Choice Of Business Entities

Persons wishing to embark on any business operation will have three options to choose from as to what they want their business entities to be.  These are:

·        A sole trader;

·        A partnership; or

·        A limited company.

A. A sole trader 

This form of business is solely owned by one person.  Management rests on that one person and his liability is unlimited.

If such a business fails or is declared bankrupt, the creditors can sue him for all debts incurred.  They can obtain a court order to claim against his personal assets.  These can even include his house if such other assets are insufficient to cover the debts.

One of the advantages of this form of business is that there are fewer formalities in terms of its formation and registration.  It also involves less paper work.

B. A Partnership 

In a partnership, a person trades jointly with one or more persons to carry out a business.

Partnership must comprise at least two members.  The maximum number allowed is twenty.

Partnership is governed by the Partnership Act 1961.  If the partners do not make their own agreement, or if their own agreement does not cover any particular matter specified in the Partnership Act, provisions of the Partnership Act dealing with that particular matter will become applicable.

The advantages of operating sole proprietorship and partnerships are that you are not required to disclose your financial statements to general public.  It will be relatively easy if subsequently you wish to convert your business into a limited company.

Losses incurred by such business can be set off against other personal income such as interests, rent and dividend as well as employment income (if any).

C. A Limited Companies 

A limited company is incorporated under the Companies Act, 1965.  It can be:

·        A company limited by shares;

·        A company limited by guarantee;

·        An unlimited company with or without a share capital.

C (I). Company Limited By Shares

The liability of a member’s contribution to the company’s assets is limited to the amount specified, unpaid on his shares if any.  Once the shares are fully paid up there is, in general, no further liability, i.e. if the company becomes insolvent, or falls into liquidation, the members are not required to make any further contribution to discharge its debts.

In other words, the personal assets of a shareholder would not be available to the creditors of the company unless a personal guarantee had been given by the shareholder.

C (II). Companies Limited By Guarantee

The liability of members is limited to such amount as they undertake to contribute to the assets on winding-up.  That amount is specified in its memorandum of association, which forms part of a company’s constitution.  If the company is wound-up, each person who is a member at that time or has been a member within one year of winding up, may be required to contribute up to the amount of his guarantee towards payment of the debts incurred while he was a member.  Past members are liable only if the present members default.  Such companies are invariably non-profit-making concerns.  They include professional bodies, trade societies, clubs et cetera.

C (III) Unlimited Companies

There is no limit to the liability of the members.  Such undertakings do not materially differ from partnerships or individual traders.  A past member is liable only if he ceases to be a member within one year of the winding up.  Unlimited companies must have special articles of association and are free to return capital to their members.

Companies Limited By Shares

A company limited by shares can be:

·        A private limited company (Sendirian Berhad)

·        A public limited company (Berhad)

Private Limited Companies

A private limited company is one which by its articles—

1.       Restricts the right to transfer its shares (the transfer may be subject to the approvals of the directors);

2.       Limits the number of its members to fifty (the minimum being two);

3.       Prohibits any invitation to the public to subscribe for any shares in or debentures of the company; and

4.       Prohibiting any invitation to the public to deposit money with the company for fixed periods or payable at call.

Public Limited Companies

A public limited company is any company other than a private company whose shares

may be offered to the public for subscription.  Such shares are freely transferable.

The company may apply to the Stock Exchange for permission for its shares to be

listed, thus, providing an effective market for such shares.

Advantages Of Limited Companies

One of the major advantages of a limited company is that the shareholders are not liable for the company’s debts beyond the amount of share capital they have subscribed, provided there has been no deceit, fault or other malpractice.

Another advantage of such a company is that it is easy to transfer the ownership, either wholly or partially, through the selling of all or part of its total shares, or through the issue of new shares to additional investors.  There is now need to wind up the company in the event of deaths, or changes amongst the shareholders or directors.

Disadvantages Of Limited Companies

·         The public will have the access to the financial affairs of the company.

·         The company has to comply with the requirements of the Companies Act, 1965.

·         The company has to appoint auditors to very and report its financial statements.

·         Every limited company must have at least a company secretary to take charge of its statutory returns as well as board and shareholders’ meetings.

·         The cost involved in forming a limited company is high.  This includes the cost of capital dury on authorised share capitals, the cost of formation expenses such as professional fees, filing fees, printing of memorandum and articles of association, share certificates, common seal et cetera.

Exempt Private Company

An exempt private company is a private limited company, the shares of which are not held directly or indirectly by any corporation (i.e. another limited company), and which ahs not more than 20 members.  An exempt private company need not file its annual accounts with the Registrar of Companies (ROC) for the information of the public as long as the company files a certificate, signed by a director of the company, the secretary and the auditor of the company, that the company is able to meet its liabilities as and when they fall due.