Chapter 6-Business Ownership

MBBC3033 Entrepreneurship Session I 2022/2023
CHAPTER BUSINESS OWNERSHIP

6 AND STARTING A NEW
ENTREPRENEURIAL VENTURE
LEARNING OBJECTIVES
At the end of this chapter, you will be able to:
1. Explain the factors to consider when selecting the form of
business ownership.
2. Discuss the types of business ownership and their differences
3. List the advantages and disadvantages of each type of ownership.
4. Registration Procedures and Legal Aspects of Business Ownership
5. Differences between a Sole Proprietorship, partnership and
Company
6. Highlight the critical factors that need to be taken into
consideration in starting a new entrepreneurial venture
7. Discuss the various ways to establish a new entrepreneurial
venture
8. Explain the advantages and disadvantages of each alternative in
6.1 INTRODUCTION
Once an entrepreneur makes the decision to start a business, one of the first things
an entrepreneur must decide is choosing the proper form of business ownership. It
is important for entrepreneurs to get it right the first time because changing from one
ownership form to another can be difficult, time consuming, complicated, and
expensive. The form of ownership that is best for one entrepreneur may not be
suitable at all for another. Choosing the right form of business ownership means that
entrepreneurs must understand the characteristics of each form and how well thos e
entrepreneurs match their business and personal circumstances.
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This chapter aims to describe several forms of business ownership that is

familiar in Malaysia. It is necessary for a business to periodically review whether the
current form of business ownership remains appropriate. It is depending to the
owners of a firm and their attorney to select the legal entity that best meets their
needs.
6.1.1 Definition of Business Ownership

The form of business ownership describes the business legal structure. All ongoing
businesses must be registered and comply with certain legal requirements and they
are given certain legal protection under the law. Section 5(1), Registration of
Businesses Act 1956 stated that
‘The person responsible for the business shall register the business in a period of
not more than 30 days from the date the business is being carried on’.
Business includes every form of trade, commerce, craftsmanship, calling, profession

or other activity carried on for the purpose of gain, but does not include any office or
employment or any charitable undertaking or any occupation specified in the
Schedule of the Registration of Businesses Act 1956 (ROBA 1956) & ROBA Rules
1957. In Malaysia, a business may be conducted are as follows:
• By an individual operating as a sole proprietor

• By two or more (but not more than 20) persons in a partnership
• By a limited liability partnership (LLP)
• By a locally incorporated company or by a foreign company (i.e. branch office)
registered under the provisions of the Companies Act, 1965
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6.2 FACTORS IN SELECTING A BUSINESS OWNERSHIP
The decision to select the right form of business ownership typically depending on
several factors, which are shown in Figure 6.1.
Capital
Sharing of Personal
information assets
Span of
control
Figure 6.1 Factors in selecting a form of business ownership
6.2.1 Capital
In the business world, the main element that determines the type of business one
should venture in is capital. If the individual possesses a small amount of capital, he
should venture in a sole proprietorship instead of a company. This is because the
cost of forming a company is relatively high. Capital also determines the probability
of an individual obtaining credit or loans from external sources. Most debtors are
willing to grant loans to a company because there is a guaranteed agreement when
the loan is approved. Companies pledge their own assets as collateral on the given
loans.
6.2.2 Personal Assets

Personal assets have to be taken into account when selecting the kind of business
one wants to venture in. Personal assets are liable to the creditor if losses are
incurred either in a sole proprietorship or a partnership. Meanwhile in companies,
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there is a separate entity between the shareholders property and members of the
boards and the company. These assets will not be affected although the company
incurs losses. In other words, all losses will be borne by the company.
6.2.3 Span of Control

By choosing certain forms of ownership, an entrepreneur automatically gives up
some control over the company. Entrepreneurs must decide early on how much
control they are willing to sacrifice in exchange for help from other people to build a
successful business. If an individual wants to have a bigger span of control and
authority, sole proprietorship is the best form of ownership. In a partnership, the span
of control is shared among all partners. In a company, the person who is responsible
for initiating the business will not necessarily be the director of the company
throughout his lifetime. As such, only a sole proprietorship will have full power and
authority in carrying out his business.
6.2.4 Sharing of information

If an individual decides not to share information with his counterparts, it is advisable
for him to form a sole proprietorship. This is because in partnership and companies,
there is no confidential information among the partners, members of the company,
or creditors.
6.3 FORMS OF BUSINESS OWNERSHIP IN MALAYSIA
Business that may be registered under the Registration of Business Act 1956 is a
business operating in West Malaysia which includes Peninsular Malaysia and the
Federal Territory. The types of business are sole proprietorship and partnership.
6.3.1 Sole Proprietorship

The simplest form of business entity is the sole proprietorship. A sole proprietorship
is a form of business organization involving one person. The owner may hire a few
workers to help him with the business. Sole proprietorship is allotted under the
Business Registration Act 1956 where this type of business is easily established and
formed. It becomes the highest number of registered businesses in Malaysia
because a sole proprietorship is the easiest and cheapest to set-up. Only Malaysian
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citizens who are permanent residents can register a business as a sole

proprietorship. Unlike private limited companies, a sole proprietorship is only
required to pay an annual fee to the Companies Commission of Malaysia (SSM) to
keep its business renewed from year to year.
There is no audit and annual filing requirement. However, the danger of this
set-up is that it has unlimited liability. That is to say that if the sole proprietorship
cannot meet its liabilities, the creditors may go after the owner’s personal assets.
There is no protection to the owner’s personal assets. There is no separation
between the owner and its personal assets.
Profits made from carrying on a business, trade, vocation or profession under
this business structure is considered a business income under individual income.
Only expenses directly incurred to generate the business income is allowed for the
purpose of calculation of chargeable income. Personal expenses such as phone
bills, personal car, pre-incorporation expenses is not allowable.
Examples of sole proprietorship businesses: Mini markets, restaurants, convenient

stores, burger kiosk, tailors, beauty salons etc.
Advantages and Disadvantages of Sole Proprietorship
Advantages Disadvantages
• It is easy to register and dissolve with • Limited source of capital
minimum formalities. • The owner is fully responsible for all of
• The registration fee is low the business liability and risks. Liability
• Easy to manage as the management is on the owner’s part is unlimited.
solely done by one person, the proprietor. • Limited ability to secure loan and credit
• Flexible and minimum regulatory facilities. The business relies on the single
requirement. owner’s skills and abilities.
• Profits belong to the owner. • The survival and prosperity of then
• Tax is assessed by the income tax business entirely depends on the business
department based on the proprietor’s owner.
personal income tax. • Liquidations or business close downs as a
result of owner’s death, owner quitting
the business, insolvency and bankrupt.
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6.3.2 Partnership
Partnership is the same as sole proprietorship except there are more than 1 owner.
It is an extended version of a sole proprietorship. In partnership, the relationship
exists between people who are doing business together for the purposes of seeking
profits, (Section 3, Partnership Act, 1961). This form of set-up is usually for
professional firms such as lawyers and auditors.
A business that is registered under partnership has to have at least two
persons and not more than 20 persons as partners. Generally, its legal responsibility
to external parties is similar to sole proprietorship. However, the internal relationship
between partners depends on the terms of the partnership agreement made
between them. Partnership agreement is a contract agreement between partners. It
shows that partners have an intention to create a contract.
The Business Registration Act 1956 does not specify that the formation of a
partnership business requires a written agreement between partners. However, it is
advisable for partners to have a Partnership Agreement in order to avoid o r minimize
dispute between partners. A partnership agreement is usually drawn up by legal
counsel, which outlines the responsibilities of each partner, condition of termination
and means of resolving intra-partner disputes. It clearly outlines the financial and
managerial contributions of each partner and carefully delineates the roles of
partners in the partnership.
In the absence of a partnership agreement, the provisions of the
Partnership Act 1961 will be applicable. Section 26 and 27 of the Act stipulate that:
• Profit or losses are to be shared equally
• No interest is payable on a partner’s capital
• Each partner is entitled to actively participate in the management of the business
• No partner is entitled to a salary for participating in the partnership business
• Partners have the right to be paid based on their contribution to the business
• Daily normal things in business can be decided by the majority of the partners,
but any changes need to be made with consensus from all partners
• A partner may withdraw after getting the consent of the other partners
• The introduction of new partner must have the unanimous consent of all existing
partners.
• All business accounts books need to be kept at the main business premise.
Partners are allowed to check through the books and they have the right to k eep
a copy of the books.
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The owners of the business are called partners. Each partner contributes
money, labor, or skills and each shares the profits as well as the losses of the
business. Generally, there are two main types of partnership:
• General partnership
A general partnership is a form of business organization where 2 or more people
pool their skills, abilities and resources to run a business. Here, the business is not
dependent on a single person for its survival and success. In a general partnership,
all partners have unlimited liabilities for the debts of the business. They are
personally liable for all obligations of the firm. The general partner manages the
company, receives a salary, and shares the firm’s profit of losses.
• Limited partnership
A limited partnership is a modified form of a general partnership. The major
difference between the two is that a limited partnership includes two classes of
owners: general partners and limited partners. In a limited partnership, a limited
partners have limited liabilities, they share the firm’s profit or losses but do not take
an active role in managing the company. The limited partners will be liable only up
to the amount of their investment. Their responsibilities would not extend to the
management of the company, but they would share the company’s profits and
losses. A limited partnership is usually formed to raise money or to spread out the
risk of a venture without forming a corporation. Limited partn erships are common in
real estate development, oil and gas exploration, and motion picture ventures.
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Advantages and Disadvantages of Partnership
• Able to mobilize more capital and • Partnership periods are based on partners’
expertise with additional partners. agreement.
• Easier to obtain financial aid compared to • Profit has to be shared among partners.
sole proprietorship • If one partner withdraws or dies or unable
• Improved management capability with to do business then the business is
inputs from partners. dissolved.
• Business risk can be shared. • The partners are fully responsible for all
• It is not subject to double taxation. of the liabilities and risks. There is no
limited liability as for limited company.
• The risk of disagreement, conflict and
dispute between partners is high because
decision making is shared among
partners.
6.3.3 Locally Incorporated Company

Incorporation of Company under the Companies Act 2016
Company structure
The companies Act, 1965 governs all companies in Malaysia. The Act stipulates that
a person must register a company with the SSM before it can engage in any
business activity. It provides for three (3) types of companies:
• A company limited by shares

A company formed on the principle of having the liability of its members limited
by the memorandum to the amount (if any) unpaid on the shares respectively
held by them. Liability of a member of this company will depend on whether his
shares are fully paid or not. If holds fully paid shares, he has no further liability
to the company (if company becomes insolvent he does not have to contribute
to the assets of the company). If he partly paid shares, will be liable to contribute
to the company’s assets, up to the amount still unpaid on the shares
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• A company limited by guarantee

This company is not normally used for trading, but often formed to run clubs and
other organizations that are maintained by subscriptions, social activities and
donations. A company incorporated for the purpose of providing activities of
recreation or amusement, or which encourages trade/commerce, industry, art,
science, religion, welfare, pension or employee pension schemes or other
purposes beneficial to society. This company does not have a share capital,
members are not required to contribute capital while company is operating.
Although this type of company does not have a share capital, it is still a separate
legal entity.
The liability of its members limited by the memorandum to such amount
as the members may respectively undertake to contribute to the assets of the
company in the event of its being wounded up. The liability of the members is
specified in the memorandum association. If company is wound up, then its
member who has undertaken in the memorandum to contribute a certain sum
of money to the assets upon winding up, may be required to contribute up to his
amount of guarantee towards payment of debts incurred by the company while
he was a member. This liability extends to those who had left the company but
was a member within a year before the company wound up.
• An unlimited company
This company is formed on the principle of having no limit placed on the liability
of its members. In winding up, the members of this company are liable for the
debts of the company without limit if the company’s assets are not sufficient. It
is not much different than partnerships.
This company may or may not have a share capital and is rarely used
as a trading company. It has been used for mutual funds where the company
holds assets as investments among the shareholders. If a shareholder wishes
to leave, he may sell back his shares to the company. Creditors have access to
the personal property of all members to an unlimited extent if the company is
wound up and has insufficient funds. A past member is still liable if he has
ceased to be a member less than a year prior to winding up. Name of a private
unlimited company need only end with “Sendirian or Sdn.”
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This type of company enjoys the advantage of being a separate legal

entity with two special features:
▪ Unlike other companies, they are free to return their capital to their members
without having to comply with the restrictions imposed
▪ They must have their own Articles of Association
Company limited by shares

The most common company structure in Malaysia is a company limited by shares.
Such limited companies may be either privately held (Sendirian Berhad or Sdn.
Bhd.) or public listed (Berhad or Bhd.) companies. Berhad as part of its name
indicate limited liability.
This is to inform creditors that the liability of the members are limited and that
they can only look to whatever assets the company has to seek payment of the
company’s debt. The most common form of company limited by shares in Malaysia
include Private Company and Public Company.
Private limited company

A company having a share capital may be incorporated as a private company if it’s
Memorandum and Articles of Association:
• Restricts the right to transfer its shares

• Limits the number of its owners from 2 to 50, excluding employees and some
former employees
• Prohibits any invitation to the public to subscribe for its shares and debentures
• Prohibits any invitation to the public to deposit money with the company
Private limited company is the most common form of companies in Malaysia. It is

a company incorporated under the Company Act 1965. The term ‘limited’ means it
has a legal identity of its own that is separated from the people who own it. The
private limited companies are companies whose liabilities of its members are limited
to the amount of shares held in the company. This applies even if the shareholders
are working directors, unless the company has been trading fraudulently or
wrongfully. The following are a private limited company’s characteristics:
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• Separate legal entity is recognized as a legal entity that is separate from

founding members. Therefore, it can acquire and own property, it can sue and
be sued use its own name in court of law. The life span of the company is not
dependent upon the death or resignation of any of its members.
• Limited liability is financial liability of members of the company is limited to the

amount of shares being held or subscribed by the members or amount that each
have contributed as capital to the company. Personal assets of members are not
part of the company’s assets, therefore they are not affected regardless of what
happens to the company (unless the members become loan guarantors to the
company’s borrowing). It means that if the company fails to meet its liabilities,
the creditors will not be able to go after the owners’ personal assets.
• Credibility is a private limited company (Sdn Bhd) gives credibility to the

business owners. Companies limited by shares must carry the words ‘Sendirian
Berhad’ or ‘Private Limited’ with its abbreviation ‘Sdn Bhd’. or ‘Pvt. Ltd.’ behind
their names according to Section 22(4) of the Companies Act which means it is
owned by a group of people.
The owners of a company are called shareholders. The shareholders elect a

board of directors who are responsible for establishing the general policies of the
corporation and appointing the president and other key officers of the company. The
companies Act 1965 protects the rights and interests of shareholders and investors,
and provides regulations for the incorporation of companies, the formulation of
company constitutions, management and closures. Examples: Honda Malaysia
Sdn. Bhd, Smart Glove Corp Sdn. Bhd.
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Advantages and Disadvantages of Private Limited Company
• Generally, credit is easier to obtain • Partnership periods are based on partners’
compared to sole proprietorship and agreement.
partnership. • Profit has to be shared among partners.
• Member’s liability is limited to the shares • If one partner withdraws or dies or unable
subscribed only. to do business then the business is
• The life span of the company is not dissolved.
dependent upon the death of all founding • The partners are fully responsible for all
members. The shares of these members of the liabilities and risks. There is no
can be transferred to beneficiaries or sold limited liability as for limited company.
to others. • The risk of disagreement, conflict and
dispute between partners is high.
Public limited company

A public limited company (Berhad) is rather similar to private limited companies
except that it may offer its shares to the public and has more than 50 members. It is
also governed by the Securities Commission of Malaysia. A public company be
formed or, alternatively, a privately company may be converted into a public
company subject to Section 26 of the Commission Act 1965. Such a company can
offer shares to the public provided:
• It has registered a prospectus with the Securities Commission of Malaysia.

• It has lodged a copy of the prospectus with the SSM on or before the date of its
issue.
This type of entity is usually the type selected by large businesses. A public
limited company is a company limited by shares with at least seven or more
individuals and there is no maximum limit in terms of membership. Public limited
companies are very large in size. The companies raise or source their capital by
selling shares to the public and are run by a board of directors elected by the
shareholders. Although not necessarily so, public limited companies are usually
listed companies. The term ‘public’ means publicly held. In other words, the shares
of stock can be easily purchased or sold by investors. The public can also buy and
sell the shares of the company. Once a business has been registered with the
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Companies Commission of Malaysia, a public company can apply to have its share
quoted on Bursa Malaysia Berhad subject to its compliance with the requirements
laid down by the exchange. A listed company in Malaysia would trade on the Bursa
Malaysia Berhad. The Bursa Malaysia or Malaysia Exchange was formerly known
as Kuala Lumpur Stock Exchange or KLSE, Bursa Saham Kuala Lumpur in Malay.
A public limited company shows its status by using the word ‘Berhad” or
‘Limited’ with its abbreviation ‘Bhd’. or ‘Ltd.’, after the company’s name. Example:
Affin Holdings Berhad, AEON Co. (M) Berhad, IOI Corporation Berhad, Malayan
Banking Berhad, Malaysia Airports Holdings Berhad.
Advantages and Disadvantages of Public Limited Company
• The stockholders’ liability is limited to the • Partnership periods are based on partners’
individual’s investment in the company. agreement.
This is the maximum amount of money • Profit has to be shared among partners.
the individual can lose if the company • If one partner withdraws or dies or unable
suffers a loss. to do business then the business is
• The company has a separate and distinct dissolved.
life from that of its owners and can • The partners are fully responsible for all
continue for an indefinite period. of the liabilities and risks. There is no
• Ownership can be transferred through the limited liability as for limited company.
sale of stock to interested buyers. • The risk of disagreement, conflict and
• Size is not a barrier. A public limited dispute between partners is high.
company has a great potential for • A large amount of organizing expenses is
expansion. involved in forming a corporation.
• Operation output is bibber which enables • Various taxes must be paid by the
the firm to economies of scale. company.
• Capital can be acquired through the • The company is normally run by
issuance of bonds securing capital in and professional managers. Unfortunately,
capital can also be obtained through the interests of managers are not always
shares of stock the business or large parallel with the interests of its owners.
amounts short-term loans made against • Extensive government regulations and
the assets of personal guarantees of the reports are required by the state and
major stockholders. federal agencies which often result in a
• The corporation is able to draw on the great deal of paperwork and bureaucracy.
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expertise and skills of a number of • Corporate activities are limited by the

individuals, ranging from major charter and by various laws.
stockholders to professional managers • When the stocks of a company are
who are employed in the company. publicly traded, investors have the right to
examine the corporation’s financial data
within certain limits. This may force the
firm to disclose more information about
its operation and financial status than it
would desire.
6.3.4 Limited Liability Partnership (LLP)

The limited liability partnership or LLP is a new form of business vehicle that would
complement the traditional options of carrying on a business either by way of sole
proprietorships, partnerships or companies. The LLP is governed by the Limited
Liability Partnership Act 2012 (Act 743) (‘LLP Act 2012’).
LLP combines the characteristics of a company and a partnership firm
that provides the protection of limited liability for its partners and flexibility of the
partnership arrangement for the internal management of its business. Meaning, all
partners enjoy limited liability. The LLP will provide businessmen and investors the
flexibility and freedom to select the best business model that suits their needs and
the requirements of their respective business structure. The LLP combines the
limited liability advantage of the company with the tax advantages of the
partnership.
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Advantages and Disadvantages of Limited Liability Partnership (LLP)
• Members are liable for the debts and • Setting up and maintaining one is more
obligations of the business only up to the difficult and expensive
amount of their investment • Tax accounting can be complicated
• The number of shareholders is unlimited • Some of the regulations governing LLP
• An LLP can elect to be taxed as a sole vary by state
proprietor, partnership or company, • Because LLPs are relatively new type of
providing much flexibility. business entity, there is not as much legal
• Because profits are taxed only at the precedent available for owners to
shareholder level, there is no double anticipate how legal disputes might affect
taxation their business.
6.4 REGISTRATION PROCEDURES AND LEGAL ASPECT OF

BUSINESS OWNERSHIP
In Malaysia, all legally operating companies must go through the Companies

Commission of Malaysia that is the authority that manages and governs the
establishment and registration of a business or known as ‘Suruhanjaya Syarikat
Malaysia in Malay, abbreviated as SSM.
SSM is a statutory body under the Ministry of Domestic Trade, Cooperatives
and Consumer Affairs. It is formed as a result of a merger between the Registrar of
Companies (ROC) and Registrar of Business (ROB) in Malaysia which regulates
companies and businesses. Companies should comply business registration and
corporate legislation to sustain the positive developments in the corporate and
business sectors of the Nation. The following are the functions and activities
performed by SSM:
• Administration and enforcement of relevant Acts and related legislation

• Custodian of corporate statutory records
• Incorporation of companies and registration of businesses, as well as regulation
of related matters
• Supply of corporate and business information to the public
• Acting as government agent in the enforcement and collection of prescribed fees
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• Inculcation of ethical conduct amongst directors, company secretaries,

managers and personnel directly involved in the management of a company or
business
• Research and investigation on issues related to corporations, companies and
businesses
• Adviser to the Minister of Domestic Trade and Consumer Affairs on general
matters pertaining to corporations, companies and businesses
• Accomplishment of relevant and appropriate activities to ensure proficient
administration and effective implementation of the Companies Commission’s
functions listed within the Act
6.4.1 The Responsibility of Business Owner

Owner of the business is responsible to do the following:
• To register the business within 30 days from the date of commencement of the
business by submitting the Business Registration Form (Form A)
• To renew the registration of business within 30 days before the expiry date of
the registration or the prior renewal by submitting the Application for Renewal of
Business Registration Form (Form A1)
• To register any changes in the business particulars within 30 days from the date
of the change of the principal business address, type of business, particulars on
branches and information of the owner by submitting the Registration of
Changes of Business Particulars Form (Form B)
• To inform the termination of business within 30 days from the date of termination
of the business operation or, if it is due to death, within 4 months from the date
of death by submitting the Notification of Termination of Re gistered Business
Form (Form C)
• To display the Certificate of Registration of Business in a conspicuous place at
the main business premises or branch
• To put up a signboard displaying the business name and registration number
outside the place of business and if there is more than one place of business,
outside each place of business
• To display the business name and number of certificate of registration on every
business letterhead, invoice, bill or other document
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• To duly obtain the licence, permit or approval letter from the relevant authority
in relation to the types of businesses which require approval prior to
commencement event if the said business has been registered with the
Companies Commission of Malaysia
6.4.2 The General Principles and Characteristics of Business

Names
The following are the general principles and characteristics of names which can be
considered as company’s name.
• Business name should not be too long and not more than 50 characters
including spaces between words
• The use of numbers, sign and symbols are not allowed as part of a business
name
• Business name registered must be in accordance with the type of business
• The business name registered cannot be altered or changed once the business
is registered
• Name shall use the correct language and spelling
• If a name contains words other than the Malay or English Languages, the
meaning of such words must be given
• Names which are not blasphemous or likely to be offensive to members of the
public
• Names which do not resemble elements of religion or contains any word that is
offensive to any race or religion
• Certain names which are not too general, for example “ Attempt Sdn. Bhd.” or
“Beautiful Sdn. Bhd.”
• State the meaning of the created words
• Company name is not an acronym that can be used to mislead as the name of
a multi-national company such as PNB, ICI, IBM and etc
• For the use of the words Nurseries, Care Centre, Kindergarten, Tuition Centres,
Colleges and Schools as part of business name must obtain the approval of
business names, business owners must also obtain written permission from
other relevant agencies prior to registering the business
• The usage of individual names shall be from the names of the directors to be
named in the Memorandum or Articles of Association. However, individual
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names can be considered if such names are from the names of immediate
family members of the director or promoter, for example, the names of children,
father, wife, grandfather or grandmother. Proof of family relationship must be
given. If the name of the company is from the individual name of a group of
companies in existence, consent letter must be obtained from the group of
companies which have such individual names
• Gazetted words under the Government Gazette No. 716 dated 30 January
1997, Gazette Amendments of 2001 and the names that administratively
controlled under the Companies Act 1965 will also be considered co ntrolled for
a business name
Pursuant to section 22(1) and 341 Companies Act 1965, the Minister
directs the Registrar of Companies not to accept for registration an name of a
company or a foreign company that is a name or a name of kind mentioned in
the Schedule unless prior approval of the Minister has been obtained.
Government Gazette and Guidelines on Company Name can be viewed in the
SSM’s website at www.ssm.com.my
6.4.3 Registration for Sole Proprietorship and Partnership

General requirement for registration of sole proprietorship and partnership
• Owner must be a Malaysian citizen or permanent resident of Malaysia

• Owner must be aged between 18 years and above
• Register the business not later than thirty (30) days from the date of
commencement of business
• The nature of the registered business should not contravene an y laws or likely
to be used for unlawful purposes or any purpose prejudicial to or incompatible
with the security of the Federation, public order or morality
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General guidelines for registration of sole proprietorship and partnership

A new business registration may valid for a period of one (1) year and does not
exceed five (5) years on each registration.
• Business registration certificate can be obtained within one (1) hour from the
time payment is made
• A person who carries on business without registering a business commits an
offence under the ROBA 1956 and it found guilty be fined not exceeding
RM50,000 or imprisonment for a term not exceeding two (2) years or both
• Even though businesses have been registered with SSM, business owners are
responsible to obtain licences, permits or approval letters from other relevant
authorities in order to operate their businesses
General registration procedure for sole proprietorship and partnership
Step Action Remarks

1 Approved name Business may be registered using personal name or using a trade
of the business name.
to be registered • The business name using personal name as stated in the identity
card is not required to apply for business name.
Example: Ruslan bin Mohamed, Siow Ah Thai or Ramasamy a/l
Mutusamy
• Trade name is the name of the proposed business and must obtain
prior approval from the Registrar of Business.
Example: Kedai Dobi Mewah, Lucky Star Catering or ABS
Unggul Enterprise.
2 Registration of Complete the Business Registration Form (Form A) with the
business following information:
• Business name
• Commencement date of business
• Principal place of business
• The address of the branch of business (if any)
• Information of owner and partners
• Type of business carried out
• Provide a copy of the partnership agreement (if any)
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Person responsible must submit the application to counter or through

online via SSM e-Lodgement services in the SSM’s website at
www.ssm.com.my.
• Sole proprietorship using personal name as stated in the identity
Registration Fee card – RM30.00
• Sole proprietorship or partnership using trade name – RM60.00
• Registration of branches – RM5.00 for each branch
• Business Information print-out – RM10.60 (inclusive GST)
3 Preparing and • Every business owner and partner must sign the completed Form
submitting the A.
documents
Person responsible must submit the application to counter or through
online via SSM e-Lodgement services in the SSM’s website at
www.ssm.com.my.
Documents to be attached are as follows:

• Photocopy of owner and/or partner’s identity card
• Permit, licence or supporting letter for the type of business such
as nurseries (Department of Social Welfare), Kindergarten,
Tuition Centres, Schools/College (Ministry/Department of
Education)
• Approval of supporting letter from relevant agency if required
by the Registrar of Business.
Business registration Certificate can be obtained within 1 hour from
the payment transaction is made.
Even though businesses have been registered with SSM, business
owners are responsible to obtain licenses, permits or approval letters
from other relevant authorities in order to operate their businesses.
4 Changes in • Business changes must be registered within 30 days from the
business date of the changes.
particular • Changes of business particular can be registered by submitting
form of changes of business particular (Form B) to the SSM’s
counter and only owner/partner is allowed to submit application.
• Changes of business particular can be registered are as follows:
1. Changes of business address
2. Changes of business type
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3. Changes of particulars on branches

4. Changes of information of owner or partner(s)

• Owner’s and/or partner’s identity card
• Original business registration certificate for the change of
business, type of business and branch
• Photocopy of death certificate is required for the death or
deceased of the business owner or associate partner and
• Supporting document or approval letter from relevant agencies
for certain type of business if required by Registrar of Business.
Result of the application can be obtained within 1 hour from the time
payment is made:
Registration fee Change of business particular – RM20.00

Change of branch address – RM5.00 for each branch
Business information print out – RM10.60 (inclusive GST)
5 Renewal of • Registered business is required to renew the business
business registration certificate by submitting the completed Application
registration for Renewal of Business Registration (Form A1).
• Certificate of business registration may be renewed at any time
before the expiry date up to 12 months after the expiry date.
• Renewal of Business Registration can be made for a period of
one year and not more than 5 years.
• Sole proprietorship using personal name as in identity card –

Registration fee RM30.00
• Sole proprietorship or a partnership using trade name –
RM60.00
• Registration of branches – RM5.00 for each branches
• Business information print out – RM10.60 (inclusive GST)
6 Termination of Business may be terminated for the following reasons:
business • Cessation of the business
• Bankrupt
• Death of the owner
• Pursuant to court order
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The owner and every partner must sign the completed Form C – the
notification of Termination of Registered Business
• Business Registration Certificate
• Photocopy of owner and/or partner’s identity card
• Photocopy of death certificate in the event of termination upon
the death of owner or an associate partner
• A copy of the court order if termination has been ordered by
court and
• Relevant documents if the owner has become bankrupt.
Result of application can be obtained within 15 minutes from the
time submission is made.
Registration • Notification of Termination of Registered Business has no fee

Fee
• Business information print out – RM10.60 (inclusive GST)
Penalty provisions under the Registration of Business Act 1956 and

Registration of Businesses Rules 1957
A person who carries on business without registering a business commits an
offence under the ROBA 1956 and if found guilty be fined as follows:
• Contravention of items (1) & (2) shall, on conviction, be liable to a fine not
exceeding RM50, 000.00 or to imprisonment for a term not exceeding 2 years or
both
• Contravention of items (3), (4), (6) & (7) shall, on conviction, be liable to a fine
not exceeding RM10, 000.00 or to imprisonment for a term not exceeding 1 year
or to both
• Contravention of item (5) shall, on conviction, be liable to a fine not exceeding
RM2, 000.00 or to imprisonment for a term no exceeding 6 months or to both
• Any person being a person responsible for his business continues to carry on
the business without submitting the changes to the registered particulars of
business commits an offence under the Act and shall on conviction be liable to a
fine not exceeding RM10,000 or imprisonment for a term not exceeding 1 year
or both
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• Any person who continues to carry on any business after the period of
registration has expired commits an offence and shall on conviction be liable to
a fine not exceeding RM50, 000.00 or imprisonment for a term not exceeding 2
years or both
• Any person who being a person responsible for his business or a personal
representative or next-of-kin or a remaining partners fails to file a notice of
termination where a business has been terminated commits an offence and
shall on conviction be liable to a fine not exceeding RM10 ,000.00 or
imprisonment for a term not exceeding 1 year or both
6.4.4 Registration of Limited Liability Partnership (LLP)
Step Action Description

1 New LLP LLP may be registered by an application made to the
Registrar by furnishing the following information:
• Name of the proposed LLP
• General nature of the proposed business of the LLP
• Proposed registered office of the LLP
• Name and details of every person who is to be a
partner of the LLP
• Name and details of compliance officer (s) of the LLP
• If the LLP is formed for the purposes of carrying on
any professional practice, the application shall be
accompanied by an approval letter from the governing
body as specified in the third column of the First
Schedule of the LLP Act 2012 and
• Such other relevant information as may be specified
by the Registrar.
The registration form shall be lodged to the Registrar of
Limited Liability Partnerships (‘Registrar’) by the
compliance officer.
Registration fee for the registration of a new LLP or for

the conversion into LLP is RM500.
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2 Conversion into a LLP An application to convert from a conventional partnership

or a private company into a LLP may be made to the
Registrar in the applicable form as the Registrar may
determine and the Registrar shall be furnished with the
following information required in that form:
From conventional Partnership to LLP

• The name and registration number of the conventional
partnership
• The date on which the conventional partnership was
registered under the Registration of Businesses Act
1956 or any other written law.
• That as at the date of the application, the conventional
partnership appears to be able to pay its debts as they
become due in the normal course of business and
• All other information required for the registration of a
new LLP as stated in paragraph 3 above.
From Private Company to LLP
• The name and registration number of the private
company
• The date on which the private company was
incorporated under the companies Act 1965
• That as at the application date, the private company
appears to be able to pay its debts as they become due
in the normal course of business
• That as at the application date, all outstanding
statutory fees or any amount owing to any government
agency has been settled
• That the private company has placed an advertisement
in at least one widely circulated newspaper in
Malaysia and published a notification in the Gazette of
its intention to convert to a LLP
• That all of its creditors have agreed with the
application to convert to a LLP
new LLP as stated in paragraph 3 above.
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From Conventional Professional Frim to LLP for

Professional Practice
• The name and registration number (if any) of the
conventional professional firm
• The date on which the conventional professional firm
was registered under the relevant law.
• That as the date of the application, the conventional
professional firm appears to be able to pay its debts as
they become due in the normal course of business
• A letter of approval or letter of no objection from the
relevant governing body as specified in the third
column of the First Schedule of the LLP Act 2012.
new LLP as stated in paragraph 3 above
3 Dissolution of LLP One of the modes of dissolving a LLP is through the
voluntary winding-up process. The registered LLP that
has ceased to operate and has discharged al its debts and
liabilities may apply in writing to the Registrar for a
declaration of dissolution of the LLP.
Declaration of dissolution of the LLP by the Registrar

The registrar may, by notice in writing, declare that the
LLP is dissolved if:
• There is no objection received from any partner or
creditor of the LLP
• The objection to the proposed dissolution was
subsequently withdrawn, or
• The registrar is of the view that the objection to the
proposed dissolution is without justification.
Application Fee The completed application shall be submitted to the

Registrar together with an application fee of RM100.
Withdrawal of The applicant may withdraw the application for

Dissolution application declaration of dissolution at any time before the
declaration of dissolution is made by the Registrar by
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writing the reasons for the withdrawal of the application

together with a fee of RM100.
Once the Registrar has made the declaration of dissolution,
no application for withdrawal will be entertained.
Limited liability partnership agreement

The mutual rights and duties of the partners of an LLP and the mutual rights and
duties of the LLP shall be governed by the LLP agreement. However, in the absence
of agreement as to any matter set out in the Second Schedule of the LLP Act 2012,
provision of the Second Schedule relating to that matter shall apply.
Compliance officer
• Every LLP must appoint at least one compliance officer who shall be either one
of the partners or a person who is qualified to act as a secretary under the
Companies Act 1965
• At least 18 years of age and citizen/permanent resident of Malaysia and
• Ordinarily resides in Malaysia
Registration as a compliance officer of an LLP

Once a person is appointed as a compliance officer of an LLP, he must register with
the Registrar so as to enable him to lodge or submit documents on behalf of the
partners or the LLP. The registration shall be done via the MyLLP Portal and the
compliance officer is required to go to the nearest SSM office for identity verification
purposes.
Duties and liabilities of compliance officer.

A compliance officer shall be responsible for the doing of all acts, mater s and things
as required to be done under the LLP Act 2012 and the Limited Liability Partnerships
Regulations 2012 (‘LLP Regulations 2012’) as follows:
• Lodging or submitting of documents on behalf of the partners or the LLP as
stated in Regulation 6 of the LLP Regulations 2012
• Registering changes in registered particulars of the LLP with the Registrar as
and when it occurs as required under section 17 of the LLP Act 2012
• Keeping of registers and statutory documents at the registered office of the LLP
as required under section 19 of the LLP Act 2012
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• Publishing the LLP’s name and the registration number outside it’s registered
office and place of business as required under section 20 of the LLP Act 2012
and
• Any other matters that may be required to be done by the Registrar of LLP form
time to time under the LLP Act 2012 and/or LLP Regulations 2012
Continuous obligation of LLP

Upon registration, every LLP must comply with the requirements under the LLP Act
2012 as set out below:
• Registration of changes in particulars

An LLP shall ensure to lodge a notification to the Registrar if any changes made or
occurs in the registered particulars of the LLP within 14 days from the date of which
the changes made or occurred.
• Keeping of Registers and statutory record

An LLP shall keep at all times at the registered office the following:
✓ A notice of registration issued by the Registrar of LLP

✓ A register of the name and address of each partner and compliance officer
✓ A copy of the most recent annual declaration
✓ A copy of any statement lodged with the Registrar under the LLP Act 2012
✓ A copy of certificated (if any), issued by the Registrar under section 11(4)
LLP Act 2012
✓ A copy of the LLP agreement and any amendment thereto
✓ A copy of any instrument relating to any charge created by the LLP and
✓ Any other documents that the Registrar may from time to time, require to be
kept by an LLP
• Keeping of accounting records

An LLP shall keep such accounting and other records as will sufficiently explain the
transactions and financial position of the LLP and enable profit and loss accounts
and prepare balance sheets from time to time which give a true and fair view of the
state of affairs of the LLP at the LLP registered office or such other place as the
partner thinks fit provided that a notification of that place been made to the Registrar.
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An LLP shall retain the accounting records and other records as above for a
period of not less than seven years form the end of financial year in which the
transactions of operations to which those records relate are completed.
• Annual declaration
An LLP shale ensure to lodge with the Registrar on an annual basis within 90 days
form at the end of the financial year of the LLP, a declaration made by any two of its
partners that the LLP is able or not able to pay its debts as they become due in the
normal course of business and the declaration shall be accompanied by such other
particulars as may be required by the Registrar. In the case of the first annual
declaration, it shall be lodged not later than 18 months form the date of the
registration of the LLP
6.4.5 Requirements of a Locally Incorporated Company

The incorporation of companies under the Companies Act 2016 may be made by
individuals who intend to form a company. The basic requirements are:
• Private company must have at least one director who ordinarily resides in
Malaysia by having a principal place residence in Malaysia and one promoter or
• Public company must have at least two directors who ordinarily reside in
Malaysia by having a principal place of residence in Malaysia and minimum one
promoter.
A company must maintain a registered office in Malaysia where all books and
documents required under the provisions of the Act are kept. The name of the
company shall appear in legible Romanized letters, together with the company
number, on its seal and documents. A company cannot deal with its own shares or
hold shares in its holding company. Each equity share of a public company carries
only one vote at a poll at any general meeting of the company. A private company
may, however, provide for varying voting rights for its shareholders.
The secretary of the company must be a natural person of full age who has
his principal or only place of residence in Malaysia. He must be a member of a
prescribed body or it’s licensed by SSM. The company must also appoint an
approved auditor to be the company auditor in Malaysia. In addition, the public
company shall appoint at least two directors who each has his principal or only place
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of residence within Malaysia. Directors of public companies or subsidiaries of public

companies normally must not exceed 70 years of age. A company director may also
be a shareholder.
Procedure of Incorporation
Step Action Remarks

1 Name search and To incorporate a company, a person must apply to SSM using
application of name Form 13A – to apply for the name suggested by the company and
to determine if the proposed name of the intended company is
available.
• RM30 for each the application of a company name at counter

• RM50.00 for each name applied by online
A name search must be made to ensure that the proposed name is

available. There are 2 ways to apply for a name of a company:
Application for the name and incorporation of a company

(Direst Incorporation)
• The applicant must complete the information during the
application for the name and incorporation of a company via
online and incorporation fees of RM1,000.00;
• If the proposed name is approved by SSM, the application to
incorporate the company would be directly sent to officer to
be processed.
Name reservation
• The applicant must complete the information for the name of
the company online.
• Incorporation of company is a separate process.
• The result of the application for company name will be
approved within 1 working day.
• If the name is approved by SSM, the name is reserved for 30
days or any longer date as allowed by the Registrar
(maximum 180 date) from the date of approval.
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Name application for Consideration of the Minister

• For application of name that need the approval of the
Honourable Minister, the applicant needs to submit all the
required details together with a fee of RM150 (for
application to omit the word ‘Berhad’, a supplementary fee
of RM150 is applicable).
• Completed applications will be presented to the Honourable
Minister for his consideration
• The applicants will be notified of the result of their name
applications within 5 days after Registrar has received the
decision form the Honourable Minister.
2 Registration of Particulars required to incorporate a company
company and Under section 14(1) of the Companies Act 2016, the applicant
preparing and must complete the information required as follows:
submitting the • The proposed name of the company
documents • The status of private or public company
• The proposed type of business
• The address of registered office
• The business address
• Complete detail of director(s) and promoter(s)
• Declaration from the director(s) or promoter(s) that he/she:
o Is not an undischarged bankrupt either in or outside
Malaysia and
o Has not been convicted of any offence whether in or
outside Malaysia
• A person must then lodge the following documents with
SSM within three months to secure the use of proposed
name:
o Memorandum and Article of Association (M&A)
▪ The M&A documents the company’s name, its
objectives, the amount of its authorised capital (if
any) proposed for registration and its division into
shares of a affixed amount.
▪ The Articles of Association describes the regulations
governing the internal management of the affairs of
the company and the conduct of its business.
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o Declaration of Compliance (Form 6)

This declaration states that the applicant has complied
with all requirements of the Companies Act 2016. The
declaration should be made by the individual who is
responsible for the incorporation.
o Statutory declaration by a person before appointment as
a director, or by a promoter before the incorporation of
a company (Form 48A)
o Additional Documents:
▪ A copy of consent letter from the corporate body
named as the member of the company
▪ A copy of certificate of director’s qualification, if
required
▪ A consent letter from relevant agency, if any.
Fee • The applicant can then apply for incorporation. Capital duty
for the authorised capital must also be paid to the SSM
o Company limited by shares – RM1000
o Company limited by guarantee – RM3000
3 Verification of • A notice of commencement of business will be issued within
commencement of one working day by SSM upon compliance with the
Business procedures and submission of duly completed documents.
• Certificate of commencement of business would be issued by
SSM upon request together with the payment of prescribed
fee.
4 After the issuance • Once the Certificate of Incorporation is issued, the
of Certificate of subscribers to the memorandum, together with such other
Incorporation persons who may from time to time become members of the
company, shall be a body corporate, capable of exercising the
functions of an incorporated company and of suing and being
sued.
It has a perpetual succession under common seal with
the power to hold land, but with such liability on the part of
the members to contribute to its assets in the event of it being
wound up, as provided for in the Companies Act, 1965.
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• The company shall appoint a company secretary within 30

days after incorporation. The company secretary shall be
registered with SSM and possessed a valid practising
certificate issued by SSM
• If required by the company, it may file the constitution of the
company after the incorporation of the company.
• The company is advised to obtain the necessary
license/permit/approval from the relevant authorities before
commencing business.
6.4.6 Establishment of Foreign Branch Office

Foreign companies incorporated outside Malaysia that intend to establish a branch
office in the country must register with SSM. Every foreign company shall within a
month of establishing a place of business or commencing business within Malaysia,
lodge with the SSM the registration notice of the location of its registered office in
Malaysia by using the prescribed form.
Step Action Remarks

1 Registration of • To complete Form 13A – to apply for the name suggested by
business the company and to determine if the proposed name of the
intended company is available.
• If the intended name of the foreign company is available, the
application will be approved and the name reserved for three
months.
Registration Fee • RM30 for each the application

• Registration fees are payable in accordance with a graduated
scale set by the SSM based on the authorised capital of the
parent company.
2 Preparing and Upon approval, applicants must lodge the following documents
submitting the with the SSM:-
documents • A certified copy of its Certificate of Incorporation (or a
document of similar effect) from the country of origin.
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• A certified copy of its Charter, Statute, of M&A or any other

instrument that constitutes or defines its constitution.
• A list of its directors and certain statutory particulars
regarding them (Form 79).
• Where there are local directors, a memorandum stating the
powers of those directors.
• A Memorandum of Appointment of Power of Attorney,
authorising one or more persons resident in Malaysia to
accept on behalf of the company the service of process and
any notices that may be served to the company.
• A statutory declaration in the prescribed form made by the
agent of the company (Form 80).
The appointed agent will agree to undertake all acts that are
required to be carried out by the company under the Companies
Act, 1965. Any change of agents must be reported to the SSM.
The process of registering a branch office takes one month and
upon registration, the SSM will issue the registration certificate
of a foreign company (Form 83)
3 After the issuance A foreign incorporated company must file a copy of its annual
of Certificate of return each year within one month of its annual general meeting.
Incorporation The company must also file a copy of the balance sheet of its
headquarters, a duly audited statement of assets used, and
liabilities arising out of its operations in Malaysia, as well as a
duly audited profit and loss account within two months of its
annual general meeting.
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6.5 DIFFERENCES AMONG A SOLE PROPRIOTERSHIP,

PARTNERSHIP AND COMPANY
A comparison highlighting the distinction among sole proprietorship, partnership and

company is summarized and simplified as follows:
No. Features Sole proprietorship Partnership Company

1 Structure Individual in 2 or more people An entity separate from
business on his own doing business with its members
a view of profit
2 Registration Needs to be Needs to be Needs to be registered
registered under the registered under the with the Registrar of
Businesses Act Businesses Act Companies
1956 1956
3 Transferability The owner may Generally a partner Shares in a company
transfer his cannot transfer his are generally
business to status as a partner transferable although
someone else. to someone else the rights of transfer
without the consent may be restricted.
of all partners
4 Management The sole proprietor Partners are agents Members of a company
owns and manages of the firm for as such are neither its
the firm by himself carrying on its managers (directors)
and can employ business in the not its agents. Board of
employees to ordinary course of directors elected by the
manage the firm for business and are shareholders
him. generally entitled to
manage the firm.
All partners share
control equally,
unless otherwise
specified
5 Number of There is only one The maximum is There is no maximum
members
person in a sole 20. There is no number of members
proprietorship ceiling on the except when it is a
number of private company, in
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members for which case the

professional firms. maximum is fifty
6 Constitution A sole Partnership may be A company must be
proprietorship does formed orally or in constituted in writing
not require a writing. that is by a
written constitution Memorandum and
as it is run by only Articles of Association.
one person
7 Capital and A sole proprietor Partners may Capital subscribed by
liability
may also withdraw withdraw capital members for their
capital. His but their liability shares cannot ordinarily
liability for the for the firm’s debts be returned to them, but
firm’s debts to its to its creditors is in a limited company
creditors is unlimited they are not liable for
unlimited. its debts once they hold
fully paid shares.
The liability is limited
to amount of
investment
8 Borrowing A sole proprietor Partners have Companies can borrow
powers
has unrestricted restricted powers of for purposes covered by
powers of borrowing in terms their objects as
borrowing. of amount and contained in their
purpose. memorandum of
Association.
9 Security over A sole proprietor Partners cannot Companies can use
assets
cannot create create floating current assets as
floating charges but charges but they security by creating
can mortgage the can mortgage the floating charges.
firm’s assets firm’s assets
10 Rules, Sole Partnership may be Companies are subject
procedure and
proprietorships are formed informally to various statutory
information to
public formed informally and they need not rules of procedure and
and information supply information are required to supply
about the firm need to the public certain information to
not be published. the public
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11 Dissolution Sole proprietorship Partnership may be A company is dissolved

may be dissolved dissolved by winding up and
informally by the informally, such as liquidation which is a
sole proprietor by agreement of the formal procedure.
himself. partners.
6.6 FACTORS TO CONSIDER WHEN STARTING A NEW

Many people enjoy the notion of starting a new entrepreneurial venture because of
the lure to generate quick profit. However, it takes more than just having ideas to
establish a new venture that later leads to business success. The critical factors that
need to be considered when initiating a new business venture are
• Capital
• Location of business
• Interest, knowledge and experience
• Size of business
• Competitors and
• Law and regulations
6.6.1 Capital
An entrepreneur must have sufficient funds to initiate and run a business. The total
credit needed is based on the size and kind of business, and location. Sources of
capital for an entrepreneur are personal funds, funds form family and friends,
retirement accounts, and banks. In order to obtain a loan from the bank, a working
paper needs to be submitted to convince the relevant bank on his ability to pay the
debts.
6.6.2 Location of Business

Entrepreneurs must choose a strategic location for the business. The selection of a
location is influenced by factors such as availability of capital, rental, competition,
infrastructure and regulations.
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6.6.3 Interest, Knowledge and Experience

Entrepreneurs who have a strong interest in the business will sustain in the industry
for a longer time period compared to those who do not have any interest. They must
have specific knowledge and experience related to the business. For example, to
open a textile shop, the entrepreneur must know how to get the supply o f products
to be sold in the shop. He must also have knowledge and experience in
management, financial management, time management, entertaining customers,
and keeping records and accounts. Previous experience in the business will assist
the entrepreneur and give him ideas on how to run the business. Knowledge can be
enhanced through several ways such as studying at a school, business, attending
short courses, discussing with other entrepreneurs, and attending in hose training
with an established entrepreneur on ways to handle a business.
6.6.4 Size of Business

The entrepreneur must be able to determine the nature and size of the proposed
business venture. The nature of business has to accommodate the capital,
capabilities, knowledge as well as experience of the entrepreneur. The size of
business also needs to be in line with the available capital, knowledge, and
experience to control and manage business activities. The smaller the size of the
business, the simpler and easier it is to handle. On the other hand, a big -scale
business requires a bigger amount of capital and is difficult to handle.
6.6.5 Competitors
The entrepreneurs must also think about his competitors, he must know the size of
the competitors and their strengths and weaknesses. It would be difficult to obtain
customers when he carries out a business with many competitors. However, if the
entrepreneur is able to offer a variety of goods at reasonable prices and excellent
after-sales services, he will gradually be able to compete with his rivals.
6.6.6 Law and Regulations

An entrepreneur must know and update himself on law, regulations, and acts related
to running a business in Malaysia. Local authorities such as local councils ( Majlis
Tempatan), city councils (Majlis Bandaran), or city halls (Dewan Bandaraya) decide
on what kind of business the entrepreneur can venture in and the kind of licences
that are required. As such, he has to abide to all types of enforcement established
164
by the local authorities.
6.7 ALTERNATIVES IN STARTING A NEW

An entrepreneur has several ways to start a new venture. Ventures that are most
frequently practiced by entrepreneurs can be classified into three forms which are
start-up company, buying an existing company or acquisition, and franchise.
6.7.1 Start-up Company

A start-up company is a venture whereby an entrepreneur creates a completely new
business starting from scratch. Many entrepreneurs start a business by themselves.
Usually an entrepreneur will use his own funds from his savings or borrow from
others. Those who want to start their own business usually need to have lots of
experience, knowledge, skills and interest in the related field. A start -up company
usually involves the invention of new products or services. Any new venture goes
through three phases, prestart-up phase, start-up phase and post start-up phase.
• Prestart-up Phase
This phase begins with an idea and a desire to start a business based on this idea.
It could be a new product, a new service, or a new way to produce or do something.
It sets the stage of how the business will be run and managed once it is launched.
Generally, in this phase, the entrepreneur is advised to talk to experienced business
owners, describing his own ideas and listening to their suggestions and
recommendations for the business. The entrepreneur also needs to make an
assessment on the business opportunity and his own abilities to run the business.
• Start-up Phase
This phase is also called the survival phase. It begins with the introduction of sales
activities and ends with the establishment of a concrete business. During this phase,
the entrepreneur might be getting zero revenues, achieving breakeven point of
making first profit depending on sales. The entrepreneurs is strongly recommended
to learn quickly, stay flexible and keep the cost structure low until revenues catch
up.
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• Post Start-up Phase

This phase ends when the venture is terminated, closed or the entrepreneur loses
control over the survival of the business entity.
Advantages and disadvantages of a start-up company
Complete Freedom Long Process
• Freedom of making own decisions Require a lot of time, money and additional
• Owner is in control of all aspects of the effort to start the business
business
Tendency to be creative Maximum Risk
Owner can use his own idea and develop his All of the responsibility is taken by the owner
own business image and it is more costly and risky since there is
no proven formula
Authority Difficulty in obtaining funds
Have full authority to select an ideal location, Institutions have a low confidence in the new
plant, equipment, products or services, venture
employees, suppliers and bankers to
determine the success of the venture
Free from government intervention Extra effort
Able to avoid any undesirable precedents, Need to put a lot of effort to attract new
policies, procedures and legal commitments customers and run the business
of the existing firm
Immediate operations No historical record
Able to make changes to the business since Entrepreneur difficult to forecast sales,
this business start from scratch. expenditure and profits because there is no
historical business records.
6.7.2 Buying an Existing Company/Acquisition

Buying an existing business involves purchasing an existing business by buying of
acquiring either the shares of the existing company or all the assets in an existing
company or business. Buying an existing company allows the company to expand
and enter new markets.
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Reasons for buying an existing business

The following are some of the reasons why should entrepreneur choose to buy an
established business:
• Buying an existing firm can reduce uncertainties and unknown that must be
faced in starting a business from the ground up
• In acquiring an existing firm, the entrepreneur can take advantage of the firm’s
ongoing operations and established relationships with customers and suppliers
• An existing business may be available at a bargain price or entrepreneur may
obtain an established business at a price below what it would cost to start a new
business or to buy a franchise. This is because the entrepreneur may be in a
hurry to get the business going
• To begin a business more quickly than by starting from scratch
Factors to be considered in buying an existing company

There are five factors that need to be considered in buying an existing company
which include conducting a self -assessment, reviewing a potential target, evaluating
business opportunities, exploring financing options, and ensuring a smooth
transition.
• Conducting self-assessment
In a self-assessment, an entrepreneur needs to analyze his skills, abilities and
interests to determine the types of business to be considered. He needs to evaluate
whether he has the appropriate skills, knowledge and ability to bear the uncertain ties
or risks within or outside the business.
The also needs to think about what he expects to get out of the business, the size
of the business which the wishes to buy, and the location of the business.
• Evaluating business opportunities

The entrepreneur can find potential opportunities by reading classified
advertisements, discussing opportunities with business brokers, and checking
industry sources. He should resist the temptation to buy the first business that looks
good. It would be worthwhile to make an appointment with the business sellers or
brokers for and initial introduction to the opportunity. The business sellers should
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provide him with brief financial reports, history, price, and reason for selling the
business. This will allow the entrepreneur to know more about the business and how
long it has been on sale.
• Reviewing a potential target

The list of potential target must be closely examined to determine how well it has
been managed and maintained. For service businesses, the en trepreneur should
talk to its employees and even its customer. A checklist of information has to be
prepared on financial accounting of operations and list of all assets, for example,
income tax returns and sales tax forms for the past three years, and the list of all
assets to be transferred to the new owner, including an itemized breakdown of all
inventory as of the last accounting period. Other considerations include strengths
and weaknesses of the candidates, their profitability, customer base, physical
condition and competition.
• Exploring financing options

Without proper financing, a business acquisition cannot move forward successfully.
There are several funding options that can be utilized by an entrepreneur. Lenders
generally require the following details:
✓ Details of the business/sales particulars

✓ Accounts for the last three years
✓ Financial projection
✓ Details of their personal assets liabilities.
The entrepreneur should also consider approaching the seller or traditional

sources for financial assistance.
• Ensuring a smooth transition

The entrepreneur should communicate openly and consider asking the seller to
serve as consultant until the transition is complete. After considering the five factors
mentioned above, the entrepreneur may begin the acquisition process. The process
involves seven steps as described below:
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a) Identify type of business

First identify the type of business, whether it is in the form of service, manufacturing,
wholesale, or retail. Decide on the size of the business in terms of sales, profits and
the number of employees. Decide whether to seek a business that is profitable and
stable or one that is losing money and in need of new management.
b) Sign non-disclosure document

Once both the entrepreneur and owner are satisfied, they will be likely to sign a non-
disclosure document whereby the secrecy of the negotiation is maintained.
c) Sign letter of intent/ make an offer

Before the offer is made, the seller will ask the buyer to sign the letter of intent of
buying the business and a letter containing the terms of the purchase, such as price,
payment terms, categories of assets to be sold, and a deadline for closing the final
deal.
d) Conduct due diligence/investigation

While negotiations are continuing, the buyer must conduct an investigation in order
to make sure the business is of good value. This is known as conducting due
diligence. The term due diligence describes a general duty to exercise care in any
transaction. It involves the investigation of a business or per son prior to signing a
contract. Due diligence may include outside services such as appraisers, equipment
valuation experts, or accountants to proceeds in stages. Preliminary investigation
may be conducted prior to making an offer or signing a letter of in tent. More
complete investigation is undertaken prior to the closing.
The major areas to be investigated include the items contained in the seller’s
financial statements, the status of pending or threatened litigation, business
relationships with suppliers and customers, tax matters, the competitive situation,
employee relations and benefits plan intellectual property, corporate, government
and regulatory compliance, warranty and product liability issues, and potential
environmental liabilities.
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e) Draft/preparation of purchase agreement/formal agreement

The purchase deal is a formal contract to purchase the business, covering financing,
inventory verification, asset valuation, verification of financial reports, and tax
returns.
During the negotiation process, the seller is looking to

1. Get the highest price possible for the business
2. Sever all responsibility for the company’s liability
3. Avoid unreasonable contract terms that might limit his future opportunities
4. Maximize the tax burden from the sale and
5. Make sure the buyer will be able to make all future payments
On the other hand, the buyer seeks to

1. Get the business at the lowest possible price
2. Negotiate favorable payment terms, preferably over a long period
3. Get assurances that he is buying the business he thinks he is getting
4. Avoid putting the seller in a position to open a competing business, and
5. Minimize the amount of cash paid up front
f) Close the final deal/matters

Once the purchase agreement have been drafted, the next step is for the buyer and
the seller to sign a purchase agreement which spells out the final deal and contains
the details of the agreement that are result of the negotiation process to make the
sale final.
g) Begin the transition/ ready for business

The entrepreneur now owns the new business and the real challenge begins to
become a successful business owner.
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Advantages and Disadvantages of Buying a Business/Acquisition
Immediate operations Business may be overpriced
• Some of the groundwork operations would • Need to invest a large amount upfront and
already have been done in getting the will have allocate some money for
business running. professional fees
Existing intangible assets/equipment Equipment and goods may be obsolete or
• Equipment installed and productive inefficient
capacity is known. • Inventory and facilities may be outdated or
• Both inventory and financing are in place obsolete or inefficient.
Employees established ‘Inherited’ Employees may be unsuitable
• Already has experienced employees • New entrepreneur may clash with the
• Enable a company to continue to earn company’s existing managers and
money while new owner learns the employees.
business.
Supplier relationships Uncollectible receivables
• Relationship has already been established. • Receivables listed on the balance sheet may
• Has an established set of suppliers with a be stale and uncollectible.
history of business dealings.
Less competition Outstanding contracts
• Buying a business may eliminate a • The entrepreneur will need to honor or
competitor that the entrepreneur would renegotiate outstanding contracts that the
have and can use the previous owner’s previous owner has in place,
experience in facing competition.
Easier financing Inherent problems
• It may be easier for the entrepreneur to get • There may be inherent problems in the
financing facilities, as the business would business, some of which may not be
have a proven record of accomplishment apparent until after the sale of products of
services. The business may be losing
money, equipment and facilities may be
obsolete or inefficient change and
innovation are difficult to implement
171
Quick cash flow Location may have become unsatisfactory

• Existing inventory and receivables can • Business location may have become
generate income starting from the first day unsatisfactory for change and innovation to
of operations by the new entrepreneur. be implemented.
Continuous success
• It may already have the best location. The
previous management team already has
established a customer base, built supplier
relationships, and set-up a business
system. The customer base inherited in a
business has become successful and it is a
matter of how to build on that success.
6.7.3 Franchising
One form of business that incorporates some of the independence of an
entrepreneur with the larger umbrella of a corporation is the franchise. A franchise
is any arrangement in which the owner of a trademark, trade name, or copyright has
licensed others to use it in selling goods or services. In other words, franchising is
the process of expanding a business whereby a company (franchisor) grants a
license to an independent business owner (franchisee) to sell its products or render
its services.
Each party of a franchise agreement gives up some legal rights to gain
others. The franchisor increases its number of outlets and gains additional income.
The franchisee opens and established business with strong potential for success.
The franchisee (a purchaser of the franchise) is generally legally independent but
economically dependent on the integrated business system of the franchisor (the
seller of the franchise).
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How a Franchise Works

Business franchise systems for good and services generally work the same way.
This requires the franchisee to do one or more of the following:
• Make a financial investment

• Obtain and maintain a standardized inventory and/or equipment package
usually purchased form the franchisor
• Maintain a specified quality of performance
• Follow a franchise fee as well as a percentage of the gross revenues
• Engage in a continuing business relationship
In turn, the franchisor provides the following types of benefits and assistance:
• The company name.

For example, if franchisee bought a McDonald franchise, this would provide the
business with drawing power. A well-known name, such as McDonald, ensures
higher sales than an unknown name.
• Identifying symbols, logos, designs and facilities.
For example, all McDonald’s units have the same identifying golden arches on
the premises. Likewise, the facilities are similar inside.
• Professional management training for each independent unit’s staff.
• Sale of specific merchandise necessary for the unit’s operation at wholesale
prices.
Usually provided is all of the equipment to run the operation and the food or
materials needed for the final product.
• Financial assistance, if needed, to help the unit in any way possible
• Continuing aid and guidance to ensure that everything is done in accordance
with the contract.
The failure rate for franchises is lower than the rate for all new businesses.
A franchisee will have to pay a continual royalty based on sales, usually between 5
to 12 percent. Most franchisors require franchisees to have 25 to 50 percent of the
initial costs in cash to pay for the initial franchisee fees throughout the life of the
franchise agreement. After a 10 years period, the success rate of individual
franchises business that survives is about three times greater. The franchisor has
173
already proven that his business operations management style is successful. As an

organization, franchisor is normally an organization that has been around for at least
five to ten years and must have fifty or more units.
Buying a franchise
A franchise is a way for an aspiring entrepreneur to start a business by following a
proven model for success. The following steps will help entrepreneurs in making the
right choice when buying a franchise:
• Self-evaluation
An entrepreneur should first know his own traits, goals experience, likes, dislikes,
risk orientation, and other characteristics before considering buying a franchise.
Assessing all those mentioned will help the entrepreneur in selecting the best type
of franchise business to run.
• Conduct market research

An entrepreneur should get to know the market and the area he plans to serve
beforehand. Doing research gives better perspective of the market and influences
the decision to get involved by showing how much money one should reasonably
invest.
• Consider the franchise options

The entrepreneur should study his options by reading trade journals and business
magazines that offer information about franchising.
• Visit several of the franchisor’s outlets

Prior to meeting with the franchisor, the prospective franch isee should visit several
of the franchisor’s outlets and talk with their owners and employees.
• Meet the a franchisee attorney

Prospective franchisees should have an attorney who represents their interests, not
the franchisor’s. The attorney should prepare the prospective franchisee for meeting
with the franchisor and should review all franchise documents before they are
signed. If the franchisor tries to discourage the prospective franchisee from retaining
an attorney, this is a red flag.
174
• Meet and ask the franchisor some tough questions

A good method for evaluating a franchisor’s reputation is to interview existing
franchise owners about the operation. This is a good tool for evaluating how well a
franchisor supports it franchisee, how effective the marketing system is and whether
the start-up costs projections are practical.
• Review all franchise documents with the attorney

The franchise attorney should review all the franchise documents, including the
Franchise Disclosure Document and the franchise agreement.
• Sign the franchise agreement

If everything is a go at this point, the franchise agreement can be signed. The
franchise agreement is the document in which the provisions of the franchisor -
franchisee relationship are outlined.
• Attend training
Almost all franchise organizations provide their franchisees training.
• Open the franchise business

For many franchises, particularly restaurants, the first two to three weeks after the
business is opened may be its busiest period, therefore it is needed for many
franchise organizations to send experienced personnel to help the franchisee open
the business as smoothly as possible.
There are several advantages and disadvantages of buying a business and
these are summarized as follows:
• Proven track record on products and • Many franchisees not satisfied with the
business formats. Franchisees can depend training programs. Some franchisors do not
on an established product and business deliver all they promise in a franchisee
system of franchisor. training programs.
• Franchisors often provide franchisees with • Franchises are required to pay initial
standards of goods and services that have franchise fees throughout the life of the
been a track record of proven success. franchise agreement and continual royalty
175
• The franchisor will usually provide both based on sales.

training programs and guidance in • The franchisees may be restricted in his
production and management methods for freedom to make decisions about business
franchisees to reduce failures. operations. If the franchisees do not follow
the franchisor’s directions, franchisees’
• A franchises buy a well-known national license may not be renewed.
franchise, especially a large and famous • Franchise agreement normally require
one, therefore has the ability to identify franchisees to sell only approved products
business with a widely recognized product and services from the franchisor’s outlet.
or service. • Franchisees loses a certain amount of
• In many franchise agreements, the independence and flexibility since they
franchisees can purchase materials and must agree to abide the guidelines set by the
supplies from franchisor on credit. franchisor.
• Obtaining a franchise from a well-known • Franchisees are required to pay fees and
company can provide franchisees with a share profits with the franchisor throughout
recognized name that can greatly increase the life of the franchise agreement.
the demand for their product or services.
• Franchisors often support their brands with
extensive advertising.
176
Discussion Questions
1. Discuss the main differences among sole proprietorship, partnership and

companies.
2. State five advantages of a sole proprietorship.
3. Describe six disadvantages of a partnership.
4. Write short notes on the following forms of ownership:

a. A partnership firm.
b. A private limited company.
c. A public limited company.
5. Explain the advantages and disadvantages of establishing a franchise business.
177

Chapter 6-Business Ownership

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Chapter 6-Business Ownership

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MBBC3033 Entrepreneurship Session I 2022/2023

CHAPTER BUSINESS OWNERSHIP

This chapter aims to describe several forms of business ownership that is

6.1.1 Definition of Business Ownership

Business includes every form of trade, commerce, craftsmanship, calling, profession

• By an individual operating as a sole proprietor

Figure 6.1 Factors in selecting a form of business ownership

6.2.2 Personal Assets

6.2.3 Span of Control

6.2.4 Sharing of information

6.3 FORMS OF BUSINESS OWNERSHIP IN MALAYSIA

6.3.1 Sole Proprietorship

citizens who are permanent residents can register a business as a sole

Examples of sole proprietorship businesses: Mini markets, restaurants, convenient

Advantages and Disadvantages of Sole Proprietorship

Advantages and Disadvantages of Partnership

6.3.3 Locally Incorporated Company

• A company limited by shares

• A company limited by guarantee

This type of company enjoys the advantage of being a separate legal

Company limited by shares

Private limited company

• Restricts the right to transfer its shares

Private limited company is the most common form of companies in Malaysia. It is

• Separate legal entity is recognized as a legal entity that is separate from

• Limited liability is financial liability of members of the company is limited to the

• Credibility is a private limited company (Sdn Bhd) gives credibility to the

The owners of a company are called shareholders. The shareholders elect a

Advantages and Disadvantages of Private Limited Company

Public limited company

• It has registered a prospectus with the Securities Commission of Malaysia.

Advantages and Disadvantages of Public Limited Company

expertise and skills of a number of • Corporate activities are limited by the

6.3.4 Limited Liability Partnership (LLP)

Advantages and Disadvantages of Limited Liability Partnership (LLP)

6.4 REGISTRATION PROCEDURES AND LEGAL ASPECT OF

In Malaysia, all legally operating companies must go through the Companies

• Administration and enforcement of relevant Acts and related legislation

• Inculcation of ethical conduct amongst directors, company secretaries,

6.4.1 The Responsibility of Business Owner

6.4.2 The General Principles and Characteristics of Business

6.4.3 Registration for Sole Proprietorship and Partnership

• Owner must be a Malaysian citizen or permanent resident of Malaysia

General guidelines for registration of sole proprietorship and partnership

General registration procedure for sole proprietorship and partnership

Step Action Remarks

Person responsible must submit the application to counter or through

Documents to be attached are as follows:

3. Changes of particulars on branches

Documents to be attached are as follows:

Registration fee Change of business particular – RM20.00

• Sole proprietorship using personal name as in identity card –

Registration • Notification of Termination of Registered Business has no fee

Penalty provisions under the Registration of Business Act 1956 and

6.4.4 Registration of Limited Liability Partnership (LLP)

Step Action Description

Registration fee for the registration of a new LLP or for

2 Conversion into a LLP An application to convert from a conventional partnership

From conventional Partnership to LLP

From Conventional Professional Frim to LLP for

Declaration of dissolution of the LLP by the Registrar

Application Fee The completed application shall be submitted to the