CHAPTER 1: TYPE OF BUSINESS ENTITIES

1. SOLE PROPRIETORSHIP

 CONCEPT
It is the simplest and most common form of business structures. It is a business entity that is
owned and run by one individual and in which there is no legal distinction between the
owner and the business. The sole proprietorship has only one owner. Therefore, the owner
solely and directly owns the business. He personally owns every asset of the business
including the equipment, goods, and properties. His business will be controlled, managed
and operated by himself. He may be helped by his wife and family, or he may employ other
people to work for him, but the management is will remain entirely in his hands. The owner
will bear all responsibility for running the business. He takes the profits, and pays personal
income tax on the profits of the business. As the sole proprietorship is a business of one
legal entity, the owner may enter into contracts in his own name and will be sued
personally. He has unlimited responsibility and liabilities for all the losses, debts and
obligations to the full extent of his personal assets.

 ADVANTAGES

One of the many advantages of a sole proprietorship is it is easy and inexpensive to set up
with minimum documentation. Only small amounts of capital are needed to start and run a
business. It is also an easy to organize and the least expensive business structure to
establish. It poses no risk of fraud by a partner. This business structure requires less
paperwork and formalities. Secondly, the owner will have complete control what happens in
the business and be fully responsible for it as well. There will be no requirements for him to
consult with anyone else when need to make decisions or want to make changes permitting
him with a high degree of flexibility. Thirdly, the tax preparation is easier in sole
proprietorship. The business is not taxed separately, therefore it’s easy to fulfil the tax
reporting requirements for a sole proprietorship. The tax rates are also the lowest of all
other business structures. The Malaysian government does not require sole proprietorship
to be audited. All profits from the business will go directly to the business owner’s personal
tax return.

 DISADVANTAGES

There are various disadvantages in a sole proprietorship. Firstly, as the sole trader is the
single owner of a sole proprietorship, he rightfully assumes complete control of the business
and being a single legal entity, the sole trader is obliged to wholly bear the unlimited
personal liability from the business. As there is no legal separation between owner and his
business. He can be held personally liable for the debts and obligations of the business. This
risk extends to any liabilities incurred as a result of employee actions. The unlimited
personal liabilities signify that the liabilities may be extend to the sole traders’ personal
assets. This means that in any case if the fund in the owner’s account is insufficient to pay
for the defaulted debts, personal assets will be seized for the repaying of losses and debts to
compensate the damages. Secondly, a sole proprietorship often faces many challenges in
raising long-term capital. Banks are hesitant to grant loans towards sole proprietorships
compared with other businesses. This is because they have a lack of credibility when it
comes to matters of repayment. Financial institutions know that sole proprietorship has a
low turnover which indicates that should a sole proprietorship be struck by any
unfavourable circumstances that may leads to a great lost, the chances for a surviving is
relatively lower compared with other form of business structures. A sole proprietorship
inflicts a heavy burden on its owners as they have invested a huge amount of effort and
time for ensuring their business runs smoothly as they have to rely entirely on themselves in
operating the business. The owner is ultimately responsible for all successes and failures of
the business. If the owner becomes ill, the enterprise may be terminated. This is because
the business has the same legal entity as its owner, it will be terminated upon the death of
its owner. Investors may force the sale of the owner’s personal and business property to
satisfy their claim and damages. The continuation of the business becomes difficult, as the
new owner must accept all responsibilities, liabilities and obligations of the business upon
death of the previous owner.
 DISSOLUTION

A sole proprietorship business may be terminated for six reason, namely, the owner has no
interest to continue the business, the business suffered losses, death of the owner,
bankruptcy of the owner, pursuant to court order and revocation by the ROB.

According to S.5D of ROBA, where a business has been terminated, the owner must notify
the ROB of such termination within 30 days of the termination. However, where a business
terminates upon the death of the owner, the personal representative of the deceased must
notify the ROB of such termination within 4 months from the date of such death according
to S.5D (2) of ROBA. The owner or his personal representative (in case of death of owner)
must notify the ROB of the termination of business by filing a notice of termination in Form
C as prescribed by Rule 7 (1) ROBR. The owner also needs to surrender the certificate of
registration of that business to the ROB for cancellation as stated in Rule 7 (2) ROBR. Lastly
according to S.5D (3) ROBA, upon receipt of the notice of termination in Form C, the ROB
will revoke the registration and cancel the certificate of registration.

A sole proprietorship can also be terminated through revocation of ROB. The ROB has been
given a power under S.5C (2) and S.5E to revoke the registration of a business. As stipulated
in S.5C(2), ROB may revoke a registration of a business if the ROB satisfied that the business
is being used for unlawful purposes or any purpose prejudicial to or incompatible with the
security of the Federation, public order or morality. Whilst, S.5E gives power to the ROB to
revoke the registration where the Registrar has reasonable cause to believe that the
business is not being carried on or has ceased its operation.
2. PARTNERSHIP

 CONCEPT
A partnership is formed when two or more persons but not exceeding 20 people, pool their
skills and capital to form a business jointly. The law that governs all partnerships in Malaysia
is Partnership Act 1961. According to S.3(1) of PA 1961, a partnership is defined as the
relation that subsists between individuals carrying out a business in common with a view of
profit. Hence, for a partnership to exist, there are several requirements to be fulfilled.

The first requirement is the relation which subsists between the individuals. According to
S.47(2) PA 1961, a minimum of 2 partners and a maximum of 20 partners are allowed when
forming a partnership. If the number of partners exceeds 20 partners, it would contravene
with S.14(3)(b) of the Companies Act 1965. However, a partnership is allowed to have more
than 20 partners if it is a partnership of professionals such as doctors, lawyers, engineer or
accountants. The second criteria are carrying out a business in common. The partners must
have agreed to carry out a similar business together prior to the formation of the
partnership. The last element is with a view of profit. The partners must agree to carry the
business for the purpose of making profit. If several people form a group together to raise
funds or charity or religious organisation, it does not constitute that they form a
partnership. Associations such as sports clubs and charitable organisations are not
partnerships, as they generally do not conduct their business with a view of profit.

 TYPE OF PARTNERS

A partnership consists of four types of partner namely active partner, sleeping partner,
salaried partner and partner by holding-out. An active or general partner is a partner who
actively and openly engages in the business. He provides capital and helps run the business
to enhance the business’s returns. Hence, an active partner is liable to the share of profits. A
sleeping or dormant partner is a partner who is despite known to outsiders as a partner
takes no active part in the management of the business but is still held liable as a partner. In
return for investing in the capital of the partnership, this partner has a right to share the
profits to portions that has been agreed upon. The next type of partner is a salaried partner.
This partner is held out as a partner and is paid a salary. This partner could only be an
employee, or he may be also be a partner. If this partner is an employee then he will not be
liable for the shares of the partnership. However, if he is just a partner then he will be liable
for the profits of the company. Lastly, a partner by holding out also known as a quasi-
partner is actually a separate individual and not a partner of the partnership. He holds the
title of a partner as he holds out himself as a partner and has caused people to believe he is
a partner due to his holding out. However, he may be held liable as a partner under certain
circumstances. He may be held liable to the debts of the partnership as a result of his
‘holding out’, but he will not be liable to any share of profits as he does not contribute
anything to the business.

 ADVANTAGES

The main advantage of partnership is that is has an easy formation.10 The partners can
come to an oral or written agreement to get started. There is no need of a registration
process for this type of corporation. While it can take more time and impose extra costs, it is
generally reasonable to enter into a partnership contract. This details how the relationship
will function, the legal obligations of the partners and what will occur in different
circumstances, even when the partners are deeply at odds or someone decides to leave.

Besides that, there is also the advantage of having a bigger capital due to the number of
partners.11 The more investors there are, the more money they can bring ready from their
joint capital to contribute in a company that can help drive progress. Together, their debt
ability is also anticipated to be higher. The appropriate financial partner can also improve
your capacity to borrow capital to fund the development of your company. Second, because
the earnings of a joint company are taxed just once, the partners receive a better profit in
their accounts.

The third advantage is that the partners are able to share the burden. A partner can ease
the burden by splitting the work.12 This may encourage other partners to have the time off
when required, recognizing that there is a trusted individual to shoulder the load. Beginning
a running a business alone can make you feel stressful, demanding and overwhelming,
particularly if you haven't done it before.

 DISADVANTAGES

The primary disadvantage is that there is unlimited liability in partnership13. This means
that if the company requires a lot of debts and then is unable of paying it, or if the employee
or the client wants to sue the company, the investors risk losing their financial resources to
pay restitution sustained by the corporation. In a drastic instance, if you own just 10% of the
joint venture, if your partners do not have resources, you will end up needing to pay 100%
of the partnership's liabilities and will have to offer your assets to do as such.

The second disadvantage is taxation.14 Historically, if a corporation produced greater than a

specified amount of income, people would be able to pay lower taxes by removing a
combination of income and dividends from a limited company than would be possible by
partnership drawings. However, as a result of improvements in the taxation of dividends,
this disparity is much less noticeable. If the corporation (and the associates) pull in greater
than a particular amount, they would be entitled to higher rates of individual taxes than
would be the case in a limited company.

The third disadvantage would be that the profits have to be shared. At the simple stage,
while the sole proprietorship keeps all the revenues of his or her company, those in a
partnership are distributed between the shareholders. this will contribute to conflict where
one or maybe more partners do not make an equal split of the effort to run or maintain a
company, but still accrue profits.

The final disadvantage is that there is a hold back in making decisions. As opposed to
managing a company as a sole proprietor, judgment-making can be slower because you
need to seek advice and review affairs with your partners. When you don't approve, time
will be wasted trying to establish trust or compromise. Often this can mean that chances are
missed. More often than not, a partner who has been used to making all the choices about
them company would be dissatisfied.

 DISSOLUTION

A partnership is a business where a formed between two or more individuals with a

common goal of making profit. Dissolution of a partnership means termination of binding
contractual ties between partners of the same partnership. The dissolution of partnership
may happen in various circumstances.

A partnership can be dissolved by the terms of an agreement. This method refers to

relevant clauses of a partnership agreement referring to the matters of dissolution as the
partnership agreement may fix the duration of partnership. If the duration of the
partnership has been specified in the agreement, the partnership will then be terminated
upon expiry of that period. The partners also may mutually agree to dissolve the partnership
at any time.

Dissolution can also occur by operation of law. A partnership is a result of an agreement

which is governed by the law. Dissolution of partnership by operation of law is enforced by
the expiration of a partnership agreement or by notice of dissolution. As stated in S34 (1) (a)
Partnership Act 1961, dissolution of expiration occurs when the partners of the partnership
have entered into an agreement for a fixed term. The partnership will be dissolved on the
expiration of the fixed term. According to S34 (1) (b) Partnership Act 1961, if partnership
was entered into an agreement for a single adventure of undertaking, it shall be dissolved
upon termination of the undertaking. In relation to S34 (1) (c) Partnership Act 1961, when
partners enter a partnership for an undefined time, the partnership may be dissolved at any
time by giving notice to the other partners.

A partnership will be dissolved upon the death or bankruptcy of any partner. As stated in
S35 (1) (b) Partnership Act 1961, any agreement between the partners, every partnership is
dissolved as regards all the partners by the death or bankruptcy of any partner. The
immediate and inevitable result of the death of one member of a partnership is the
dissolution of the firm. The partnership is ended and all connections are dissolved. The
future relations of the surviving parties to each other and with the representatives of the
deceased will be determined by some new agreement, or by the results which the law
pronounces upon their acts and proceeding. In the case of Lee Choo Yam Holdings Sdn Bhd
& Ors v Khoo Yoke Wah & Ors, the partners had applied for a declaration that the
partnership was dissolved by the death of any partner. The court allowed the plaintiffs
application. This is because the agreement was made between partners was before the
death of a partner. An agreement made by the surviving partner after the death of a partner
without agreement of the deceased partner will not bind the deceased nor does it
constitute to a continuing partnership. Upon death of any partner, the partnership is to be
dissolved unless there is evidence that the partners have agreed otherwise.

Partners may have an opinion of dissolving a partnership when a partner suffers his share of
the partnership property to be charged with payment of his personal debt as charged under
S35 (2) Partnership Act 1961. As seen in the case of Brown, Janson & Co v Hutchinson & Co,
the plaintiffs brought action against defendant, JA Hutchinson and his firm, Hutchinson & Co
upon a bill of exchange for £3000 drawn by JA Hutchinson and accepted by the firm. They
obtained judgment against J. A. Hutchinson under Order XIV. for £3,034 17s, leave being
granted to the firm to defend the action, on the ground that J. A. Hutchinson had no
authority to accept the bill for the firm. The plaintiffs then applied by summons under S23 of
the Partnership Act, 1890, for an order charging the interest of J. A. Hutchinson in the
partnership business with the amount of the judgment debt and for the appointment of a
receiver of his said partnership interest. This order was made and was affirmed by the Court
of Appeal.
Dissolution of partnership ay occur due to supervening of illegality in a partnership as
recorded in S36 Partnership Act 1961. Supervening illegality refers to a sudden change of
circumstances and status that makes it unlawful for the firm to carry on with business or for
the members of the firm to carry on with their business. Therefore, the partnership will be
dissolved by the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the members of the firm to carry on partnership. In the case of R
v Kupfer, the defendant was partner in a firm with his two brothers. Their partnership was
carried out in Frankfurt and Landon. The Frankfurt branch had made an order with a Dutch
company in Holland and the payment was to be settled by the London branch of the
partnership. However, a war broke out. The defendant payed the Dutch company its due
and was charged for trading with the enemy under Trading with Enemy Act 1914. One of the
issues arose was if the partnership was dissolved due to the war. The court then held that
the partnership had been dissolved as soon as war had been declared.

A partnership may be dissolved by order of the court as stated in S37 Partnership Act 1961.
A partner can apply for the dissolution of the partnership and the court may grant an order
of dissolution. However, for the court to grant a dissolution offer the court will have to take
in consideration the following circumstances : a partner’s being declared mentally
incompetent, a partner’s inability to perform his duties to the partnership; or the
misconduct of a partner that affects the partnership, a partner’s breach of the partnership
agreement; the unprofitability of the partnership and lastly in the opinion of the court that
it is just and equitable for the partnership to be dissolved. The court may dissolve the firm
when a partner becomes insane by virtue of S37 (a) Partnership Act 1961.The partner
concerned must be unable to perform his duties, of managing business affairs due to mental
incompetency. However, the insanity must be of permanent for the partnership to be
dissolved. In issue of the partners inability to performing his duties to the partnership, the
form of incapacity must be permanent as stated in S37 (b) Partnership Act 1961. In the case
of Whitwell v Arthur, a partner was paralyzed for some month. However, the partner had
recovered before the case came to court. The court then did not grant the order of
dissolution. It is provided for under Section 37(c) Partnership Act 1961 that a partnership is
to be dissolved if and when a partner is found is guilty of misconduct. This occurs when the
court sees that a partner is guilty of conduct, which is likely to affect prejudicial the carrying
on the business of the firm. In Carmichael v Evans, Carmichael and Evans were partners.
Evans applied for partnership dissolved based on Carmichael's conviction of travelling ticket-
less on the train with the intention to defraud. It was held that as honesty was an important
element in a business, Carmichael’s conviction was considered to be damaging to the
partnership business. When a partner of a partnership breaches the partnership agreement
either willfully or persistently, the court may dissolve a partnership as recorded in S37(d)
partnership Act 1961.This is only applicable if there is a serious breach of agreement that
inflicts damage to the business or on the firm. However, if the breach was a minor one and
has no impact on the business of the firm, the court will not consider for dissolution. In
 J.M.M. Lewis & Ors v W.E. Balasingam, both parties of this case were partners. The
plaintiffs alleged inter alia as the defendant was on leave from March till October 1967 upon
becoming the director of the mining company and therefore failing to contribute to the
partnership. He was guilty of gross misconduct and had committed a serious breach on the
partnership agreement. The plaintiffs had alleged that the actions of the defendant had
amounted to gross misconduct due to his lack of attendance to the office. It was held the
defendant’s behavior did not amount to gross misconduct and therefore the court cannot
grant the order for dissolution. As provided by section 37(e) Partnership Act 1961, If the
business can only be carried on at a loss that it can be petitioned to the court to dissolve the
partnership. It is a known fact that a partnership exists with a view of making profit and if it
defeats the purpose of creating a partnership then t is just for the courts to dissolve the
partnership. However, it must be proven that it is impossible of making profit. In Handyside
v Campbell, the plaintiff applied to the court to have the partnership dissolved on the
ground that the business would only continue making losses. The other partners admitted
that the firm had been suffering losses, but if it was not due to the poor management by the
plaintiff, and his absence for a long time due to illness, there is possibility for the business to
recover and make profits. The court then held that the application to dissolve the
partnership was not allowed. The court upholds the right to dissolve any partnership should
it feel that is just and equitable to do so as provided in S37(f) Partnership Act 1961. In Re
Yenidje Tobacco Co Ltd, despite the partnership’s business was thriving, the relationship of
the partners had come to a standstill. They communicated through the secretary of the firm.
The court then held that the dissolution of the firm was ordered on just and equitable
grounds.

3. PROCEDURE OF REGISTRATION FOR SOLE PROPRIETORSHIP AND

PARTNERSHIP
 To be eligible to apply for his business in Malaysia, he needs to register his new company
with Suruhanjaya Syarikat Malaysia (Companies Commission Malaysia) (SSM) or through
online via Ezbiz Online services. According to S.5 of ROBA, Registration of a new business
must be done within 30 days from the date of commencement of the business. Failure to
register is considered an offence. In relation to S.12 (1) (a) of Act 197, the offender will be
sentenced to a fine not exceeding RM 50,000-00 or imprisonment not exceeding 2 years or
both. The registering owner must be a Malaysian Citizen or a Permanent Resident who is 18
years and above. However, foreigners are not allowed to register sole proprietorship in
Malaysia. The owner may register his business using personal name or a trade name. If he
registers the business name using his personal name as stated in the identity card, the n he
is not required to apply for business name approval. Anyhow, if the owner were to use a
trade name, he has to complete Form PNA.42, before registration, in order to obtain an
approval from SSM for his desired business name.

According to Rule 3 of ROBR, upon approval of the business name, the owner will have to
complete the registration of the said business name using Form A, Business Registration
Form. The sole trader must state details of the business such as the name, type of business,
the date of the commencement and the address of the place of business and its branches if
it’s being operated in more than one place. The form must be submitted with the
registration fee of RM120 to RM150. The business registration is entitled for a period of 1
year and not more than 5 years. As stated in Rule 13 (1) of ROBR, upon receiving the receipt
of the registration application, the ROB will register the business and issue, Form D,
certificate of registration for the business. According to S.11A ROBA, the certificate of
registration must be displayed in business area where it is easily visible. Every registered
business must put up a signboard displaying the business name and registration number
outside the place of business as following Rule 13A ROBR.

4. DIFFERENCES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP

The most obvious difference between partnership and sole proprietorship is the number of
owners the business has. A sole proprietorship has only one owner who both own and runs
the business. Conversely, in a partnership, it requires two or more individuals to form a
partnership, so this business has at least two owners but not exceeding the maximum of 20
owners.

All business are entities are regulated by governing acts with specific set of rules relating to
the respective business. A sole proprietorship is not governed by any particular act. Thus,
there is no legal distinction between the owner and the business. However, the partnership is
governed by the Partnership Act 1961 (Revised 1974), which is similar to the English
Partnership Act 1890.

In the issues of management, a sole proprietor owns and manages the firm by himself. He may
be helped by his wife and family, or he may employ other people to work for him, but the
management is will remain entirely in his hands. He will bear all responsibility in running the
business. However, in a partnership, the partners are responsible for the management of the
business. They share equal responsibility to their firm and their business.

One of the major benefits of a sole proprietorship is that the owner is solely in control of all
matters regarding the business. He owner will be wholly responsible for all decision-making
profits as well as debts and obligation of his business which may sometimes be a burden to
him. He may seek advice and help from other but the final decision will always be the owner’s
say. However, the matter of control and responsibility varies in a partnership. Being a shared
business operation, all decisions made in a partnership will be shared among the partners. All
profits made as well as the debts incurred and responsibilities of the business will be shared
equally among partners lessening the burden of the partners. The ideas and advices of all
partners will be taken into account before a final decision is made.

In relation to matters of capital, sole proprietors often face challenges when trying to raise
long- term capital. This is because banks are hesitant to grant loans due to the lack of
credibility when it comes to repayment as the business is only run by one individual. Whereas,
in a partnership, it is easier to gather capital as each partner will contribute to the cause of
their business. Creditors and investors are more assured of the chances in getting their money
back.

Sole proprietorships have unlimited responsibility and liabilities for all the losses, debts and
obligations of his business. This is because there is no legal separation between owner and his
business. Therefore, the sole proprietor will be held personally liable for any business debt or
liability to the full extent of his personal assets. Creditors and investors can go after the
proprietor’s personal assets, including any homes, cars, personal bank accounts, and other
assets to claim as compensation. Unlike the sole proprietorship, partners will be held jointly
liable and responsible to all business debts and obligations. However, if a partner is sued
individually, the other partners will not be included in the lawsuit unless ordered by the
courts.

COMPANY

5. CLASSIFICATION OF COMPANY

A company is a body corporate or an incorporated business organization registered under

the companies act. Generally, companies can be divided by the liability of its members, its
membership by status, relationship with other companies and the place of incorporation.

In the matter of liability of its members, the members of a company can either be of limited
or unlimited liability. When a company is limited, it is understood that the liability of its
members is limited. Therefore, all debts and obligations of the company will only within the
company’s assets and without interference to any personal property of its members.
According to s.25 CA 2016, a company deemed to be limited must have the word “Berhad”
or “Bhd” as part of and at the end of its name. A limited company can be further broken
down as limited either by shares or by guarantee. When a company is limited by its shares,
the liability of its members is held by the unpaid shares held by the members as stated in
S.10(2) CA 2016. As read by S.10(3) CA 2016, a company limited by guarantee in which his
liability is limited to the amount undertaken to be contributed to the property of the
company by its respective members. When a company is said to be unlimited, it refers to
the fact in which the members of the company have unlimited liability towards the liabilities
and obligations of the company as stated in S.10(4) CA 2016. Therefore, in any case where
the company faces an insufficient of assets to meet its debts, members of the firm will be
held liable.
 

A company can also be grouped according to the membership of the company. The status of
a company correlated to the liability of members of that particular company. As shown in
S11 CA 2016, that a company limited by shares shall either be a private company or a public
company whereas a company limited by guarantee shall be a public company. In an
unlimited company, it could be either be a private company or a public company. In S25 CA
2016, it is seen that the name of a company ending with the word "Berhad" or the
abbreviation "Bhd” refers to a public company while a private company is identified by the
word "Sendirian Berhad" or the abbreviation "Sdn. Bhd.". In the case of an unlimited
company, the word “Sendirian” or the abbreviation “Sdn.” is used. S42 CA 2016 records that
a company limited by shares with less than fifty shareholders can be registered as a private
company. The company is allowed to change its status to a private company or may choose
to remain registered as a private company as stated under the same act. Under any
circumstances should a private company exceed a total of fifty shareholders and fail to
restrict the transfer of its shares or to share its capital, the company will be served a notice
by the Registrar in which the company will no longer hold the position as a private company
upon the date as specified in the notice. In a position should the Registrar declare that a
company no longer a private company, on the date specified, the particular company shall
have changed its name by omitting the word "Sendirian" or the abbreviation "Sdn." from its
name. Hence, a company that has become a public company cannot be converted into a
private company without the permission of the Court. As defined in S2 CA 2016, a public
company is a company other than private company. A public company seeks funds from the
public. It also encourages the public to invest money in their company. Unlike private
companies, public companies do not have restrictions in matters relating to the transfer of
their shares. All companies listed on the Malaysia Stock Exchange are public company
however not all public companies have been included in the list.

 
 The relationship between companies also determines the classification of a company. There
are two types of relationship that exists between companies namely holding and subsidiary
company. A holding company is a company to which another company is subsidiary. It is the
bigger company that controls the composition of directors, the voting power and holds
more than half of the issued share capital in the other company. As stated in S. 4 CA 2016, a
company is deemed a subsidiary of a holding company under certain circumstances where
the holding company controls the composition of the board of directors of the first-
mentioned corporation, controls more than half of the voting power of the subsidiary
corporation or when the latter holds more than half of the issued share capital of the first-
mentioned corporation or when  the first-mentioned corporation is a subsidiary of any
corporation which is that other corporation's subsidiary. In regards of an ultimate holding
company, a corporation becomes an ultimate holding corporation of another company if
that other company is a subsidiary of the holding company. However, this is only possible
when the holding company is not subsidiary to other companies. A subsidiary is a company
in which the composition of its directors and voting power is controlled by another company
which holds more than half of the issued share capital in this company. As stated in S 4(1)(b)
CA 2016, a corporation is deemed to be a subsidiary if it is a subsidiary of a holding company
that itself is a subsidiary company. A wholly subsidiary company is a corporation in which its
members are parties of its holding company, a nominee of its holding company or another
wholly owned subsidiary of its holding company as provided by S. 6 CA 2016.

A company can also be categorized by its place of incorporation. A company can either be
incorporated locally or in foreign. A company incorporated locally is a company
incorporated in Malaysia whereas a foreign company is a company that has been
incorporated outside Malaysia as recorded in S 2(1) CA 2016. A foreign corporation
intending to start up a business in Malaysia must be registered here.

6. INCORPORATION OF COMPANY

The incorporation of a company refers to the legal process that is used to form a corporate
entity or a company. An incorporated company is a separate legal entity on its own,
recognized by the law. These corporations can be identified with terms like ‘Inc’ or ‘Limited’ in
their names. It becomes a corporate legal entity completely separate from its owners.  The
most common motivating factor for incorporating a business is to have personal liability
protection for the owners. The word "corporation" originates from "corpus," which means
"body" in Latin. A corporation is a legal body or a distinct entity. It can conduct business, enter
into contracts, hold property and take legal action in its own name. A group of seven or more
people can come together so as to form a public company whereas, only two are needed to
form a private company. A company comes into existence is generally by a process referred to
as incorporation. The corporate company is an ‘artificial person’ who has separate legal
personality. In a corporate company, even though companies are formed by members, the
members are not individually directly liable to its creditors for debts owing by the company.
The following steps are involved in the incorporation of a company. Firstly, by ascertaining
availability of name. The first step in the incorporation of any company is to choose an
appropriate name and lodging it to SSM for approval of using the new name for the company.
A company is identified through the name it registers. The name of the company is stated in
the memorandum of association of the company. The company’s name must end with
‘Limited’ if it’s a public company and ‘Private Limited’ if it’s a private company. To check
whether the chosen name is available for adoption, name reservation should be made with a
payment of fee RM 50.00 together with the application. Each name applies for every 30 days.
Reservation is for a period of 180 days. Next step is by lodging application. Submission of
incorporation documents are held under S14(1) CA 2016 to the registrar making sure the
purpose of incorporation is lawful. S14 (3) (a)- (j) states the application must be accompanied
with the consent statement from promoter / director, declaration of compliance and
additional documents should be submitted in this step such as proposed company name, the
status of a private or public company, the proposed type of business, the address of registered
office, the business address, compete details of directors and promoters, declaration from
directors and promoters, declaration of compliance from individual responsible for
incorporation and additional documents if any. Disqualification of incorporation lies under
S198 CA in which persons disqualified from being a director and S199 CA, power of court to
disqualify person. S196(1) states the minimum number of company director. Private company
are bound to have a minimum of 1 director and 2 directors for public company. If it doesn’t
reach the minimum requirements, then application is to be disqualified. S 196(4) CA states the
minimum number of directors shall ordinarily reside in Malaysia. Next, upon registrar’s
satisfaction with all the compliance and fee payment under S15.CA, the registration of
incorporation is then successful. Particulars of the company and registration number should
be assigned and completed in this phase. The minimum incorporation registration fee is
RM1000 for company limited by share and RM3000 for company limited by guarantee. Next,
upon approval of registration, issue notice of registration will be given based in S.15 (c) CA.
Notice of registration is a conclusive evidence that the company has been duly registered in
which the date where the company comes into existence, equipped with legal capacity. Under
S. 17 CA, the registrar may issue certificate of incorporation upon application by the company.
S.19 CA defines that the notice of registration is conclusive evidence that the requirements of
this Act is respect of registration and matters precedent and incidental to such registration
have been complied with and that the company duly registered under this Act. However,
refusal of registration may exist under S.16 CA if the requirement pertaining to the registration
under the Act are not been complied with or if the Registrar is of the opinion that the
company is likely to be used for an unlawful purpose or for purposes prejudicial to public
order, morality or security of Malaysia. In the case of R v Registrar of Companies, the objects
of the company were unlawful according to the law of the country. Thus, the Registrar was
correct to refuse its registration.

7. SEPARATE LEGAL PRINCIPLE (SLP) AND SOLOMON v SOLOMON

The principle of separate legal entity is also is known as “the veil of incorporation “or
corporate veil. The principle of legal entity principle postulates that each company in a
corporate group is treated as a separate legal entity distinct from other companies within
the group and as such exercise’s legal powers in that regard. The principle was recognized in
the case of Salomon v Salomon & Co. Ltd (1897) AC 22.

In the case of Salomon v Salomon & Co. Ltd, Mr. Aron Salomon run a boot manufacturing
business as a sole trader. He decided to expand this business by forming a company. He
incorporated a company Salomon & Co. Ltd under UK Companies Act 1862 whereby he and
his family members were the shareholders. He and 2 of his sons were appointed as
directors. He sold the sole business to the company. The company paid part of the purchase
price and indebted the balance. As security, the company issue debenture to him. As a
result, he become secured creditor. Later, the company floundered and went into
liquidation. The value of the company’s assets was insufficient to paid out the creditors. But
the company paid to Mr Salomon as secured creditor. Other creditors of the company
claimed that Salomon had no right to the remaining assets of the company as the company
and Salomon were the same entity. Hence, the issue was whether, regardless of the
separate legal identity of a company, a shareholder could be held liable for its debt, over
and above the capital contribution, so as to expose such member to unlimited personal
liability. The court held that while organizationally and operationally the business was
managed by Salomon alone, in law, the incorporation of the company made Salomon and
his company two separate persons, therefore he could become a secured creditor of the
company, entitling him to the company's remaining assets.

The most important effect of incorporation of corporate veil is the creation of a new legal
entity known as a corporation. The company becomes an artificial person and exist
independently from its members and its directors. Therefore, the company is separate at
law from its shareholders, directors and the rest of its members which consecutively
disburdens them of their liabilities and obligations to the company. The members of the
company will no longer be responsible for the company’s debts except to the extent of their
investments in the company. Generally, the members of the company will not be personally
liable for the liabilities of the company. Only the company will be liable for all debts. The
members if a corporation will not owe to any duties of the company as they are no longer
liable to the company. Henceforth, the company will continue to exist although separate
from its members. The separate entity principle applies even when companies are related as
holding and subsidiary companies. Hence, a subsidiary’s profit will no longer regarded as the
profit of its holding company

The doctrine of separate legal entity is a doctrine which has gained increasing importance in
the analysis of company law. The importance of this doctrine and its relevance in the
analysis of laws relating to companies is evident in the case of Salomon v A Salomon and Co
 Ltd [1897] AC22, the leading case which gave effect to the separate entity principle. The
Separate Entity Principle is a fundamental principle of Company Law applied on a global
basis. Pursuant to this principle, a company is treated as a distinct entity from its members.
The separate entity rule pervades company law and has had wide reaching implications on
theoretical and practical company law. The issue in this case was whether, regardless of the
separate legal identity of a company, a shareholder/controller could be held liable for its
debt, over and above the capital contribution, so as to expose such member to unlimited
personal liability.

The House of Lord in Salomon v Salomon affirmed the legal principle that, upon
incorporation, a company will be recognized as an independent person with its rights and
liabilities appropriate to itself, and that the members of the company will be excluded from
any narration involving the rights and liabilities of the company. Thus, firmly establishing the
legal principle of "corporate veil" between the company and its shareholders onto the case.
The fundamental principle of the Corporation Act reflects the common law under S.119
which declares that a company comes into existence as a corporate body corporate as soon
as it becomes registered. In addition to this, S.124 states that a company has a legal capacity
and powers of an individual and all the power of a corporate organization at the time of
incorporation. The Salomon’s case firmly established the doctrine of separate legal entity in
which a company is a different “artificial person’’ to the members of the company by law.

In the separate case of Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor, it was held that
in the view of the law, a company is considered as a legal person, Therefore, the company
becomes a legal entity by itself. The company will be recognized as an artificial legal person
that has its own legal personality separate from its members and has the full capacity to
undertake in any business activities. This rule is provided for under S20 of CA 2016 which
states that a company incorporated under this act is a body corporate of its own and it shall
enjoy a separate legal entity from its members and shall continue in existence until it is
removed from the register.

8. EFFECTS OF CORPORATE VEIL

As provided by Section 21 of Companies Act 2016 lays down the legal effects that is brought
upon the process incorporation. These effects include the company being able to enter in
contracts, having the ability to sue and be sued, the company’s implication in terms of its
obligations and in terms of the liability of its members and the perpetual succession of the
company.

Firstly, a company is able to enter into contracts with its members, directors or employees,
suppliers and customers, which have been clearly stipulated. In the case of Lee v Lee’s Air
Farming, Lee was a pilot and formed a company to conduct the business. Lee was referred as
an employee when the workers’ insurance was taken. Lee was killed when his airplane crashed
and his widow made a claim. Her claim was first rejected on the ground that Lee is not a
worker. Privy Council however held that since the company was a separate entity, it could
enter into a contract of employment with Lee. Therefore, Lee is a worker for the purpose of
insurance.

Secondly, the company also has the ability to sue and be sued. Therefore, a company can sue
and be sued on its own name. It must be noted that the members of the company cannot take
any action on behalf of the company. Only the company can take legal actions on behalf of
itself and this principle is called ‘Proper Plaintiff Rule’. This principle has been developed in the
case of Foss v Harbottle. In this case, there were two shareholders brought an action against
the company’s directors for improper use of the company’s property. The court held that in
law, the company and its members are not the same. Thus, members could not maintain such
a suit, and it is up to the company to sue.

Thirdly, an incorporated company can enjoy a perpetual succession. The existence of the
company will never be affected by the death, insanity or insolvency of an individual member.
Once the company has been incorporated, the company will continue to exist until it is
dissolved properly according to the law or been struck off the register. In the case of Re Noel
Tedman Holdings Pty Ltd, where the company had only two shareholders who are also the
company’s directors, which is a husband and wife. Both of them died in a car accident leaving
behind their child, an infant. They left a will that all their shares will be transferred to the
infant. The court held that even though all the directors and members were dead, the
company still existed. The court allowed the personal representatives of the deceased to
appoint directors of the company in order for the directors to allow the transfer of shares to
the infant. Hence, in this case, it was clear that even upon the death of the director of a
company, the company still remain existed.

The fourth effect of incorporation of a company is that it will be conferred the power to hold
property or land on its own. The property of a company only belongs to the company and not
to any of its members even if the particular member owns all the shares in the company. For
instance, in the case of Macaura v Northern Assurance Co. Ltd, Macaura owned a tree
plantation and was covered by an insurance policy. He sold the plantation to a company to
which he became a shareholder. Macura was still owed the purchase money. After the sale,
Macara continued to insure the plantation in his own name. A fire broke out and destroyed
the plantation. When Macaura attempted to claim on the policy, the company refused to
compensate the claim. The issue raised was whether Macaura had an insurable interest at the
time of loss due to a fire in a plantation. The court held that the insurance company did not
have to pay Macaura as the plantation company was a legal entity in its own right, separate
from its shareholders. Although, Macaura had an insurance policy, he no longer holds the
insurable interest as he had assigned the plantation to the company.

The fifth effect of incorporation of a company is that it holds complete control over the
management of the company. Upon incorporation, the company becomes its own persona, all
business transactions will be controlled, managed and operated by itself. There will be no
requirements for him to consult with anyone else when need to make decisions or want to
make changes permitting him with a high degree of flexibility. The board of directors
employed to work in the company are only allowed to give suggestions to the management
during the meeting. The final decision making of the management is will remain entirely in the
hands of the company.

The final effect of incorporation of a company is the liability of its members. When a company
is incorporated, the company will be liable on its own debts and obligations. This also means
that it limits the liability of the members as they will not be responsible for it. However, the
matter of liability of its members solely depends on the classification of the company. For
example, if a company is limited by shares, the members will make a contribution to the
capital and he will be given shares. If the company suffer losses, the shareholder is not liable if
they had fully paid for his shares and if not, he has to pay the amount of the unpaid shares.
The creditors also cannot take any action to the member as they are separated from the
company. In the case of Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor, it was held that
in the view of the law, a company is considered as a legal person, Therefore, the company
becomes a legal entity by itself. The company will be recognized as an artificial legal person
that has its own legal personality separate from its members and has the full capacity to
undertake in any business activities. This rule is provided for under S20 of CA 2016 which
states that an company incorporated becomes a body corporate of its own and has a separate
legal entity from its members and will continue to exist unless removed from the register.

9. LIFTING OF CORPOARTE VEIL

Upon the incorporation of a company, the court will not look beyond the corporate veil to
identify the real person who is in the control of the company. However, it must be understood
that the principle of the corporate veil does not fully restrict the courts from looking into what
is happening behind the company. In a number of circumstances applied with exceptions, the
court will pierce the corporate veil or will ignore the corporate veil to reach the person of the
concerned company behind the veil. This is known as the doctrine of lifting the corporate veil.
There subsist few situations in which the court, as well as the legislature, have set aside the
corporate veil.

There are certain instances where lifting the corporate veil are permitted. First, to do justice
especially where fraud is involved. This is when there is a fraudulent trading. It says that
anyone who was knowingly a party to the carrying of that particular business in a fraudulent
manner can be held personally responsible for the company’s debts or other liabilities of the
company. This can be seen in the case of Prem Krishna Sahgal v Muniandy Nadasan & Ors, a
managing director of a since closed-down company attempted to appeal against a fraudulent
trading claim by his former employees. The Federal Court found that the company's funds had
been taken out deceitfully through various means, including to companies connected to the
managing director, and therefore ruled against him.

The corporate is also permitted to be lifted from being used to avoid legal obligations. In this
situation, the court will not allow the principle of separate legal personality if it is being used
by a contracting party for the purpose of avoiding his legal obligation owed to another
contracting party. This can be seen in several cases. In the case of Gilford Motor Co v Horne,
the defendant as a managing director of Gilford Motors Co. agreed through his employment
contract that he shall not attract or solicit any of their customers once he leaves the company.
Nevertheless, upon leaving, he set up a company under his wife’s name and had solicited
business from customers of his previous company. Gilford Motors Co. then sought for an
injunction. It was later decided by the court that an injunction was granted to Gilford Motors
Co. to restrain Horne (Defendant) for conducting his act solicited customers through his new
company. The new company was only a mere device which enable him to breach his contract.

The principle of lifting the corporate veil also extended to a related corporation such as a
holding-subsidiary relationship. In certain circumstances where multiple companies are
associated as a group is the last category of the judicial exception. Upon incorporation takes
place, a company shall be a separate legal entity. Nevertheless, when several companies are in
a group which means that the companies are related to one another, the court will regard
them as one legal entity. They are considered as one legal unit. This means that the group
companies do not have a separate legal entity. As all the companies were gathered under the
same control and ownership, the court will treat those companies as one. In the case of Hotel
Jaya Puri Bhd v Hotel, Bar & Restaurants Workers, the hotel company had a wholly-owned
subsidiary to carry out restaurant business in the hotel. However, after that restaurant had to
close as they suffered losses. The employees of the restaurants had to be retrenched. The
court, in this case, ruled that the hotel and the company were regarded as one entity, thus the
hotel company can be made liable to the restaurant’s employees.
However, there are instances of refusal too. It can be refused to lift the corporate veil when
the alleged wrongdoer is not a shareholder. In the case of Development & Commercial Bank
Berhad v Lam Chuan Co, the Lordship referred to the case of Salomon v Salomon, the
company is at law a different person altogether from the subscribers to the memorandum and
though it may be after incorporation the business is precisely the same as it was before, the
same person as managers, and the same hands receive the profits, the company is not in law
the agent of the subscribers or trustees for them.

For instance, in matters in which the company is there is no dispute on the identity of the
controller of the company then the lifting of the corporate veil is not allowed. In the case of
Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor, it was held that in the view of the law, a
company is considered as a legal person, Therefore, the company becomes a legal entity by
itself. The company will be recognized as an artificial legal person that has its own legal
personality separate from its members and has the full capacity to undertake in any business
activities. This rule is provided for under S20 of CA 2016 which states that a company
incorporated becomes a body corporate of its own and has a separate legal entity from its
members and will continue to exist unless removed from the register.

An instance of refusal to the lifting of the corporate veil may occur when the situation aims to
justify a wrongful taking of the company’s assets. In the case of Yap Sing Hock v PP, the
directors of the company were prosecuted under S67 of CA 1965, in relation to breach of the
financial assistance provision of that legislation and criminal breach of trust in the relation of
two sums of money. The two accused were directors of the company and one of the accused
was the beneficial owner of all the shares in the company. The accused was convicted and
appeal on the ground that the person who is the sole beneficial shareholder could not be
liable for the breach of trust. In the judgement of this Peh Swee Chin SCJ had laid down 4
circumstances where a corporate veil can be lifted. First, for the purpose of tax cases in
ascertaining tax liability. Secondly, for the purpose of any trading with the enemy. Thirdly, it is
for some illegal or improper purpose against the third party. Lastly, on account of equitable
cases. However, the court held that in our instant case, both appellants did not fall within the
four circumstances mentioned above. The lifting of the corporate veil in such criminal cases
will not be supported by the court.
10. LIMITED LIABILITY PARTNERSHIP (LLP)

11. LIMITED LIABILITY PARTNERSHIP (LLP) AND CONVENTIONAL

PARTNERSHIP

The characteristic of Limited Liability Partnership, and its differences compared to

conventional partnership is for the ownership of a limited liability partnership, it can have two
or more but not more than 20 individuals while a conventional partnership can have two or
more parties but there is no limit of maximum individual. Then, for the legal status, a limited
liability partnership has separate legal entity while a conventional partnership has no separate
legal entity status. Furthermore, for the controlling laws of a limited liability partnership are
Limited Liability Partnerships Act 2012 & Limited Liability Partnerships Regulations 2012 while
for a conventional partnership are Registration of Businesses Act 1956 & Registration of
Businesses Rules 1957.Moreover, for limitation of liability, a limited liability partnership is
limited while it is unlimited for a conventional partnership