Fundamentals of Entrepreneurship
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CHAPTER
9
FORMS OF BUSINESS ENTITIES
AND RELATED LEGAL
REQUIREMENTS
Fundamentals of Entrepreneurship
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Objectives
The objectives of this chapter are:
 To identify the types of business entities
 To give an understanding of the importance of registering a
business
 To explain procedures of business registration
 To discuss legal aspects of business formation
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Learning Outcomes
At the end of this chapter, students should be able to:
 identify and understand types of business entities and
business formation in Malaysia
 understand the advantages and disadvantages of the various
types of business entities
 understand legal aspects of business formation
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Introduction

In Malaysia, the authority that manages and governs the
establishment and registration of a business is The Companies
Commission of Malaysia or commonly known as Suruhanjaya
Syarikat Malaysia (SSM).
 SSM is a statutory body under the Ministry of Domestic Trade,
Cooperatives and Consumer Affairs.
 Through the SSM Act 2001, the Registrar of Companies (ROC)
and Registrar of Businesses (ROB) were merged together under
one management to make it more systematic and efficient.
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The Definition of Business
A business can be defined as:
 ‘All forms of activities such as trade, craft, occupation,
profession or other activity which seeks to gain profit’.
[Section 2, Registration of Businesses Act 1956]
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Forms of Business Entities
In Malaysia, there are three common types of business entities:
 Sole proprietorship
 Partnership
 Private limited company
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Sole Proprietorship
Characteristics of Sole Proprietorship

Sole proprietorship is established, owned, funded and managed
by only one person.
 Normally, it is run by one person and he may hire a few workers
to help him with the business.
 Sole proprietorship is allotted under the Business Registration
Act 1956 where this type of business is easily established and
forms the highest number of registered businesses in Malaysia.
The registration fee for a sole proprietor is only RM60.
 Examples of sole proprietorship: Mini markets, restaurants,
convenient stores, burger kiosks, etc.
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Advantages and Disadvantages of
Sole Proprietorship
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Partnership
Characteristics of Partnership

A business that is registered under partnership has to have
at least two persons and not more than 20 persons as
partners.
 Generally, its legal responsibility to external parties is similar
to sole proprietorship.
 However, the internal relationship between partners depends
on the terms of the partnership agreement made between
them.
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Partnership Agreement

Partnership Agreement is a contract agreement between
partners/parties.
 It shows that partners/parties have an intention to create a
contract.
 The Business Registration Act 1956 does not specify that the
formation of a partnership business requires a written
agreement between partners.
 However, it is advisable for partners to have a Partnership
Agreement in order to avoid or minimize dispute between
partners.
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Partnership Agreement (cont.)

In the absence of a partnership agreement, the provisions of
the Partnership Act 1961 will be applicable. Section 26 and
27 of the Act stipulates that:
– profit or losses are to be shared equally
– no interest is payable on a partner’s capital
– each partner is entitled to actively participate in the
management of the business
– no partner is entitled to a salary for participating in the
partnership business
– partners have the right to be paid based on their contribution to
the business
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Partnership Agreement
(cont.)
– 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.
– A partner may withdraw after getting the consent of the other
partners.
– The introduction of new partner must have the unanimous consent of
all existing partners.
– All business accounts books need to be kept at the main business
premise. Partners are allowed to check through the books and they
have the right to keep a copy of the books.
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Advantages and Disadvantages of
Partnership
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Private Limited Company

A private limited company is a company incorporated under the
Companies Act 1965.
 The private listed companies are companies whose liabilities of
its members are limited to the amount of shares held in the
company. The following are a private limited company’s
characteristics:
– It is recognized as a legal entity that is separate from founding
members. Therefore, it can acquire and own property, it can sue and
be sued in court of law. The life span of the company is not
dependent upon the death or resignation of any of its members.
– The total number of members in a company must be at least two and
it must not be more than fifty persons.
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Private Limited Company (cont.)
−
−
−
−
−
Financial liability of members of the company is limited to the
amount of shares being held or subscribed by the members.
Personal assets of members are not part of the company’s assets,
therefore they are not affected regardless of what happens to the
company (unless the members become loan guarantors to the
company’s borrowing).
companies limited by shares must carry the words ‘Sendirian
Berhad (Sdn Bhd)’ behind their names according to Section 22(4) of
the Companies Act.
The establishment of a private limited company is quite difficult
compared to sole proprietorship or partnership.
There are many legal requirements and procedures that must be
complied with as outlined in the Companies Act 1965.
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Private Limited Company (cont.)
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Private Limited Company (cont.)
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Business Legal Requirements

Business legal and regulatory requirements are based on the
laws of the country. The following are the hierarchy and legal
scope of the laws that affect business activities in the country:
 The Constitution of Country.
– The article of the Malaysian constitution is the supreme law of the
nation. It outlines the fundamental basis of the formation of Malaysia,
the power and right of the various vested interests in the country and
the basic individual right as a citizen of the country.
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Business Legal Requirements (cont.)

Federal Laws that are passed by act of Parliament. These laws are normally
governed and enforced by various Ministries under the Federal Government.
Examples of related ministries and agencies are:
– Ministry of International Trade and Industry (MITI)
• Manufacturing Licence
– Ministry of Housing and Local Government Malaysia
• Developer’s license
– Ministry of Home Affairs
• Immigration Department of Malaysia
– Ministry of Finance
• Royal Malaysian Customs
• Sales Tax Licence
– Ministry of Domestic Trade and Consumer Affairs
• Business registration
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Business Legal Requirements (cont.)

State enactments that are passed by the state legislative council
in matters that are under state control like land, timber
concession, water resources, mining, etc. Examples of related
departmentresponsible are:
– Land Office
– Land administration matters
– Forestry department
– Forestry and timber concession
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Business Legal Requirements (cont.)

By-laws that are approved by the local authority in matters that
the local authority is given the power by the Federal and the State
Government especially with regard to management and
development of a local authority. Examples of related
departments are:
– Local authority such as Kuala Lumpur City Hall
– License for business, etc.
– Development permit and issuance of certificate of fitness, etc.
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Business Legal Requirements
(cont.)
Generally, the scope of business law is very wide, one has to be
familiar with the laws that have immediate impact to his business
such as:
 Registration of Businesses Act 1956,
 Company’s Act 1965,
 Employment Act1955,
 Children and Young Persons’ Act 1966,
 Occupational Safety and Health Act 1994,
 Factory and Machinery’s Act 1974
 Industrial Relations Act 1967,
 EPF Act 1991, SOCSO Act 1969,
 Trade Union Act 1959,
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Business Legal Requirements
(cont.)
There are also laws that govern his relationship with external
parties such as:
 Contract Laws
 Sale of Goods Act
 Agency Laws
 Intellectual Properties Act
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