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CORPORATE COMPLIANCE AND PRACTICE I

AUTHORS

  • Slides prepared by: Dr. Maizatul Akmal Musa and Encik Mohd Faiz Ismail

CHAPTER 1: TYPES OF BUSINESS ENTITIES

Learning Outcomes

  • By the end of the chapter, students should be able to:

    • Explain the choice of business entities

    • Explain the types and characteristics of companies

    • Explain the difference between private and public companies

Contents

  1. Business Organization/Entities

    • Classification of business organizations

    • Types of business structures:

      • Sole proprietor or sole trader

      • Partnership

      • Company

  2. Legal Framework of Companies

  3. Registered companies vs. partnerships

  4. Reasons for incorporation

  5. Limited Liability Partnership

BUSINESS ORGANIZATION

Classification

  • Unincorporated organizations

  • Incorporated organizations

UNINCORPORATED ORGANISATIONS

  • Includes sole traders, partnerships, societies, and trade unions.

INCORPORATED ORGANISATIONS

  • An incorporated organisation is a company. The types of companies include:

    • Public company

    • Private company

    • Statutory company

FORMS OF BUSINESS STRUCTURE IN MALAYSIA

BUSINESS FIRMS

  1. Sole Proprietorship

    • Registered with the Registry of Business (ROB) under the Registration of Businesses Act 1956

  2. Partnership

    • Registered with the ROB under the Registration of Businesses Act 1956

    • Governed under the Partnership Act 1961

  3. Limited Liability Partnership (LLP)

    • Governed under the Limited Liability Partnership Act 2012

REGISTERED COMPANY

  • Types of companies:

    • Company limited by shares:

    • Private (Sdn Bhd)

    • Public (Bhd)

    • Company limited by guarantee

    • Unlimited company

  • Incorporated with the Registrar of Companies (ROC) under Companies Act 2016

SOLE TRADER OR SOLE PROPRIETOR

Characteristics

  • Simplest form of business.

  • Owned and operated by one person.

    • Examples: Contractor, sundry shop owner, food stall owner.

  • No separation between business and personal assets.

Responsibilities

  • Entirely responsible for the business; profits belong exclusively to him.

  • Sole manager making all decisions.

Legal Requirements

  • Minimal legal requirements; only requires a business license.

  • Eligibility to register as a sole proprietor:

    • Must be a Malaysian citizen or permanent resident.

Advantages

  1. Easy to start

  2. Minimum capital required

  3. All assets & profits belong to the owner

  4. Full exercise of entrepreneurial skill

  5. Owner makes all decisions

  6. No public account disclosure required

Disadvantages

  1. Unlimited liabilities

  2. Inadequate funds

  3. Limited skills or expertise

  4. Personally accountable for decisions

  5. No shared workload

  6. No income if incapacitated

  7. No continuity after owner's death

PARTNERSHIP (CONVENTIONAL PARTNERSHIP)

Definition

  • Governed by the Partnership Act 1961.

  • An unincorporated company regulated by registration with the ROB under Registration of Businesses Act 1956.

  • Partnership Act 1961: S. 3 (1) defines partnership as an association of persons conducting business for profit.

Advantages

  1. Easy formation and commencement of business

  2. Fewer formalities than company incorporation

  3. Requires low start-up costs

  4. Wider capital base compared to sole proprietorship

Disadvantages

  1. Difficulty in finding suitable partners

  2. Not a separate legal entity (refer to Boonchai Sompolpong v Chua Ka Seng)

  3. Unlimited liability for partners

  4. Capital may be inadequate compared to companies

Further Analysis

  • Ability to combine different skills among partners.

  • Free to bring in new partners for capital.

  • Each partner taxed individually.

Liability and Responsibilities

  • Limited to 20 partners for normal business partnerships; no limit for professional partnerships.

  • Partners are jointly liable for debts.

Succession and Continuity

  • No perpetual succession.

  • Partnership ends if any partner withdraws, is incapacitated, or a new partner joins.

INCORPORATED ORGANISATIONS

Companies
Basic Features

  • Legal Framework:

    • Companies Act 2016 (CA)

    • Companies Commission of Malaysia Act 2001 (CCM)

    • Capital Markets and Securities Act 2007 (CMSA)

    • Securities Commission Act 1993

    • Common Law and Case Laws

Definition of a Company

  • An artificial person created by law, independent of its members.

  • Exists to hold property and conduct business.

  • Comes into existence through incorporation.

Capital Structure

  • Essential for funding commercial activities.

  • Sources of capital include:

    1. Contributions from members

    2. Credits from creditors

    3. Retained profits

Share Capital
Equity Capital

  • Capital from ordinary shares; includes rights like voting and dividends.

Debt Capital

  • Money borrowed for operations; can be secured/unsecured.

Consequences of Incorporation

  • Results in:

    • Separate legal entity

    • Artificial legal person

    • Limited liability for members

    • Perpetual succession

    • Ability to sue and be sued

    • Enter into contracts in its own name

Reasons for Registering a Company

  1. Corporate personality

  2. Limited liability concept

  3. Membership stipulations (public co. has no limit)

  4. Access to public funds for capital

Management Structure

  • Decision making involves:

    • Capital structure decisions

    • Nature and form of company activities

  • Distinction between members and officers is significant.

Officers of the Company

  • Individuals responsible for managing the company, including:

    • Directors

    • Company Secretary

    • Employees

    • Receiver and Manager

    • Liquidator

Legal Framework of Companies

  • The Companies Act 1965 was replaced by the Companies Act 2016.

  • Companies Commission of Malaysia (CCM): Established in 2002 to enforce regulations, manage incorporation, and promote ethical conduct.

Common Law

  • Established precedents governing companies; crucial for regulations not contained in the CA.

Legal Terminologies

  1. Revamp: Comprehensive change to the Act.

  2. Amendment: Minor changes.

  3. Delete: Removal of law sections.

  4. Repeal: Revocation of an Act.

TYPES OF COMPANIES

  • The main types in Malaysia include:

    • Company limited by shares

    • Company limited by guarantee

    • Unlimited company

  • Must be registered with CCM to obtain body corporate status.

Separate Legal Personality

  • Companies possess corporate personality; distinct from members and controllers.

Landmark Case: Salomon v Salomon & Co Ltd

  • Established the doctrine of corporate personality preventing creditors from suing shareholders for company debts.

Lifting the Veil of Incorporation

  • In exceptional circumstances, courts may disregard a company's separate personality, especially in cases of fraud.

Fraudulent Use of Corporate Veil

  • Indications of Fraud: Courts will lift the corporate veil to hold individuals accountable if the company structure is misused to evade obligations.

  • Relevant Statutory Provision: Section 540(1) of the Companies Act 2016.

Incorporation Requirements (Section 9 Companies Act 2016)

  • Must have:

    1. A name

    2. One or more members with liability

    3. One or more shares (for limited by shares)

    4. One or more directors

FORMS OF LIMITED COMPANIES

Company Limited by Shares

  • Liability limited to unpaid shares.

Example:

  • Mr. Ahmad holds 2 shares of RM1, paid RM1, liable for the remaining RM1 at winding up.

Company Limited by Guarantee (CLBG)

  • Liability limited to a specified amount during winding up.

  • Prohibited from forming with share capital; reserved for non-profitable purposes.

Unlimited Company

  • No limit on members' liability; can be public or private.

PUBLIC AND PRIVATE COMPANIES

Characteristics

  • Public Company: Defined by not being a private company; unlimited members but minimum of two directors, can invite public deposits.

  • Private Company: Defined by shareholding constraints (max 50), restricted from public share offerings, shares not easily transferable, may be formed with a single member and director.

  • Exempt Private Company: Restrictions on share ownership and financial disclosure requirements.

COMPANY VS PARTNERSHIP

Key Differences

  1. Confidentiality: Public company accounts are public; partnerships are not.

  2. Termination: Companies have perpetual succession; partnerships dissolve upon member changes.

  3. Factors Considered:

    • Formation formalities and costs

    • Legal status and capacity

    • Liability forms (limited vs unlimited)

LIMITED LIABILITY PARTNERSHIP (LLP)

Definition

  • Regulated under the Limited Liability Partnerships Act 2012.

  • Hybrid vehicle combining conventional partnership and limited liability company features.

Key Features (Section 3 LLP Act 2012)

  1. Separate legal personality

  2. Perpetual succession

  3. Unlimited capacity to sue, own property, etc.

Formation (Section 6 LLP Act 2012)

  • Requires two or more individuals or bodies corporate for lawful business pursuits.