Business Organisation Chapter 1: Sole Proprietorship

Business Organisation

Sole Proprietorship

• A business structure wholly owned by one person
• No separate legal entity from the person who conducts the business
• No special legal documents required for its creation
• Must be registered with the Registrar of Business under Registration of Businesses Act 1956
• Limit on size: 1 Person
• Management and ownership: sole proprietor is the only boss, no need to report to the Board of Directors or Shareholders or to Partners
• Formalities: easy to set up, minimal requirement
• Property: business property is owned by the sole proprietor
• Transfer of interest or shares: easily transferred to another person
• Liability for debt: unlimited liabilities, owner is responsible for all debts of the business
• Legal rights and legal actions: can sue and be sued in own name
• Disclosure of accounts and other documentation: no public disclosure of accounts is required, business affairs can be kept private
• Capital and raising of capital: main source of funds is usually savings, can raise capital by way of loans and utilizing properties
• Audit: no need to appoint an auditor
• Income tax: has to maintain account books and to render accounts, has to submit income tax returns
• Duration and dissolution: once the owner dies, the business ceases

Partnership

• Governed by the Partnership Act 1961
• Characteristics:
  • More than one person (minimum 2, maximum 20)
  • Partners pool their capital and work together in business
  • Associations and charitable organizations cannot be partnerships
  • Not a legal entity separate from its members
  • Must be registered
  • Relationship among partners is governed by the Partnership Act 1961 and partnership agreement
• Types of Partners:
  • General Partner
  • Active Partner
  • Dormant or Sleeping Partner
  • Quasi Partner
• Management and ownership: all partners take part in management of partnership business
• Formalities: minimal legalities required to set up, can be formed with or without a written agreement
• Property: partnership property is owned by all partners collectively
• Transfer of interest or shares: a partner can assign his share in the partnership
• Liability on debts: unlimited liabilities, each partner is personally liable for debts of the partnership
• Relationship between Partners and 3rd Party:
  • Partners are agents of the partnership firm
  • Acts done by one partner binds the rest of the partners
• Legal rights and legal actions: partnership can sue and be sued in its firm name
• Disclosure of accounts and other documentation: no need to publish or disclose any financial records
• Capital and raising of capital: all partners are entitled to share equally in the capital and profits of the business
• Audit: no need to appoint an auditor
• Income tax: each partner is individually assessed to tax on his share of the partnership profit
• Rights and duties of Partners:
  • All partners are entitled to share equally in the capital and profits of the business
  • Firm must indemnify every partner in respect of payments made and personal liabilities incurred
  • Partners may agree to renew the partnership for another fixed period
• Duration of Partnership:
  • May exist for a fixed period and comes to an end at the expiry of the period
  • May be dissolved by agreement, death or bankruptcy of a partner, illegality of partnership, or court order

Company

• Artificial person created by law

• Exists independently of the individuals who are the members of the corporate body

• Law applicable is the Companies Act 1965

• Limit on size:

  • Minimum number of members – 2 Persons
  • Public limited company – No Limit
  • Private limited company – Maximum of 50 Members

• Registration of A Company:

  • Memorandum of Association (Company’s Constitution) must be lodged
  • Contains the company’s name, its objects, the amount of its share capital and whether the company is limited or unlimited
  • First directors must be named in the MOA and Articles of Association
  • MOA must be signed by persons called the ‘Subscribers’ in the presence of witnesses
  • Upon registration of the MOA, the Registrar will issue a Certificate of Incorporation### Company Incorporation

• A company's birth certificate is its Certificate of Incorporation.

Management and Ownership

• The Companies Act 1965 separates the management and ownership of a company.
• A company must appoint directors to manage the company, with at least 2 directors at all times.
• Directors' powers are outlined in the Articles of Association (AOA).
• Directors are accountable to shareholders and have wide management powers.
• Retirement or removal of directors does not affect the company's existence.
• Members do not have the power to participate in company management.

Formalities

• Prescribed procedures must be followed for company incorporation, involving expenses.
• During a company's existence, formalities related to accounting, registers, and minutes must be complied with.
• An approved auditor or auditing firm must be appointed to report to shareholders on company accounts.

Transfer of Interest or Shares

• Shares are freely transferable, but the company may impose restrictions in its Memorandum of Articles.
• Examples of restrictions include transfer at the discretion of the Board of Directors or offering shareholders the first option to buy shares.
• If a shareholder dies, their shares may pass to their beneficiary.

Liability for Debt

• Company members are not responsible for company debts, depending on the type of company (public limited, private limited, unlimited, or by guarantee).
• Unlimited companies have full liability for members.

Legal Rights and Legal Actions

• A company's rights can only be enforced by the company itself.
• A company can sue or be sued by its own members or anyone else.

Disclosure of Accounts and Documents

• A company must file copies of its balance sheet, profit and loss account, and other documents with the Registrar.
• These documents are available for inspection by anyone paying the appropriate search fee.

Capital and Raising of Capital

• A company can raise funds by borrowing, issuing shares, or debentures.
• The Companies Act regulates raising funds from the public.
• A registered prospectus must accompany any public offer of shares or debentures.

Audit

• All companies must appoint an independent auditor.

Income Tax

• Every company resident in Malaysia must deduct income tax at the prevailing rate from dividends paid to shareholders.

Duration and Dissolution

• A company has perpetual existence and is not affected by the death or incapacity of one or more members.
• Members may come and go, but the company's existence remains unaffected.

Company as a Body Corporate

• A registered company is considered a body corporate with a separate legal personality.
• The concept of separate legal entity is that the corporation is distinct from its members and controllers.

Salomon's Principle

• A company exists independently and separately from its members.
• Effects of incorporation include:
  • Separate legal personality.
  • Ability to sue and be sued in its own name.
  • Perpetual succession.
  • Ability to own property.
  • Limited liability for members.

Exceptions to Salomon's Principles (Lifting the Corporate Veil)

• Numbers of members below 2.
• Fraudulent trading.
• Publication of name.
• Holding and subsidiary companies.
• Evasion of legal obligations or abuse of legal rights.
• Taxation and nationality rules.