Unit: ONE

In this unit:
 Meaning of company
 Types of business entities in Malaysia
 FUNDAMENTAL DISTINCTIONS BETWEEN THE COMMON FORMS OF ORGANIZATION
 Classification of company
 Lifting the veil of corporate veil
 Pre-incorporation agreement

1. Meaning of a Company
The word ‘company’ is derived from the Latin word (Com=with or together; panis =bread), and it
originally referred to an association of persons who took their meals together. In the leisurely past,
merchants took advantage of festive gatherings, to discuss business matters.

A. Definition of Company
In the legal sense, a company is an association of both natural and artificial persons (and is
incorporated under the existing law of a country). In terms of the Companies Act, 2013 (Act No. 18
of 2013) a “company” means a company incorporated under this Act or under any previous company
law

In common law, a company is a “legal person” or “legal entity” separate from, and capable of
surviving beyond the lives of its members. However, an association formed not for profit also a
cquires a corporate character and falls within the meaning of a company by reason of a license
issued under Section 8(1) of the Act.

The important characteristics of a company are as

follows:-
1. Registration 2. Legal Entity 3. Perpetual Succession 4. Transferability of Shares 5. Limited
Liability of Members 6. Capital 7. Common Seal 8. Board 9. Buy-Back of Shares  10.
Separation of Ownership and Management 11. Management and Control 12. Taxation

13. Incorporated Association of Persons 14. Risk-Bearing 15. Articles of Regulations 16.
Prescribed Mode of Winding Up.

2. Types of Business entities in Malaysia

Generally, there are 5 main types of business entities in Malaysia.

 Sole proprietorship
 Partnership
 Limited Liability Partnership
 Private Limited Company

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  Public Limited Company

The table below will highlight the differences of each business type:

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 Sole Limited Liability Private Limited Public Limited
Column 1 Partnership
proprietorship Partnership (LLP) Company Company

Members Members
(shareholders) (shareholders)
Owner(s) of the Owned by single Owned by 2 Partners have share in invested into the invested into the
business individual to 20 partners the capital and profits Company have certain Company have certain
rights relation to the rights relation to the
Company Company

Not separate Not separate

Legal status Separate legal entities Separate legal entities Separate legal entities
legal entities legal entities

Liable party
towards the Owner Partners Company Company Company
debts

Company Not Qualified company Qualified company Qualified company

Not applicable
Secretary applicable secretary secretary secretary

Annual declaration
Annual return must Annual return must
Annual Annual fee Annual fee and solvency
be filed on each be filed on each
compliance required required statement must be
calendar year calendar year
filed

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 Sole Limited Liability Private Limited Public Limited
Column 1 Partnership
proprietorship Partnership (LLP) Company Company

Not compulsory Not compulsory

Audit Not
Not applicable unless stated unless stated Compulsory
requirement applicable
otherwise otherwise

Tax chargeable on Tax chargeable on Tax chargeable on

Company Company Company

For paid up capital For paid up capital For paid up capital

less than MYR 2.5 less than MYR 2.5 less than MYR 2.5
million: million: million:
Tax On first MYR 600k – On first MYR 600k – On first MYR 600k –
Tax chargeable
chargeable on 17% 17% 17%
Tax rate on owner (0% to
owner (0% to
26%) Subsequent balance – Subsequent balance – Subsequent balance –
26%)
24% 24% 24%

For paid up capital For paid up capital For paid up capital

more than MYR 2.5 more than MYR 2.5 more than MYR 2.5
million million million

Flat rate 24% Flat rate 24% Flat rate 24%

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 2. FUNDAMENTAL DISTINCTIONS BETWEEN THE
COMMON FORMS OF ORGANIZATION
There are 4 main types of business organization: sole proprietorship, partnership, corporation, and
Limited Liability Company, or LLC. Below, we give an explanation of each of these and how they are
used in the scope of business law.

Sole Proprietorship
The simplest and most common form of business ownership, sole proprietorship is a business owned
and run by someone for their own benefit. The business’ existence is entirely dependent on the
owner’s decisions, so when the owner dies, so does the business.

 Advantages of sole proprietorship:

All profits are subject to the owner

There is very little regulation for proprietorships

Owners have total flexibility when running the business

Very few requirements for starting—often only a business license

 Disadvantages:

Owner is 100% liable for business debts

Equity is limited to the owner’s personal resources

Ownership of proprietorship is difficult to transfer

No distinction between personal and business income

Partnership
These come in two types: general and limited. In general partnerships, both owners invest their
money, property, labor, etc. to the business and are both 100% liable for business debts. In other
words, even if you invest a little into a general partnership, you are still potentially responsible for all
its debt. General partnerships do not require a formal agreement—partnerships can be verbal or
even implied between the two business owners.

Limited partnerships require a formal agreement between the partners. They must also file a
certificate of partnership with the state. Limited partnerships allow partners to limit their own
liability for business debts according to their portion of ownership or investment.

 Advantages of partnerships:

Shared resources provides more capital for the business

Each partner shares the total profits of the company

Similar flexibility and simple design of a proprietorship

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 Inexpensive to establish a business partnership, formal or informal

 Disadvantages:

Each partner is 100% responsible for debts and losses

Selling the business is difficult—requires finding new partner

Partnership ends when any partner decides to end it

Corporation
Corporations are, for tax purposes, separate entities and are considered a legal person. This means,
among other things, that the profits generated by a corporation are taxed as the “personal income”
of the company. Then, any income distributed to the shareholders as dividends or profits are taxed
again as the personal income of the owners.

 Advantages of a corporation:

Limits liability of the owner to debts or losses

Profits and losses belong to the corporation

Can be transferred to new owners fairly easily

Personal assets cannot be seized to pay for business debts

 Disadvantages:

Corporate operations are costly

Establishing a corporation is costly

Start a corporate business requires complex paperwork

With some exceptions, corporate income is taxed twice

Limited Liability Company (LLC)

Similar to a limited partnership, an LLC provides owners with limited liability while providing some of
the income advantages of a partnership. Essentially, the advantages of partnerships and
corporations are combined in an LLC, mitigating some of the disadvantages of each.

 Advantages of an LLC:

Limits liability to the company owners for debts or losses

The profits of the LLC are shared by the owners without double-taxation

 Disadvantages:

Ownership is limited by certain state laws

Agreements must be comprehensive and complex

Beginning an LLC has high costs due to legal and filing fees

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Classification of Companies

Primary Classification
Companies are primarily classified into private and public. Private companies or private limited
companies are those companies that are closely-held and have less than 200 shareholders. Public
companies are limited companies that have more than 200 shareholders and are listed on a stock
exchange.

The 2013 Act has brought with it a new form of a company entitled One Person Company (OPC),
which in theory is a private company. As can be deciphered from the name, a One Person Company
requires only one member to form it. The person forming an OPC must be a natural person, a citizen
of India and an Indian resident during the time of formation. A minor can never be a member or a
nominee of a member in OPC. OPC provides an opportunity for the sole proprietors to reap the
benefits of limited liability by becoming a corporate entity.

Classification on the Basis of Control

Companies, on the basis of control, are classified as follows:

 Holding company
 Associate company
 Holding Company

Holding company: The relationship of holding or subsidiary companies is established either with the
control of Board of Directors or control of share capital. A company will be a holding company of
another in the following scenarios:

Controls the composition of the Board of Directors of the other company.

Exercises or controls more than 50% of the total share capital either on its own or together with one
or more of its subsidiary companies.

Associate Company

If a company has significant influence over another company, the latter will be the Associated
Company of the first company. Significant influence is derived either from control of at-least 20% of
the total share capital, or of business decisions under an agreement.

Classification on the Basis of Liability

Companies, on the basis of liability, are classified into the following:

 Company Limited by Shares

This is the most widespread form of a company. Companies usually have limited liability of members
unless specified otherwise in the memorandum (MOA) and articles of association (AOA). In this case,

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the liability of the members is limited to the extent of face value of shares and premium payable on
shares. A limited company can either be a private or public company.

 Company Limited by Guarantee

A company limited by guarantee refers to a company having the liability of its members limited by
the memorandum to an amount the members may respectively undertake to contribute to the
assets of the company in the event of it being wound up.

 Unlimited Liability Company

Unlimited Company is a kind of a company which doesn’t have any limit on the liability of its
members. The liability of the member’s will not cease until the final payment. Such a company may
or may not have a share capital of its own.

Classification on the Basis of Access to Capital

Companies, on the basis of access to capital, are classified as follows.

 Unlisted Company

When the securities of a private or public company aren’t listed on any of the stock exchanges, it is
an unlisted company. Such companies cannot raise funds from the public at large by issuing a
prospectus. However, an unlisted company may issue shares on Private Placement basis or to raise
private equity funding.

 Listed Company

A listed company is a kind of a company whose securities are listed on at-least one of the stock
exchanges. Such a company must comply with the provisions of listing.

Classification on the Basis of Size

Companies were earlier not classified on the basis of size, but the introduction of “Small Company”
back in 2013 prompted the need for this kind of classification. Any company other than a small
company is either a mid-size or a large company.

 Small Company

Companies, whose paid-up share capital does not exceed fifty lakh rupees or any prescribed amount
not exceeding 5 crore rupees, and its turnover as per its latest profit and loss account is limited to 2
crore rupees or any prescribed amount not exceeding 20 crore rupees, will be considered as a small
company. A public company can never be a small company. Likewise, a holding or subsidiary
company will not be a small company.

Classification on the Basis of Objects

This classification is based on the objective of a firm, which could be profit-oriented or otherwise.

 Not for Profit Company

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A company whose sole objective is to promote commerce, art, science, sports education, research,
social welfare, religion, charity, protection of environment or any other useful purpose and not
having any profit motive will be termed as a not-for-profit company. Such a company must apply its
profits or other incomes in promoting its objects. It mustn’t make any payment of dividend to its
members. 

 Nidhi Companies

Nidhi companies have been in existence right from the days of yore. Their primary objective is to
support the habit of thrift. It was promoted by public spirited men drawn from affluent local
persons, lawyers and professionals etc.

Classification on the basis of Holding of Shares

Companies, on the basis of holding of shares, are classified into the following.

 Government Company

A Government company is a kind of a company in which not less than 51% of the paid-up share
capital is held by the Central or State Government, or partly by the Central and State Governments,
and includes any company which is a subsidiary of a Government company.

 Foreign Company

A foreign company is any company or body corporate incorporated outside India which has a place
of business in India, and conducts any business activity in India.

Effects of the Corporate Veil Theory

The Corporate Veil Theory is a legal concept which separates the identity of the company from its
members. Hence, the members are shielded from the liabilities arising out of the company’s actions.

Therefore, if the company incurs debts or contravenes any laws, then the members are not liable for
those errors and enjoy corporate insulation. In simpler words, the shareholders are protected from
the acts of the company.

Lifting the veil of corporate veil

Piercing the Corporate Veil means looking beyond the company as a legal person. Or, disregarding
the corporate identity and paying regard to humans instead.

Scenarios under which the Courts consider piercing or lifting the corporate veil are as below,

1] To Determine the Character of the Company

There are cases where the Courts need to understand if the company is an enemy or friend. In such
cases, the Courts adopt the test of control. The Courts usually avoid piercing the corporate veil,
unless the public interest is in jeopardy. However, to ascertain if a company is an enemy company,
the Court might choose to do so.

2] To Protect Revenue or Tax

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In matters concerning evasion or circumvention of taxes, duties, etc., the Court might disregard the
corporate entity.

3] If trying to avoid a Legal Obligation

Sometimes the members of a company can create another company/subsidiary company to avoid
certain legal obligations. In such cases, piercing the corporate veil allows the Courts to understand
the real transactions.

4] Forming Subsidiaries to act as Agents

Sometimes, the basis of the formation of a company is to act as an agent or trustee of its members
or of another company. In such cases, the company loses its individuality in favour of its principal.
Also, the principal is liable for the acts of such a company.

5] A company formed for fraud or improper conduct or to

defeat the law
In cases where a company is formed for some illegal or improper purposes like defeating the law,
the Courts might decide to lift or pierce the corporate veil.

The Agency Relationship

An agency relationship consists of the principal and the agent where the principal gives the agent
legal permissions to act on the principal's behalf. In plain terms, the principal of the agency
relationship is a single individual who appoints an agent to perform certain duties.

Simple instances of the principal-agent relationship are:

 Commissioning a contractor to do home repairs.

 Hiring an attorney to do legal work.
 Employing an investment advisor to diversify a stock portfolio.

There are agency relationships by this description that can have principals that are:

 Corporations
 Non-profit organizations
 Government agencies
 Partnerships

The agent is usually an individual who is skilful at understanding the task that's delegated by the
principal and can execute the assignment with no problems.

In this regard, all the promoters or shareholders are just the agent to the company.

Promoter and pre-incorporation contract

Promoter is a person who brings about the incorporation and organisation of a corporation. He
brings together the persons who become interested in the enterprise, aids in procuring
subscriptions, and in motion the machinery which leads to the formation itself.

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Who is Promoter?

 One who works from the very beginning

 One who formed scheme to build a company
 One who provisionally formed company
 One who prepare Prospectus
 One who is being paid for printing and advertising and other incidental to formation of a
company i.e. Attorney's fee
 One who is discharged from his liabilities as soon as governing body, like board of directors
starts functioning

Pre-incorporation contract

A contract made prior to the incorporation of a company shall be a proposed contract only, and such
contract shall not be binding on the company.

A pre-Incorporation contract is a contract that is entered into by a person who is acting on behalf of
a company that does not exist. The person entering into the agreement has the intention that once
the company comes into existence the company is to be bound by the provisions of the pre-
incorporation contract.

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