BUSINESS ENTITIES,

FORMATION & SUPPORT SYSTEM

Dr. Azlin Shafinaz Mohamad Arshad

BUSINESS
ENTITIES
 Business Entities in Malaysia
Business Entities Sub-Types

Business a. Sole Proprietorship

b. Partnership

Company a. Private Limited (Sdn Bhd)

b. Public Limited Company (Bhd)

Hybrid Limited Liability Partnership

Business Registration Act 1956:
 Sole Proprietorship
 Partnership
Limited Liability Partnership Act 2012
 Limited Liability Partnership
Company Act 1965:
 Limited Company by Guarantee
 Limited Company by Share
 Private Limited Company (Sdn Bhd)
 Public Limited Company
 Foreign Owned Company
 Unlimited Company
 Sole Proprietorship
 Formed under the Business Act 1956 (Amendment
1978).
 Owned by one person whose liability is unlimited.
 Simplest business structure.
 May use the name of the owner or any other name
may be used.
 Requires a small amount of capital to start with,
compared with other forms of business entities.
 Advantages Sole Proprietorship
a. Easy to manage as owner can make own decisions.
b. The owner enjoys a certain degree of flexibility since as
a sole owner he can react quickly and positively
regarding necessary changes in the business.
c. Easy to form and dissolve (minimum formalities).
d. All profits or losses bear by the owner.
e. Not subjected much to government rules and
regulations. The owner pays income tax based on his
total individual income.
 Disadvantages Sole Proprietorship

a. Limited source of capital.

b. Liability of the business is unlimited. If the business incurs debts for which
the business assets are not sufficient to cover, the owner must be prepared to
settle the debt with his personal assets.
c. Future development of the business is limited and depends on the
management capability of the owner and the condition of his health.
d. The owner is solely responsible for carrying out all the tasks, therefore, a lot
of time and effort needs to be spent in managing the business.
e. The life span of the business depends upon the age of the owner and how
efficiently he manages the business. In addition, the business will be
dissolved if the owner passes away. If someone wishes to continue the
business, it will have to be re-registered.
 Partnership
 A partnership is a legal business entity with two or more
partners.
 In this form of business, a person forms a partnership
with one or more persons to carry out a business with a
view to making profits.
 A partnership business is also incorporated under the
Business Registration Act 1956 (Amendment 1978).
 Between one person but not exceeding 20 persons agree
to undertake a joint business and jointly own the business.
 Partnership Advantages
a. Easy to set up with few formalities.
b. Easier to secure financial assistance.
c. Equity can be increased through enlisting additional partners.
d. Business risks can be reduced and distributed among partners. In
case of losses, each partner will share the burden.
e. The responsibility of managing and handling the business can be
divided equally among partners.
f. Lot of ideas, talents and skills can be pooled together for better
management.
g. As in a sole proprietorship business, income tax is not imposed on
the partnership itself but on the owners as individuals.
 Partnership Disadvantages
a. Business liabilities are unlimited, which may involve
personal assets of all partners of the company
b. Life span depends on the life span of the partners. If any of
the partners passes away or is declared a bankrupt, the
business is automatically dissolved, unless there is an
agreement otherwise.
c. If no Letter of Agreement is being made, unethical or
misconduct behaviour may happen.
d. Risk of personal clashes among partners.
 Private Limited Company
 Set up under the Companies Act 1965.
 A legal entity and its identity is separate from
the identity of the company’s members.
 Private Limited Company
Characteristics
a. Right and Responsibility
 A company has a specific right and responsibility. It can acquire assets under its own name. A
company can also take legal action and face legal action under its own name
b. Life Span
 The life span of a company is not dependent upon the death or resignation of its members. A
company can be dissolved when its members are no longer interested in continuing the business
c. Liabilities
 The liabilities of the members in a company are limited to the total shares contributed to the
company’s capital. Personal assets are not affected regardless of what happens to the company
d. Membership
 A company must have at least two members who are of Malaysian nationality. These two
members can act as a director and founder of the company. The members of the company will
appoint the Board of Directors who will manage and run the business operation subject to the
Companies Act 1965
 Terms & Conditions of Private Limited
Company
a. The number of members does not exceed 50 people;
b. It has specific authority to transfer ownership of
members’ shares with the approval of the company’s
Board of Directors;
c. A company is not allowed to offer or sell any share
or debenture to the general public;
d. A company is not allowed to offer the general public
to deposit money within a stipulated time frame; and
e. A company must use the word “Sdn. Bhd.” at the
end of its name.
 Private Limited Company
Requirements
a. Memorandum of Association
b. Articles of Association
c. The Share Capital of a Company
a. Authorised capital
b. Paid-up capital
d. Members of Shareholders
e. Board of Directors
f. Company Secretary
g. Auditors
h. Registered Office
i. Company Seal
j. Authorization Letter
 Private Limited Company
Advantages
a. Funds are easy to acquire through the exchange of share ownership or
loan from a financial institution.
b. All shareholders are legally protected by law.
c. Shareholders are not burdened with the management of the business
because the responsibility to manage and run the business is held by the
Board of Directors, who are appointed by the company’s shareholders.
d. Limited liabilities to the capital that they contributed.
e. Life span of the business is not dependent upon the age or resignation
of its members.
f. Greater potential for expansion.
g. Legally, the company is one business entity by itself.
 Private Limited Company
Disadvantages
a. More rules and regulations and must always abide by the
rules and fulfil the terms set by the Companies
Commission of Malaysia.
b. The company’s shares cannot be transacted through the
share market.
c. The company must pay corporate tax.
d. The qualified Auditors must audit the company’s yearly
financial statement and the statement must be complete
and regularly updated.
e. The financial affairs of the company must be made
transparent to the general
f. The cost of setting up a company is high.
 BUSINESS
FORMATION
 Business Formation

1. Starting from scratch

2. Buying an Existing Business

3. Family Business Succession

4. Acquiring a Franchise
 1. Starting From Scratch
 The most popular method among entrepreneurs
 Entrepreneur has to make decisions on:
a. Appropriate form of business
b. Business or trade name
c. Business and product/service image
d. Suitable location of the business
e. Appropriate funding to kick-start the business
f. Proper business planning for everything that needs to be take
into consideration.
 Starting From Scratch
Advantages

a. Entrepreneurs are free to make his/her own decisions.

b. Entrepreneurs have the opportunities to try and practice
his/her own ideas.
c. Entrepreneurs are free to choose suitable business location
and premise, and acquiring appropriate machine and
equipment's for the business.
d. Entrepreneurs are free to develop business image and
personality that suits their desire and interest.
 Starting From Scratch
Disadvantages
a. Need to put in a lot of efforts. It requires more time,
energy and money in ensuring the business kick-off.
b. Higher chances of losses due to high project
implementation cost.
c. Not able to accurately estimate sales, cost and profit as
zero business history (i.e. sales record, costing and so on)
d. No track record hence difficult to convince the financial
institutions in getting the financing
 2. Buying Existing Business
 Entrepreneurs start a new venture buy taking over an
existing business either buying the whole business or
partial shares in the existing business.
 Entrepreneurs must “investigate” before buying.
previous owners have reasons why they wanted to sell
their business. So, it is the entrepreneurs’
responsibilities to “investigate” the business that they
want to buy as well the “background” of the existing
owners.
 Buying Existing Business
Advantages
a. The time entrepreneurs spent to start the business is
faster compared to starting a new venture form
scratch
b. The probability of getting the financing is greater if
the existing business has a good track record.
c. Existing market and loyal customers of existing
business.
d. Established networking with suppliers, supporting
agencies and communities.
 Buying Existing Business
Disadvantages
a. Buying existing business requires bigger amount of capital
either to buy the whole business or part of the business.
b. If the existing business is not well managed by the previous
owner, entrepreneurs need to put in a lot of efforts, money and
time to improve the situation.
c. Entrepreneurs have to respect and abide the agreements that
have been made by the previous owner with related parties
(suppliers, agencies etc.).
d. Conflicts could arise between the new owner and existing
employees.
 3. Family Business Succession
 Entrepreneur is the successor of the business
which was started by the earlier family
members (predecessors).
 Entrepreneur did not face the difficulties of
starting-up a new venture.
 Family Business Challenges
a. Financing – debt financing versus equity financing.
b. Liquidity/Cash – family’s need for cash versus business’s needs
for cash.
c. Transition period – older generation versus new generation (to let
go or not to let go – ownership & management power).
d. Succession - finding the right successor (competent, motivated,
and the most important getting consensus from all family
members).
e. Emotion – family interest versus business interest.
f. Rivalry – siblings, cousins.
 Family Business Advantages
a. Freedom and flexibility in decision making.
b. Pride of family culture, high commitment and
motivation lead to business stability.
c. Family members willingness to “sacrifice” their
time and money (e.g. no salary taken for 1st year of
operation).
d. High possibility of achieving great monetary
success due to high commitment.
e. Family members have good exposure to business
environment.
 Family Business Disadvantages
a. Unstructured early-stage business organization.
b. Early-stage limited financial resources.
c. Family conflicts such as siblings and/or cousins
rivalry.
d. Nepotism among family members (e.g. incompetent
family member is given a better management
position).
e. Traditions practiced by older generation passed on
to new generation could lead to resistance to change.
f. Difficulty in getting the right successor.
 4. Acquiring Franchise
 Another alternative of starting a new business
 A franchise is a product and/or service distribution system which is governed
by a contract
 Made between two parties namely, the franchisor and the franchisee
 The franchisor is a company which sells the right to another party to operate
the franchise.
 The franchisee is a person who purchases the right from the franchisor to
operate the franchise.
 Operating a franchise includes selling and marketing the products and/or
services using the trade name and trade mark, as well as a set of systems
developed and owned by the franchisor.
The right to operate the franchise granted by the franchisor
to the franchisee involves a few payments made by the
franchisee agreed upon the signing of a franchise. These
fees are:
 Franchise Fee – one-off payment made by the franchisee
to purchase the right to operate the franchise
 Royalty - an on-going payment made by the franchisee
to the franchisor based on the percentage of sales as
agreed upon the signing of franchise contract (monthly
or yearly)
 Advertising and Promotional Contribution - an on-going
payment or contribution made by the franchisee to
franchisor’s advertising and promotional fund.
 Franchising Advantages
Franchisee
Lower business risks as franchisee shares the business risks
with the franchisor.
Better market acceptance of products and/or services offered as
they are established products and/or services of the franchisor.
Benefits of economies of scales
Guidance by the franchisor’s management team
Continuous support from the franchisor and government
agencies that involved in the development franchise industry.
 Franchising Advantages
Franchisor:
The franchisor’s business expansion can be done through
recruitment of new franchisees.
Benefits of economies of scales
Lower business risks as shares business risks with the
franchisees.
Problems related human resource management is reduced.
More focus on product research and development since
business expansion is done through franchise system.
 Franchising Disadvantages
Franchisee:
 Limited freedom and flexibility to manage the business
according to franchisees’ desire
 The franchise right granted by the franchisor has its price to
pay; the franchise fee, royalty and advertising & promotional
contribution
 Limited product varieties; the franchisees are allowed to market
and sell only the franchisor’s products
 Fear of chain-reaction; bad reputation and tarnished image due
to the fault of either the franchisor or the franchisee would
affect the whole franchise system.
 Franchising Disadvantages
Franchisor:
 Difficult to manage the franchisees especially in
ensuring the conformity of the operational methods
of all franchisees in the system.
 May have different business objectives with
franchisee.
 “Wrong” franchisee as some franchisees want an
“easy-ride” in an attempt to gain instant popularity
for the business.
 Competition through imitation of business concept
and model
 BUSINESS
SUPPORT SYSTEM
 WHAT IS BUSINESS
SUPPORT SYSTEM??
 Business support system is an aid or assistance
provided by the government and other private
agencies to an existing and new entrepreneur.
 These assistance and services are provided to help
entrepreneurs to start a new business or to develop
an existing one.
 Technical &
Technological

Information,
Marketing Infrastructure &
Advisory
BUSINES
S
SUPPORT
SYSTEM
Research &
Financial
Development

Entrepreneurs &
Management
Marketing Assistance
Technology & Technological
Information, Infrastructure & Advisory
Financial Assistance
Entrepreneurs & Management
Research & Development