ENT/ETR300 – FUNDAMENTALS OF ENTREPRENEURSHIP
BUSINESS ENTITIES & FORMATION
BUSINESS ENTITIES
& FORMATION
Hj. Ramli Raya
Hjh. Zanariah Zainal Abidin
Mohd. Ali Bahari Abdul Kadir
Zainal Lode
1
ENT/ETR300 – FUNDAMENTALS OF ENTREPRENEURSHIP
BUSINESS ENTITIES & FORMATION
FORMS OF
BUSINESS ENTITIES
2
Forms of Business Entities
Businesses in Malaysia can be registered under:
a.
b.
c.
d.
Business Registration Act 1956 (Amendment
1978) & Procedures Of Business Registration
1957
Company Act 1965
Cooperative Act 1948
Parliamentary Act or State (Government)
Enactment
3
Types of Business Entities
Under Business Registration Act 1956
(Amendment 1978) & Procedures Of Business
Registration 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
4
Types of Business Entities
The most common forms of business entities
registered by small and medium enterprises
(SMEs) are:
a. Sole Proprietorship
b. Partnership
c. Private Limited Company
5
Sole Proprietorship
• Formed under the Business Act 1956 (Amendment
1978).
• This form of business structure is solely owned by
one person, where management rests on that
person whose liability is unlimited.
• A sole proprietorship is the simplest business
structure.
• 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 with
other forms of business entities
6
Advantages of Sole Proprietorship
a. Easy to manage because the owner or proprietor can
make decisions by himself.
b. The owner enjoys a certain degree of flexibility since as
a sole owner he can react quickly and positively
regarding 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 statement
that needs to be submitted to the Inland Revenue Board
does not require validation by a qualified auditor.
f. The owner pays income tax based on his total individual
income
7
Disadvantages of Sole Proprietorship
a. Limited source of capital that could limit the business
activity.
b. The liability of the business is unlimited. If the business
incurs debts for which the business assets are not
sufficient to cover, the owner must be prepared to settle the
debt with his personal assets.
c. The future development of the business is limited and
depends on the management capability of the owner and
the condition of his health.
d. The owner is solely responsible for carrying out all the
tasks, 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. In
addition, the business will be dissolved if the owner passes
away. If someone wishes to continue the business, it will
have to be re-registered.
8
Partnership
• A partnership is a legal business entity with two or more
partners.
• In this form of business, a person forms a partnership
with one or more persons to carry out a business with a
view to making profits.
• A partnership business is also incorporated under the
Business Registration Act 1956 (Amendment 1978).
• A partnership is carried out by more than one person but
not exceeding 20 persons. In a partnership, partners
agree to undertake a joint business and jointly own the
business.
• Professional businesses (legal firms, architect and
accounting firms the members could number up to 50
persons).
• In this form of business entity, partners carry out the
business, share the capital, profits and losses.
9
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 among
partners. In case of losses, each partner will share the
burden.
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 together
for better management.
g. As in a sole proprietorship business, income tax is not
imposed on the partnership itself but on the owners as
individuals.
10
Disadvantages of Partnership
a. Business liabilities are unlimited, which may
involve personal assets of all partners of the
company
b. The life span of the partnership business depends
on the life span of the partners. If any of the
partners passes away or is declared a bankrupt,
the business is automatically dissolved, unless
there 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
11
Partnership Agreement
• The Business Registration Act 1956 does not
specify that the formation of a partnership business
must be followed by a written agreement between or
among partners. However, it is necessary for the
business to have some kind of Contract or
Partnership Agreement to avoid any
misunderstanding that may occur among the
partners
12
Partnership Agreement
Some of the important elements that need to be stated in a
Partnership Agreement:
a. Name of the business
b. The duration of the partnership (to prevent the
dissolution of the business). The agreement should also
state that in the event one partner passes away or
withdraws from the partnership, the business will not be
dissolved.
c. Individuals involved in managing the partnership
business.
d. The accounts of the business and share capital that
show the contribution of each partner and the right and
obligations of each partner towards the capital.
e. The properties are considered as assets of the
business.
13
Partnership Agreement
Partnerships are governed by the Partnership Act
1961. If partners do not have their own agreement, the
provisions of the Act will become applicable. Sections
26 and 27 of the Act, among other things, stipulate that
the 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 partner’s capital.
c. Each partner is entitled to actively participate in the
management of the business.
d. No partner is entitled to a salary for participating in
the partnership business.
e. Partners have the right to be paid based on their
14
contribution to the business.
Partnership Agreement
f. Daily normal things in business can be
decided by the majority of the partners, but any
changes that regularly occur need to be made with
consensus from all partners.
g. A partner may withdraw after getting the consent of
the other partners.
h. The introduction of a new partner must have the
unanimous consent of all existing partners.
i. All business accounts books need to be kept at the
main business premises. Partners are allowed to
check through the books and they have the right to
keep a copy of the books.
15
Registration of Sole Proprietorship
and Partnership Business
• A proprietorship or partnership can be registered
with the Business Unit of the Companies
Commission 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
16
Registration of Sole Proprietorship
and Partnership Business
Why applications are turned down:
• The applicant does not use capital letter when filling
out the application form;
• Application form is too dirty or untidy;
• Corrections are made using liquid eraser;
• The business is already registered, but the owner
has not taken any initiative to terminate the existing
business before applying to register a new one;
17
Registration of Sole Proprietorship
and Partnership Business
 Verification of application form has been
made by unauthorised personnel;
 The applicant does not attach a copy of the
approval letter from other respective
agencies in the case where the business is
required to have other licences or permits;
and
 Other things that may cause the Registrar of
Business to have doubts.
18
Private Limited Company
• A private limited company is one of the business
entities set up under the Companies Act 1965.
• As a corporate body, it has characteristics that
differentiate it from a sole proprietorship and
partnership. This is because a private limited
company is a legal entity and its identity is separate
from the identity of the company’s members.
19
Characteristics of Private Limited
Company
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 action
and 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 its
members 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 company’s capital. Personal assets are
not 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 founder of
the company. The members of the company will appoint the Board
of Directors who will manage and run the business operation
subject to the Companies Act 1965
20
Terms & Conditions of Private
Limited Company
a. The number of members does not exceed 50 people;
b. It has specific authority to transfer ownership of
members’ shares with the approval of the company’s
Board of Directors;
c. A company is not allowed to offer or sell any share or
debenture to the general public;
d. A company is not allowed to offer the general public to
deposit money within a stipulated time frame; and
e. A company must use the word “Sdn. Bhd.” or “Sendirian
Berhad” at the end of its name.
21
Requirements of A Private Limited
Company
a. Memorandum of Association
b. Articles of Association
c. The Share Capital of a Company
a. Authorised capital
b. Paid-up capital
d.
e.
f.
g.
h.
i.
j.
Members of Shareholders
Board of Directors
Company Secretary
Auditors
Registered Office
Company Seal
Authorisation Letter
22
Advantages of Private Limited
Company
a. Funds are easy to acquire through the exchange of share
ownership 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 appointed
by the company’s shareholders.
d. The liabilities of the company’s members are limited to the
capital that they contribute to the company. Shareholders’
personal assets are not affected.
e. The life span of the business is not dependent upon the age
or resignation of its members.
f. It has greater potential for expansion.
g. Legally, the company is one business entity by itself
23
Disadvantages of Private Limited
Company
a. A Private Limited Company is subject to more rules and
regulations compared with a Sole Proprietorship or
Partnership. A company must always abide by the rules
and fulfil the terms set by the Companies Commission of
Malaysia.
b. The company’s shares cannot be transacted through the
share market.
c. The company must pay corporate tax.
d. The qualified Auditors must audit the company’s yearly
financial statement and the statement must be complete
and regularly updated.
e. The financial affairs of the company must be made
transparent to the general
f. The cost of setting up a company is high
24
Procedures in Registering a Private
Limited Company
• The registration of a private limited
company must use the services of a
company secretary. The company secretary
will then forward the form together with
relevant documents to the Companies
Commission of Malaysia in the state in
which the operation will take place.
• For further details, please refer to
http://www.ssm.com.my/DOINGBUSINESSINMALAYSIA/Guid
elinesDoingBusinessInMalaysia.pdf
25
ENT/ETR300 – FUNDAMENTALS OF ENTREPRENEURSHIP
BUSINESS ENTITIES & FORMATION
BUSINESS FORMATION
26
BUSINESS FORMATION
There are four common methods of starting a new
venture:
1.
2.
3.
4.
Starting from scratch
Buying an Existing Business
Family Business Succession
Acquiring a Franchise
27
1. Starting From Scratch
•
•
The most popular method among start-up
entrepreneurs
Entrepreneur has to make decisions on:
a. Appropriate form of business
b. 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 that
needs to be take into consideration.
28
Advantages of Starting From
Scratch (cont.)
a. Entrepreneurs are free to make his/her own
decisions.
b. Entrepreneurs have the opportunities to try and
practice his/her own ideas.
c. Entrepreneurs are free to choose suitable business
location and premise, and acquiring appropriate
machine and equipments for the business.
d. Entrepreneurs are free to develop business image
and personality that suits their desire and interest.
29
Disadvantages of Starting From
Scratch (cont.)
a.
b.
c.
d.
Entrepreneurs need to put in a lot of efforts. It
requires more time, energy and money in ensuring
the business kick-off.
Higher chances of losses due to high project
implementation cost.
Entrepreneurs are not able to accurately estimate
sales, cost and profit. ( zero business history (i.e.
sales record, costing and so on)
A new venture usually has no track record.
Therefore, it is difficult for entrepreneurs to
convince the financial institutions in getting the
financing
30
2. Buying an Existing Business
• Entrepreneurs start a new venture buy taking over
an existing business either buying the whole
business or partial shares in the existing business.
• Entrepreneurs must “investigate” before buying.
previous owners have reasons why they wanted to
sell their business. So, it is the entrepreneurs’
responsibilities to “investigate” the business that
they want to buy as well the “background” of the
existing owners
31
Advantages of Buying an Existing
Business (cont.)
a.
b.
c.
d.
The time entrepreneurs spent to start the business
is faster compared to starting a new venture form
scratch
The probability of getting the financing is greater if
the existing business has a good track record.
Existing market and loyal customers of existing
business.
Established networking with suppliers, supporting
agencies and communities.
32
Disadvantages of Buying an
Existing Business (cont.)
a.
b.
c.
d.
Buying existing business requires bigger amount
of capital either to buy the whole business or part
of the business.
If the existing business is not well managed by the
previous owner, entrepreneurs need to put in a lot
of efforts, money and time to improve the situation.
Entrepreneurs have to respect and abide the
agreements that have been made by the previous
owner with related parties (i.e. suppliers, agencies
etc.)
Conflicts could arise between the new owner and
existing employees
33
3. Family Business Succession
• Entrepreneur is the successor of the business which
was started by the earlier family members
(predecessors).
• Entrepreneur did not face the difficulties of startingup a new venture.
34
Levels of Family Business
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)
35
Challenges of Family Business
a. Financing – debt financing versus equity financing
b. Liquidity/Cash – family’s need for cash versus
business’s 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
36
Advantages of Family Business
a. Freedom and flexibility in decision making.
b. Pride of family culture, high commitment and
motivation lead to business stability.
c. Family members willingness to “sacrifice” their time
and money (e.g. no salary taken for 1st year of
operation).
d. High possibility of achieving great monetary
success due to high commitment.
e. Family members have good exposure to business
environment.
37
Disadvantages of Family Business
a. Unstructured early-stage business organization.
b. Early-stage limited financial resources.
c. Family conflicts such as siblings and/or cousins
rivalry.
d. Nepotism among family members (e.g.
incompetent family member is given a better
management position).
e. Traditions practiced by older generation passed on
to new generation could lead to resistance to
change.
f. Difficulty in getting the right successor.
38
4. Acquiring a Franchise
• Another alternative of starting a new business
• A franchise is a product and/or service distribution
system which is governed by a contract
• Made between two parties namely, the franchisor
and the franchisee
• The franchisor is a company which sells the right to
another party to operate the franchise.
• The franchisee is a person who purchases the right
from the franchisor to operate the franchise
39
Acquiring a Franchise (cont.)
• Operating a franchise includes selling and marketing
the products and/or services using the trade name
and trade mark, as well as a set of systems
developed and owned by the franchisor.
40
Acquiring a Franchise (cont.)
• The right to operate the franchise granted by the
franchisor to the franchisee involves a few payments
made by the franchisee agreed upon the signing of a
franchise. 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 as
agreed upon the signing of franchise contract (monthly
or yearly)
• Advertising and Promotional Contribution - an on-going
payment or contribution made by the franchisee to
franchisor’s advertising and promotional fund.
41
Types of Franchise Systems
Two major types of franchise system:
•
•
Product/Trade name Franchise
Business Format Franchise
42
Product/Trade name Franchise
• This type of franchise system involves the
franchisee acquires sales right which
includes the trade name, trademark, and/or
products from the franchisor upon the
signing of the so-called dealership contract,
and agreed to sell the product line identified
by the franchisor. This type of franchise
system is commonly used in the
automotive, petrol kiosk and service station,
soft beverages, and tyre industries.
43
Business Format Franchise
• This franchise system is also named “full-fledge
franchise” The franchisee is granted the right to
manufacture and market the franchisor’s product
and/or services using a complete franchisor’s 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 equipped
with operation manual and has to undergo a training),
premise settings and layout ( exterior and interior
layout; ambience, colour scheme and decoration must
in-line with franchisor’s brand and image).
44
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 products
and/or services of the franchisor.
c. Benefits of economies of scales
d. Guidance by the franchisor’s management team
e. Continuous support from the franchisor and
government agencies that involved in the
development franchise industry.
45
Advantages of Franchising
To the Franchisor:
a. The franchisor’s business expansion can be
done through recruitment of new franchisees.
b. Benefits of economies of scales
c. Lower business risks as franchisor shares the
business risks with the franchisees.
d. Problems related human resource management
is reduced due to the fact that the franchisees
have to manage the human resource related
matters themselves.
e. The franchisor can put more focus on product
research and development since business
expansion is done through franchise system. 46
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 its
price to pay; the franchise fee, royalty and advertising
& promotional contribution
c. Limited product varieties; the franchisees are allowed
to market and sell only the franchisor’s products
d. Fear of chain-reaction; bad reputation and tarnished
image due to the fault of either the franchisor or the
franchisee would affect the whole franchise system
47
Disadvantages of Franchising
To the Franchisor:
a. Franchisee conformity; it is difficult to manage the
franchisees especially in ensuring the conformity of the
operational methods of all franchisees in the system
due to the fact that they are not franchisor’s employees.
b. The franchisor/franchisee goal incompatibility; The
franchisor and franchisees may have different business
objectives as well as personal objectives that could
jeopardize the business “marriage”.
c. “Wrong” franchisee; There are franchisees who want
an “easy-ride” in an attempt to gain instant popularity
for the business.
d. Competition through imitation of business concept and
model
48
END OF MODULE 5
49