A business entity is a voluntary organization formed and organized to carry on activities of trading goods, services or both to consumers for some profitable or charitable purpose. It is determined by its business plan as the outcome of its operation and main activity. Most of business entities are privately owned and administered by individual or consist of few individuals.
In Malaysia, the most common types of business are sole proprietorship, partnership private limited companies. They differ on the level of control the ultimate owners exercise on the business, but in all forms the personal transaction of the owners are not mixed up with the transaction and accounts of the business.
Similar with many other countries, Sole Proprietorship is solely owned by one individual and in Malaysia only Malaysia citizens or permanent residents can register as owner of this type of business. Personal names or trade names can be used as business name. The applicant of business name must be filled in to related body, the Registrar of Business (“ROB”) under Companies Commission of Malaysia (“CCM”) before a business can be registered.
Sole proprietorship type of business liability is unlimited, which means if a business fails or declared bankrupt, creditors can sue the sole proprietor’s owner for all debts owed to respective merchants. This means personal assets, personal income and employment income are all liable.
Partnership consist of two or more business partners (minimum 2, maximum 20) combining their resources to carry out a legal business in Malaysia with a view to profit. Similar with sole proprietorship, only Malaysia citizens or permanent residents can register to form this type of business entity. A partnership agreement is usually drawn up by legal counsel, which outlines the responsibilities and liabilities of each partner, conditions of termination and means of resolving intra-partner disputes. All business partners share the profits and liabilities in the business undertaking in which all have invested. The partnership itself does not pay taxes, but each partner are taxed as individual and has to report their share of business profits or losses.
Companies in Malaysia are governed by the Companies Act, 1965, which protects the rights and interest of shareholders and investors, and provides regulations for the incorporation of companies, the formulation of company constitutions, management and closures. This type of business offers limited liability or legal protection for its shareholders, but places certain restrictions on its ownership that are meant to prevent any hostile takeover attempt.
A limited company has special status in the eyes of the law. This type of companies are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more of these is called a shareholder. Because of limited companies have their own legal entity, their owners are not personally liable for the firm’s debts. Unlike sole proprietor and partnership, the shareholders have limited liability.
There are two (2) main types of limited company:-
Private limited company prohibits any invitations to the public to subscribe to any of its shares, deposit money with the company for investment or subscription. It is often a small medium business such as an independent retailer in a market town. Shares do not trade on the stock exchange. Minimum members in a private limited company is two (2) and maximum is fifty (50).
Public limited company source their capital by selling shares to the public which means its shares can be offered to the public for fixed periods and any other forms of subscription. Public limited companies usually a large, well-known business. This could be a manufacturer or a chain of retailers with branches in most city centres. Shares trade on stock exchange.
There are three (3) types of limited companies in Malaysia:-
Companies limited by shares are the most common type of business entity incorporated in Malaysia. Liability of members’ contribution to this company is limited to the amount specified on their unpaid shares. Should the company becomes insolvent or goes into liquidation, members are not obligated to pay off the company’s debts if and unless any one of the members gives a personal guarantee. Also, members’ personal assets, employment and personal income are not liable to any of the company’s debts.
Companies limited by guarantee are widely used for charities, community projects, clubs, societies and other similar bodies. Most guarantee companies are not-for-profit companies, that is, they do not distribute their profit to their members but either retain them within the company or use them for some other purpose. In this type of business entity, its Memorandum & Articles of Association stated that members’ liability is limited to the amount they “guarantee” or undertake during winding-up, which is the amount is specified in Memorandum, signed and agreed by all numbers. This type of companies has no share capital, hence there are no shareholders.
Formation of this type of company is very rare. An unlimited company is a hybrid company incorporated either with or without a share capital. It is similar with limited company (limited by shares), but the liability of the members or shareholders is not limited. It means that its members have joint, several and unlimited obligation to meet insufficiency in the assets of the company in the event of the company’s formal liquidation to settle its outstanding liabilities if any exist.
Until formal liquidation takes place, an unlimited company is similar with its counterpart the limited company where its members or shareholders have no direct liability to the creditors or security holders of the company during its formal course of business.
Limited Liability Partnership (“LLP”) is another alternative vehicle regulated under the new Limited Liability Partnership Act, 2012 which combines the characteristic of a company and a conventional partnership. Was proposed to be fully implemented by Companies Commission of Malaysia (“CCM”) or Suruhanjaya Syarikat Malaysia (“SSM”) in 2003, passed in Parliament on 21 December 2011 and gazette on 9 February 2012, LLP giving another option to those who wishes become a businessman or businesswoman but hardly make decision whether to register themselves as a proprietor, a business partner or a body corporate.
The LLP business structure is designed for all lawful business purposes with a view to make profit. LLP may also be formed by professionals such as Lawyers, Chartered Accountants and Company Secretaries for the purpose of carrying on their professional practice. The LLP concept will also support startups, small and medium enterprises (SMEs) to grow their business without having to worry too much on their personal liabilities, personal assets and strict compliance requirements.
Amongst others, LLP is featured with the protection of limited liability to its partners similar to the limited liability enjoyed by shareholders of a company coupled with flexibility of internal business regulation through partnership arrangement similar to a conventional partnership.
Any debts and obligations of the LLP will be borne by the assets of the LLP and not that of its partners’. An LLP has the legal status of a body corporate which is capable of suing and being sued in its own name, holding assets and doing such other acts and things in its name as bodies corporate may lawfully do and suffer.
LLP also offers flexibility in terms of its formation, maintenance and termination while simultaneously has the necessary dynamics and appeal to be able to compete domestically and internationally. With the introduction of LLP, entrepreneurs will have more options to choose the most preferred form of business vehicle.