the franchisee is
________.
• A) the parent company
• B) the local owner
• C) the supplier
• D) any of a number of customers
• Answer: B
• 2) In a franchise agreement, the franchisor is
________.
• A) the parent company
• B) the local owner
• C) the supplier
• D) any of a number of customers
• Answer: A
• 3) The most significant disadvantage of owning a
franchise is ________.
• A) startup costs
• B) guidelines on operating the business
• C) competition
• D) difficulty obtaining loans
• Answer: A
• 4) Which of the following represents the most
businesses in Malaysia?
• A) sole proprietorships
• B) partnerships
• C) cooperatives
• D) corporations
• Answer: A
• 5) A(n) ________ invests money in a partnership but
is liable only to the extent of his/her investment.
• A) agent
• B) general partner
• C) limited partner
• D) officer
• Answer: C
• 6) A ________ is a business that is legally
considered a separate entity from its owners and is
liable for its own debts.
• A) sole proprietorship
• B) corporation
• C) partnership
• D) cooperative
• Answer: B
• 7) The owners of a corporation are the ________.
• A) board of directors
• B) officers
• C) stockholders
• D) top managers
• Answer: C
• 8) Corporate officers are ________.
• A) top managers
• B) members of the board
• C) non-voting stockholders
• D) none of the above
• Answer: A
• 9) Corporations sell shares in the business called
________.
• A) bonds
• B) treasury securities
• C) stock
• D) dividends
• Answer: C
• 10) Company A purchased Company B. This is an
example of a(n) ________.
• A) merger
• B) spin-off
• C) divestiture
• D) acquisition
• Answer: D
• 11) Company A sold its pet food division to
Ralston-Purina so that it could focus on its core
businesses. This is an example of a ________.
• A) spin-off
• B) divestiture
• C) strategic alliance
• D) merger
• Answer: B
• 12) Curves, McDonald's, and Subway are examples
of ________.
• A) government entities
• B) university sponsored businesses
• C) franchises
• D) networking businesses
• Answer: C
• Explanation: C) All of these businesses represent an
agreement between a franchisee and a franchiser.