TOPIC 1: BUSINESS ORGANIZATIONS IN MALAYSIA

In Malaysia, the business industry runs business through different types of business organization.
Business organization is also known as business entities and business vehicles. It is called as
business vehicle because a business needs something to ride on in order to operate the business.
The types of business organization is differ based on the size of the business.

1.1 DIFFERENT FORMS OF BUSINESS ORGANIZATIONS

• In Malaysia, there are basically five (5) types of business entities namely a sole-
proprietorship, partnership, limited partnership, limited liability partnership and company.
Except for limited partnership (only available in Labuan), all of these business entities are
available throughout Malaysia.

Business Organization in Malaysia

Sole Limited
Partnership Limited Liability Company
Proprietorship Partnership
Partnership
(Labuan only)

• There are few factors which entrepreneurs should consider before deciding the type of
business entity. The type of business entity should be suitable with the needs of the
entrepreneur.

• The factors includes the following:

i) Procedure: The procedure for some business entities are complicated and requires
more steps and expenses for formation of the business entity as well as to continue
their existence.

ii) Liability: The liability of the owners of the business differs depending on the type of
business entities. The liability does not only refers to debts of the business vehicle but
also for any wrongful act or omission.

iii) Continuity of business: Business entities may have perpetual existence depending
on the type of business entity. However, the existence of some entities is closely
connected with the identity of the owner of the business.

iv) Transferability: Some business entities allow the owner to transfer his rights to a third
party without affecting the status of the business entity.

v) Taxation: The taxation for every type of business entity differs. The profit of some
business entities are taxed at the entity level. The taxes payable are at a different
scale, compared to taxes paid by individuals.
1.2 SOLE-PROPRIETORSHIP

Features
• This business entity is the oldest and simplest form of business organization.
• It is suitable for a small size business.
• This business entity is owned by one person, the sole proprietor.
• The person does the business in his own name and he has no partners as he/she is the only
owner.
• It is a business having no separate existence from its owner.
• The person who formed the business owns all the business property, assets as well as the
debts.
• The owner is fully responsible for all the control, liabilities and management of the business
even he may employ other people to run the business.
• If the sole proprietor dies or becomes bankrupt, the business is dissolved.

Procedure and requirement of law

• A sole-proprietorship is to register within thirty (30) days of its commencement under the
Registration of Business Act 1956.
• Registration of business can be done through the ebiz online.
• Upon registration, Certificate of Registration will be issued by Registrar.
• If the sole proprietorship is not registered, the sole proprietor may be liable for an offence
which is punishable to a fine not exceeding RM50,000 or imprisonment for a term not
excedding two (2) years or both.
• If the sole proprietor is not registered, he or she could not sue to enforce his or her rights but
can be sued by others instead

Advantages Disadvantages

• Easy to form. • The owner is having unlimited liability

• Minimal start up costs/ inexpensive. and fully responsible for the business’s
• No formalities necessary. debts.
• The owner is in complete and direct • Difficult to raise capital and need to use
control of decision making owner’s fund savings or loan.
• The owner receives all income/ • Difficult to hire high-caliber employees.
profits generated by the business • If the owner dies, the business will not
• Tax advantages to the owner continue to exist.
• Easy to be dissolved
• No limit to borrowings
• Can maintain secrecy of the
business since information need not
be published.
1.3 PARTNERSHIP

Features
• Partnership is suitable for bigger business which requires more funds as compared to sole-
proprietorship.
• Business is defined as every trade, occupation or profession. The business carried must
include the supply of goods or services.
• Partnership is defined under Section 3(1) of Partnership Act 1961 as ‘the relationship which
subsists between persons carrying on business in common with a view of profit.’ Thus, it must
be at least two persons agreeing to run a business for a profit to form a partnership.
• Partnership cannot exist before the business commence. Thus, to form a partnership, the
business is already being carried or has been started.
• Like sole-proprietorship, it does not differentiate between the business and its owner.
• Section 7 of the Partnership Act 1961 provides that every partner is an agent of the firm and
his other partners for the purpose of the partnership business.
• Thus, when one partner does any act in carrying on the usual business of the firm, the firm
and his partners are bound.
• However, the firm and his partners are not bound in the following circumstances:
(a) if he or she is not authorized by other partners and third party knows he or she does not
have authority; or
(b) the third party does not know or believe him or her to be a partner.
• Section 11 of the Partnership Act 1961 provides that every partner is jointly liable with other
partners for all debts of the firm incurred while he or she is a partners.

IAC (Singapore) Pte Ltd v Koh Meng Wan (1979)

• Held : If the firm fails to pay a debt, the creditor can take action and obtain judgement against
the firm. If the partnership property is insufficient to satisfy the debt, the creditor may claim
from any of the partners.

• Section 12, 13 and 14 of the Partnership Act 1961 provides that every partner is jointly and
severally liable for any wrongful act or omission committed or misapplication of money by a
partner acting in the ordinary course of business.
• Thus, a victim may sue all the partners or to sue one or more of the partners without
discharging other partners.
• A partner who retires from partnership continues to be liable for any obligations and debt
incurred before his or her retirement.
• In order to establish a well and proper terms of partnership business, a legal agreement should
be drawn up.
• The partnership agreement will only bind the partners and not the third party.
• If there is no partnership agreement or the partnership agreement is silent on some of the
terms, the rights provided in the Partnership Act 1961 will be applicable.
• Partnership may be dissolve by way of expiration of terms, notice from partners, charge of
shares, bankruptcy, death, illegality of partnership and dissolution from the court.

Procedure & Requirement of Law

• The rights and duties of partners in a partnership is governed under the Partnership Act 1961.
• Partnership shall not consist of more than twenty (20) person as it is not allowed for
unincorprated associations to do so (Section 13 of CA 2016).
• Section 6(1) of the Partnership Act 1961 provides that persons who have entered into
partnership with another are collectively called a firm. The name of under which their business
is carried on is called the firm name.
• It is not a requirement under the Partnership Act 1961 to register a partnership.
• A partnership is to register within thirty (30) days of its commencement under the Registration
of Business Act 1956.
• However, non-registration of partnership will not affect the rights and duties of the partners
under tha partnership agreement. Third parties may also enforce any obligation against the
firm.
• If the partnership is not registered, he or she could not sue to enforce his or her rights but can
be sued instead by others.

Advantages Disadvantages

• Easy to form • The partners are having unlimited liability

• Minimal start-up costs/inexpensive
• No formalities are necessary
• Having the ability to raise funds since
there is more than one owner combining
resources and expertise (wider
knowledge, expertise, skills, contact and
investment capital)
• Limited regulation by authorities
and fully responsible for the business’s
debts
• Difficult to find suitable partners
• There is a possibility of conflict
developing between partners
• The partners are personally and jointly
responsible for all the debts of the firm
• Divided authority and the lines of
authority may not be clear
• If any partner dies, is injured, withdraws,
sells his interest or a new partner is
admitted into the business, the
partnership comes to end.

1.4 LIMITED LIABILITY PARTNERSHIP (LLP)

Features
• LLP is a form of business entity that combines the features of a company and partnership.
• LLP enjoys limited liability for the partners and flexibility of the partnership agreement for
internal management purposes.
• LLP may be formed by a minimum of two persons ( individual or body corporate), for any lawful
business with a view of profit and in accordance with the terms is of LLP agreement.
• LLP is a professional practice if it consist of natural persons of the same profession
(accountants, lawyers & company secretaries) and have in force professional indemnity
insurance as approved by the Registrar of LLP.
• LLP is a body corporate and has a legal personality separate from its partner (a separate legal
entity).
• It has the legal status of a body corporate and unlimited capacity which is capable of suing
and being sued in its own name, holding assets and doing such other acts and things in its
name as bodies corporate may lawfully do and it has perpertual succession.
• LLP is solely liable for any obligation in contract or tort. Thus, a partner will not be liable merely
because he is a partner in the firm.
• If the partner is liable to any outsider due to his wrongful act or omission in the course of LLP
business, the firm is liable. The liability of LLP shall be taken from LLP’s property.

Procedure & Requirement of Law

• LLP is governed by the Limited Liability Partnership Act 2012 (“LLP Act”).
• The provisios in Partnership Act 1961 and rules of equity and common law applicable to
partnership are not applicable to an LLP registered under LLP Act.
• Formal registration is vital to establish an LLP. The registration of an LLP is to be done by a
compliance officer appointed by the LLP.
• It is important to form the LLP in the manner as prescribed by the LLPA Act and register the
firm in order to enjoy the advantages of limited liability.
• Upon registration, the name of each LLP shall end with “Perkongsian Liabiliti Terhad” or “LLP”.
• Registrar has the power to refuse registration of LLP if it is contrary to national security or
interest, used for charitable or unlawful purpose or prejudicial to public peace, welfare or good
order or morality in Malaysia.
• The rights and duties of the LLP and partners of the LLP are governed by the limited liability
partnership agreement. In absence of an agreement, Second Schedule of LLP Act shall apply.

Advantages Disadvantages

• The partners are having limited liability • As compared to the conventional

if the partners are limited partners
(personal assets are protected).
• Separate legal entity (partners free
from the firm's legal course of action).
• Business flexibility (in accordance to
Partnership Agreement)
• Cost saving (no audit requirement and
less statutory compliances)
• No minimum capital required
• No issuance of shares
partnership, LLP is required to prepare
true and fair financial statements.
However, the financial statements need
not be audited or lodged with the
Registrar.
• The Registrar may send a notice to the
LLP to lodge the true and fair and
financial statements.
• LLP are required to file an annual
statement on its solvency status with
the Registrar.
1.5 COMPANY

• According to Section 2 of CA 2016, company is defined as a company incorporated under

the CA 2016 or any corresponding previous written law. Traditionally, a means by which
a large group of people with capital and management resources could come together to
conduct an enterprise on an ongoing basis.
• Company is an artificial legal entity with the attributes of perpetual succession, having a
common seal, the ability to own property and having capacity of suing and and being sued.
• The dominant form of business organization in Malaysia.
• Further explanation will be done in other chapters with regards to company.

Advantages Disadvantages

• The members are having limited liability • Expensive to establish

• The ownership is transferable
• As it has its own separate legal entity,
the business will continue in existence
notwithstanding of no human being
• Easier to raise capital
• Possible tax advantage
• Need to comply with many law and
regulations
• Having restrictive power – every act done
must be consistent with its constitution and
the law

1.6 DIFFERENCES BETWEEN SOLE-PROPRIETORSHIP, PARTNERSHIP, LIMITED

LIABILITY PARTNERSHIP AND COMPANY.

Differences SOLE- PARTNERSHIP LIMITED COMPANY

PROPRIETORSH LIABILITY
IP PARTNERSHIP
(LLP)

Business The sole- Two or more Combination (or A company is a

structure proprietor owns persons carrying hybrid) of a person
the business to on business with partnership and a separated from
himself using a a view of profit. company its members,
personal name or directors and
trade name. officer.
Owner Sole-Proprietor or Partners Partners have a Member or
sole-owner share in the shareholders
capital and profits own ‘shares’ in
of the LLP the company
that provide
them rights in
the company

Relevant law Registration of Partnership Act Limited Liability Companies Act

Business Act 1961 Partnership Act 2016
1956 Registration of 2012
Business Act
1956

Registration Needs to register Needs to register Required by the Required by

the business the business law to be the law to be
under the under the registered with registered with
Registration of Registration of the Registrar as the Registrar of
Business Act Business Act required by the Companies as
1956 in order to 1956 in order to Limited Liability required by the
have the capacity have the capacity Partnership Act Companies Act
to sue. to sue. 2012. 2016.

The Partnership The provisions in

Act 1961 governs Partnership Act
the right and 1961 is not
duties in a applicable to LLP.
partnership
relationship

Legal status No separate legal No separate legal Separate legal Separate legal
entity entity entity entity

Transferability A sole-proprietor Generally, a Generally, a Shares in a

may transfer his partner cannot partner cannot company are
business to transfer his status transfer his status generally
someone else. as partner to as partner to transferable
someone else someone else although the
without the without the right of transfer
consent of all the consent of all the may be
other partners. other partners. restricted.

Continuity of Business will be Business will be LLP will still exist Company will
business terminated after terminated after even after key still exist even
the owner retires the owner retires owner has after key owner
or passed away. or passed away. passed away. has passed
away.
Management The sole- Partners are Partners are Members of a
proprietor owns agents of the firm agents of the firm company as
and manages the for carrying on its for carrying on its such are
firm himself and business in the business in the neither its
can employ ordinary course of ordinary course of directors,
employees to business and are business and are shareholder
manage the firm generally entitled generally entitled and debenture
for him. to manage the to manage the holder. The
firm. firm. company is
managed by
the
management
such as
directors.

Number of There is only one The minimum The minimum Depends on

Partners / (1) person in a number of number of the type of
Shareholders sole- partners is two (2) partners is two (2) company:
proprietorship. and the maximum and no maximum. Private
is twenty (20). Company:
(There is no Minimum is
ceiling on the one (1)
number of Maximum is
members for fifty (50)
professional
firms). Public
Company:
Minimum is two
(2)
No maximum
limit

Constitution No agreement is A partnership A LLP may be All companies

necessary since may be formed formed orally or in (except for
the sole- orally or in writing. company
proprietor is only writing. The rights and limited by
one person by The rights and duties of partners guarantee)
himself. duties of partners is contained in may or may not
is contained in the LLP have a
the partnership agreement. In constitution.
agreement. absence of LLP
In absence of agreement,
partnership reference will be
agreement, made to the
reference will be Second Schedule
made to the of the LLP Act
Partnership Act 2012.
1961.
Contribution Capital is All the partners All the partners Capital
of capital contributed by the contribute to the contribute the subscribed by
owner and it may capital of the capital of the members for
be withdrawn by partnership and partnership and their shares
him anytime. they can withdraw they can withdraw cannot
the capital subject the capital subject ordinarily be
to the agreement to the agreement returned to
entered between entered between them subject to
all the partners. all the partners. certain law.

Liability of The owner is fully Partners are fully LLP or the firm Due to the
debt liable to settle the liable to repay all itself is soley separate legal
debts and there is the debts of liable to repay the entity, the
no limit as to his partnership and debts and the members of
liability. their liability is partners are not the company
unlimited. liable. are not liable to
repay the debts
of the
company. The
company itself
is liable to
repay all the
debts incurred.

Annual return Not required Not required Not required Required

and financial
statement

Taxation Tax on sole Tax on partners Tax on LLP Tax on

proprietor. company
Profits are treated Profits are treated
All profits and as part of each as part of each A company is a
losses go directly partner’s personal partner’s personal separate legal
to the business income. income. entity. The tax
owner. Thus, no is on the
separate tax for a corporation
sole proprietor. and not on the
directors/
shareholders.

Suitable for Micro and small Very suitable for Start-ups and Most common
businesses. Very professional firms small businesses. form of entity in
suitable for one- and ventures that Malaysia.
person venture do not seek to Suitable for
with no raise funds. SMEs.
employees
Dissolution Informal based on Informal based on Formal procedure Formal
owner’s own agreement either by winding procedure
decision among members up and liquidation either by
or by order of the winding up and
court liquidation

Common Shopkeepers, Accounting firms, Professional Family owned

examples hair salon, solicitor firms etc. service businesses,
plumber, art and businesses small
craft shop, bake engineering &
shop etc. manufacturing
firms etc.