8.

1 Ownership Right

A) Types of Business

1. Sole Proprietorship

• Can react quickly to change

WBB 10102- Technopreneurship

Topic 8: Legal Aspects and Ethics in Business

Figure 8.1: Ownership right

A Sole Proprietorship is formed under the Registration of Businesses Act 1956. Sole
proprietorship is the simplest form of business organisation. It is owned by one person, but it
need not be operated by that person alone. A sole proprietorship can even have large numbers
of employees. 
There are advantages and limitations of running a Sole Proprietorship type of business. Do
carefully study the legal implications of the pros and cons before deciding the best option.

Advantages of Sole Proprietorship

• Easy to manage - the owner is the boss

• Easy to form and dissolve – minimum formalities

• The owner keeps the profits
• Few legal problems
• Pay tax based on total individual income

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Disadvantages of Sole proprietorship
• Few or limited resources
• Unlimited liability
• Limited development
• More responsibilities
• Life span depends upon the age of owner

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2. Partnership

A partnership occurs when you decide to pool capital and work together with at least
one more person. A partnership business is also incorporated under the Registration of
Businesses Act 1956. A partnership is carried out by more than one person but exceeding 20
persons. In this form of business, you and your partners are joint-owners of the business and
therefore will share the business profits and risks.
There are advantages and limitations of running a Partnership type of business. Carefully
study the implications of these pros and cons before deciding if this form of business is right for
you.

Advantages of Partnership Disadvantages of Partnership

• Easy to set up - few formalities
• Easy to secure financial assistance
• Contributions to capital can be increased through
enlisting additional partners
• The risk is reduced - each partner will share the
loss
• Responsibility can be divided equally
• Better management - through skills, knowledge
and experience of each individual partner
• Income tax on individual
• All partners carry the same responsibilities.
• This means they are liable for risks and debts of
the business even if it is caused by the actions of
their partners. With unlimited liability, each
partner is also liable to use their private
resources to meet the partnership's debts.
• Disagreements and disputes may occur among
partners and this may disrupt business plans or
operational efficiency.
• A Partnership’s lifespan is limited – it may end if
any one of the partners has mental disorder, falls
bankrupt, resigns or dies.

Contract Agreement

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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.
The following are some of the important elements that need to be stated in a Contract
Agreement:
1. Name of the business
2. 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.
3. Individuals involved in managing the partnership business.
4. 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.
5. The properties are considered as assets of the business.

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 contribution to the business.
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.

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B) Company
Companies are registered legal entities formed by several persons. Companies can own
property, draw contracts and employ people. All companies in Malaysia are governed by the
Companies Act 1965. 
A company and the people who own it are regarded as different entities regardless of
percentage of shareholding in the company. There are three types of limited companies:
1. A company limited by guarantee where the members' liabilities will be restricted to the amount
each agrees to contribute to the assets of the company.
2. An unlimited company where there is no limit to the members’ liabilities
3. A company limited by shares where the members’ personal liabilities are limited to the par value
of their shares.
A company limited by shares can be:
a) A private limited company (Sendirian Berhad)
b) A public limited company (Berhad)

a) A private limited company (Sendirian Berhad)

 Has minimum 2 members or a maximum of 50 members.
 cannot sell shares to the general public and the members cannot freely transfer their
share holdings.
 Advantages and disadvantages

Advantages of Private Limited Disadvantages of Private Limited

• Funds are easy to acquire through the • Subject to more rules and regulations- must
exchange of share ownership or loan from abide by the rules and fulfill the term set by
financial institution. the CCM.
• All shareholders are legally protected by law. • The company’s share cannot be transacted
• Shareholders are not burdened with the through the share market.
management of the business- Board of • The company must pay corporate tax.
Directors will manage the business. • The qualified auditors to audit the
• The liabilities of the company’s members are company’s yearly financial statement.
limited to the capital that they contribute to • Financial affairs must be made transparent
the company. to the general public.
• The life span of the business is not • The cost to setting up the company is high.
dependent upon the age or resignation of its (Registration fees, professional fees, filing
members. charges, printing of company’s
• It has greater potential for expansion. Memorandum of Association and Articles of
• Legally, the company is one business entity Association, share certificates and the
by itself. company’s seal).

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b) A public limited company (Berhad)

 Minimum number of its members is 2 but there is no limit to its maximum numbers of
members.
 Raises its capital by selling shares to the public and there is no restriction on the
transfer of shares.
 The company run by a board of directors elected by the shareholders.
 Many large public companies seek a listing for their shares on the stock exchange.
 When shares are listed on the stock exchange the share become marketable shares.
 Not all public companies are listed companies.

8.2 Ethics

Definition
 Ethics is a philosophical term derived from the Greek word "ethos," meaning character or
custom. This definition is germane to effective leadership in organizations in that it connotes an
organization code.
 Ethical behavior is that which is accepted as morally "good" and "right" as opposed to "bad" or
"wrong" in a particular setting. For the individual that means acting in ways consistent with
one's personal values and the commonly held values of the organization and society.
 Example
- Is it ethical to pay a bribe to obtain a business contract in a foreign country?
- Is it ethical to allow your company to withhold information that might discourage a job
candidate from joining your organization?
- Is it ethical to do personal business on company time?
 In the broadest sense, ethics provide the basic rules or parameters for how society conducts
any activity in an 'acceptable' manner.
 More specifically, ethics represent a set of principles prescribing a behavioural code that
explains what is good and right or what is bad and wrong at any given time.
 Morals are values held by an individual (or a moral community) and define what constitutes a
good life.
 Ethics are essentially a system of moral duty and obligations.

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The relationship between ethics and morality.

 Ethics is the discipline that deals with what is good and bad and with moral duty and obligation.
Ethics can also be regarded as a set of moral principles or values.
 Morality is a system or doctrine of moral conduct. Moral conduct refers to that which relates to
principles of right and wrong in behavior.
 We can think of ethics and morality as being so similar that we may use the terms
interchangeably to refer to the study of fairness, justice, and right and wrong behavior in
business.
 Business ethics, therefore, is concerned with good and bad or right and wrong behavior and
practices within a business context. Concepts of right and wrong are increasingly being
interpreted to include the more difficult and subtle questions of fairness, justice, and equity.

Types of moral philosophy or ethics

a) Normative ethics
- concerned with supplying and justifying a coherent moral system of thinking and judging.
- seeks to uncover, develop, and justify basic moral principles that are intended to guide
behavior, actions, and decisions.
- Normative business ethics, therefore, seeks to propose some principle or principles for
distinguishing ethical from unethical in the business context. It deals more with "what ought
to be" or "what ought not to be" in terms of business practices
- concerned with establishing norms or standards by which business might be guided or
judged.

b) Descriptive ethics
- concerned with describing, characterizing, and studying the morality of a people, a culture,
or a society.
- compares and contrasts different moral codes, systems, practices, beliefs, and values.
- descriptive business ethics, therefore, the focus is on learning what is occurring in the real
of behavior, actions, decisions, policies, and practices of business organizations,
managers, or specific industries.
- focuses on "what is"—the prevailing set of ethical standards in the business community or
specific organizations or on the part of specific managers. A real danger in limiting our
attention to descriptive ethics is that some people may adopt the view that "if everyone is
doing it," it must be acceptable.

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- Example, if a survey reveals that 77 percent of employees in retail are stealing from work,
this describes what is taking place but it does not describe what should be taking place.
Just because many are participating in this questionable activity doesn't make it an
appropriate practice. This is why normative ethics is important.

It is tempting to observe the prevalence of a particular practice in business (for example,

deceptive advertising or discrimination) and conclude that because so many are doing it
(descriptive ethics), it must be acceptable behavior. Normative ethics would insist that a
practice be justified on the basis of some ethical principle, argument, or rationale before being
considered acceptable. Normative ethics demands a more meaningful moral anchor.

Ethics and the Law

Ethical behavior is typically thought to reside above behavior required by the law. This is the
generally accepted view of ethics. It should be clear, however, that in many respects the law and
ethics overlap. To really appreciate this, one needs to recognize that the law embodies notions of
ethics. That is, the law may be seen as a reflection of what society thinks are minimal standards of
conduct and behavior.

Figure 8.2: Overlap between ethics and law

Both law and ethics have to do with what is deemed appropriate or acceptable, but law reflects
society's codified ethics. Therefore, if a person breaks a law or violates a regulation, he or she is
also behaving unethically. In spite of this overlap, our view is that desirable ethical behavior is
behavior that extends beyond what is required by law. Viewed from the standpoint of minimums,

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we would definitely say that obedience to the law is generally regarded to be a minimum standard
of behavior.
The law does not address all realms in which ethical questions might be raised. Thus, there
are clear roles for both law and ethics to play. It should be noted that research on illegal corporate
behavior has been conducted for some time. Illegal corporate behavior, of course, comprises
business practices that are in direct defiance of law of public policy.

Ethics in Entrepreneurship

Ethics is very important in the field of entrepreneurship. In this situation now, especially in the
organisational context, ethics is much needed to be studied and practiced by all employers,
employees, shareholders and other parties in the organisation. But, fine ethics is hard to come by
because there are many obstructions blocking the individual, group or organisation in fulfilling their
ethical duties.
The obstructions are not from internal factors only but include the external factors like the
environment, technology, politics and economics. The organisation cannot evade the external
factors because it does not have the power to control it. The internal factors of the organisation are
easier to solve.
Why should the ethics of entrepreneurship be of particular interest and importance now? 
 First, entrepreneurship has emerged as a distinctive area of academic inquiry, with unique
problems and questions that can be productively studied in their own right.
 Second, entrepreneurship is an inescapably ethical activity – whether one views it from the
societal, the organizational or the individual level, entrepreneurial action has powerful ethical
dimensions and implications.

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The Importance of Ethics

The importance of ethics is very significant for entrepreneurs especially in running their businesses
as mentioned below:

1. Responsibility to society
The individual or group that has ethical values will be concerned about the well being of the
society. When they perform their business activities the entrepreneurs will ensure these
activities will bring benefits to the society as a whole.

2. Committed to the profession

Entrepreneurs with strong ethical values will be committed to their profession. Knowing that
their business profession will contribute valuably towards other people, these entrepreneurs
will strife to ensure they carry out their businesses well and responsibly.

3. Time management
Entrepreneurs with ethical values will manage their time well. They will make sure that they will
consistently gain benefits as time goes by. So, with right time management, the entrepreneur
will be more proactive and sensitive to the changes in customers' taste, competitors' strategy
and environment.

4. Willing to take the initiative

Although there are many obstructions in running the business, yet the entrepreneurs have to
find ways and means or alternatives to solve their problems and to keep looking for more
opportunities. This attitude does not only make them work harder but work smarter too.

5. Continuous improvement
Through ethics entrepreneurs will not be complacent with their present achievement. They will
continue to improve their products and services, systems and processes and, continue to gain
new market shares besides maintaining the existing market. They will also be prepared to
challenge their talents and be open-minded towards new ideas.

Factors Influencing Ethics

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There are variables that can influence ethical and social responsibility decision-making in
organisations which include business organisations.

1. Culture dimension
Cultural dimensions contribute to differences in the perceived importance of ethics and social
responsibility. Masculine societies encourage entrepreneurs to be ambitious and competitive, and
to strive for material success therefore; they would attach less importance to ethics and social
responsibility than to efficiency, competitiveness, and long-term survival. Individuals from cultures
with high power distance are likely to perceive a need to minimise disagreement with others. In
other words, business performance is likely to be relatively more important to them.

2. Economic and business environments

The business environment is typically characterised by powerful business enterprises, a legal
environment aimed at eliciting ethical behaviours on the part of businesses, and societal
expectations that businesses should be more ethical and socially responsible. In this situation
entrepreneurs tend to be more competitive by focusing more towards customer satisfaction in
order to gain their loyalty. In developing countries such as Malaysia, the business and economic
environmental forces are still evolving and hence the entrepreneur may perceive the importance
of business ethics and social responsibility to be lower relatively to their counterparts in
developed countries.

3. Legal/Political environment
Entrepreneurs should realise that their involvement in business need total support from the
society. Therefore, society always sets the boundary to limit their business. The limits are often
moral, but they are also frequently written into law. Law is the public's agency for translating
morality into explicit social guidelines and practices and stipulating offenses. The legal/political
framework within a country can be expected to impact an entrepreneur's perception about ethics
and social responsibility.

4. Organisational ethical climate

The organisational ethical climate refers to the shared understanding regarding what is correct
behaviour and how ethical issues will be handled. It helps establish and maintain the standards

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that delineate the "right" things to do and the things "worth doing". An organisation that seeks to
foster an ethical environment will not only have a code of ethics, but also the willingness and
commitment to enforce it. Entrepreneurs will consider modifying the morality of their actions not
just because of stated organisational concern, but only when specific sanctions are attached for
misconduct.

5. Gender
Men and women entrepreneurs differ in their moral reasoning. In particular, men are more likely
to adhere to the "ethic of justice" by emphasising rules and individual rights. Women, however,
are more likely to adhere to the "ethic of care" by emphasising relationships and compassion. The
"ethic of caring" exhibited by women would lead them to believe that taking actions in the interest
of the subordinate would enhance company performance and would contribute to a perception of
greater importance of ethics in organisational effectiveness.

6. Age
In cognitive moral development theory, an individual's cognition, emotion, and judgement may
change as he/she moves through stages of moral development. Given that an individual moves
through stages of moral development and the changes are essentially due to life experiences,
intuitively one would expect a positive relationship between age and ethical behaviour.
Entrepreneurs tend to become more ethical as they grow older because e at this stage profit is no
more the main reasons for them to jump into business. They tend to become less concerned with
wealth and advancement and more interested in personal growth and societal acceptance.
Therefore, at this stage the entrepreneur is more likely to act in an ethical and socially responsible
manner.

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