CHAPTER 3 – BUSINESS

OWNERSHIP
 BUSINESS OWNERSHIP
 AT THE END OF THIS CHAPTER, YOU WILL BE
ABLE TO:
 Understand the importance of carrying out a business in Malaysia
 Explain the factors to consider when selecting the form of
business ownership
 Discuss the four types of business ownership
 List the advantages and limitations of each type of ownership
 Describe the procedures involved in registering each type of
ownership
 Highlight the critical factors that need to be taken into
consideration in starting a new business venture
 Discuss the various ways to establish a new venture
 Explain the advantages and disadvantages of each alternative in
starting a new venture
 INTRODUCTION
 One of the first things an entrepreneur must decide on
before embarking on his venture is the proper form of
business ownership.
 Selecting the right form of business ownership is
important because the form of business ownership will
determine how the business is organized.
 They should also be aware of the rules and regulations
governing business organizations and the business
support system available for them.
INTRODUCTION – CONT’D
A person wanting to set up a business has to
consider what legal form organisation should
take.
Factors influencing this decision are:
 How many owners the business is going to
have?
 What is the tax position of the business?
 Can the owner take the risk of unlimited
ability?
 Does the owner want all the business profits?
INTRODUCTION – CONT’D
 Is there a complete privacy in the affairs
of the business for the owner?
 In the case of the owners illness or death
what will happen to the business?
TYPES OF BUSINESS OWNERSHIP

 In Malaysia, there are four popular types of

business ownership for an entrepreneur to
choose from:
 Sole proprietorship
 Partnership (conventional partnership)
 A limited liability partnership (LLP)
 Private limited company
 Public limited company
SOLE PROPRIETORSHIP/TRADER
Sole trader is a person who owns and operates their
own business. They may or may not employ other
people.
It is important to remember that a sole trader is usually a
relatively small business with little capital available for expansion
and the capital that has been invested comes from one source and
that is the owner.
Sole traders are common businesses. Example of a
sole trader business is a hairdresser, tailor, restaurant,
mini markets.

* Only Malaysian citizens who are permanent residents

can register a business as a sole proprietor.
 SOLE TRADER
The advantages of being a sole trader are:
 Profits - they are kept by the owner. There are
no other shareholders so the profits don't have to
be split.
 Easy to run - every business is difficult to run
successfully but sole trader is the easiest form of
business
 Easy to establish - hardly any complicated forms
or procedures. Some of the other legal forms
have to have legal forms completed before the
business can start.
 SOLE TRADER
 Total control - the owner is in charge of the
business. He/she does not need to discuss their
decisions with any other owners. They have total
control of the business.
 Privacy - As there are no shareholders in the
business, the owner only need to inform Inland
Revenue and Customs Dept in order for them to see
how well the sole proprietor is doing. As there is no
requirement for financial reports to be published
and checked by auditors, the owner do not need to
make any public disclosure of accounts.
SOLE TRADER

 Flexibility - very flexible working hours

as sole trader is its own boss e.g. Rather
than working on Friday he/she can decide
to work on Sunday instead.
 Taxation advantage – Earnings of a sole
trader are considered as personal income
and may be subject to lower taxes
compared to earnings of other forms of
businesses.
 SOLE TRADER
Disadvantages of Sole Trader:
 Unlimited liability - if the things don’t work out as
planned the sole proprietor could lose all its
investment. There is no limit on the amount of
debts for which a sole trader is liable to and his
liability can extend to all of his personal property.
 Lack of continuity - because the owner is the
business there is no guarantee that the business
will carry on running once the owner decided to
stop, die or judged insane.
SOLE TRADER
 Long hours - long hours may be required
of the owner to keep the business afloat.
 Difficulty in raising capital - small
businesses find it hard to find a start up
capital and usually the owner might have
to put his/her house as an insurance for
capital borrowed.
 Limited skills – the expertise of a sole
trader is limited. To be successful, the
owner may need to obtain relevant advice
from experts.
SOLE TRADER
 Incurs all losses - Just as the owner
enjoys all the company’s profits, he
suffers all losses.
 Limited economies of scale - e.g. a small
construction business would have to hire a
lorry to do the required task as this would
be cheaper but larger business would buy
its own as this would prove to be cheaper
due to the fact that lorry is in continuous
use.
PARTNERSHIP
What is partnership?
Partnership is a type of business owned by at least
2 or more individuals but not exceeding the
maximum of 20 persons. A partnership is formed
under the Businesses Registration Act 1956
(Amendment 1978).

* Only Malaysian citizens or permanent residents

can register partnerships.
PARTNERSHIP
When setting up a business a person has
to decide whether to set up a business on
their own or with others.
This will depend on:
 how much control they want over the
business
 are they prepared to share the profit
 can they raise necessary capital to start
up the business by themselves
 PARTNERSHIP
 There is also a risk factor. Is this person
prepared to accept the risk of unlimited
ability?
 2 main types of partnership:
 A. General/conventional partnership

– all partners have unlimited liabilities for the

debts of the business. They are personally
liable for all obligations of the firm.
 B. Limited Liability Partnership (LLP)

- registered under the Limited Liability

partnerships Act 2012
LIMITED LIABILITY PARTNERSHIP [ LLP
OR PLT (PERKONGSIAN LIABILITI TERHAD)]
 LLP is a hybrid business entity that combines the best
features of partnerships and company.
 It enjoys the attributes of a body corporate, namely,
separate legal entity, limited liability, and perpetual
succession HOWEVER the flexibility of internal business
regulation through partnership
agreement/arrangement for LLP is similar to a
conventional partnership.

LLP is more suitable for:

 Professionals (Lawyers, Accountants & Company Secretaries)
 Small and Medium sized businesses
 Joint Ventures
 Venture Capitals
 LIMITED LIABILITY PARTNERSHIP (LLP)
The ADVANTAGES OF LLP
 Separate legal entity: An LLP has a separate legal identity
and can own property, enter into contracts, sue or be sued
in its own name.
 Limited personal liability : The partners of the LLP will not
be held personally liable for any business debts incurred by
the LLP or the wrongful acts of another partner.
 Perpetual succession: Any changes in the LLP (eg.
Resignation or death of partners) do not affect its
existence, rights or liabilities.
 Ease of compliance : Compliance requirements are more
complex than sole proprietorship but simpler than a private
limited company. The latter need to have their accounts
audited and appoint a qualified company secretary.
LIMITED LIABILITY PARTNERSHIP (LLP)
The DISADVANTAGES OF LLP
 Requires a minimum of two partners at all times
(minimum of one director/shareholder in a Sdn.
Bhd.)
 Individual partners can commit the partnership
to formal business agreements without the
consent of the other partners.
 No corporate tax benefits: tax exemptions
available to private limited companies are not
available to LLPs. LLP is not taxed as an entity.
Instead each partner is taxed on their share of
the profits as per income tax rate.
DIFFERENCE BETWEEN LLP AND
GENERAL /CONVENTIONAL PARTNERSHIP
 IN a general partnership, partners are jointly and
severely liable for all business debts and
obligations.
For example, if the partnership had incurred a debt and the
debtor sues the partnership for the debt, all the partners
will be named as party to the suit, notwithstanding that
some partners are not involved in the debt.
 The LLP offers limited liability to its partners
whereby any debts and obligations of the LLP will
be borne by the assets of the LLP. Thus, the named
party in a suit involving a LLP would be the LLP
itself.
 DIFFERENCE BETWEEN LLP AND
A LIMITED COMPANY
 There are many fundamental differences between an LLP
and a company. Amongst others, the differences are:
 – No issuance of shares;
– Flexibility in making decisions;
– No formal requirement for Annual General Meetings;
– No requirement to submit financial statements to
CCM/SSM;
– Accounts need not be audited.

 However, one drawback of a LLP as compared with a

conventional partnership is the tax structure.
 The tax treatment of LLPs is similar to the tax treatment
of companies. Thus, LLPs would be subject to income tax
at the rate of 25%.
PARTNERSHIP (CONVENTIONAL
PARTNERSHIP)

The ADVANTAGES of partnership:

 Increase in resources for capital – more
partners means pooling of wealth and
resources of all partners
 Distribution and sharing of business risks –
any losses will be absorbed by more than one
partner
 Direct rewards – partners will directly share
the profits
 Taxation advantage – partners escape the
higher tax rate assessed against corporations
ADVANTAGES OF PARTNERSHIP
 Privacy - Only tax authorities need to be
told how much partners are earning and
profit of the business
 Combined talents and business acumen –
partners’ abilities combined to cover a wide
range of skills, ideas and expertise
 Ease of formation – few legal requirements to
establish
 Ability to specialise - partners can focus on
their areas of specialization which improve
efficiency
PARTNERSHIP
The disadvantages of partnership:
 Conflicts/ Disagreements between partners,
which can be bad for business – actions of
one partner will affect other partners
 Unlimited liability – all partners are
personally liable for the debts of the business
 Limited life span – partnership may end if any
one of the partners suffers from mental
disorder, bankrupt, resigns or dies.
DISADVANTAGES OF
PARTNERSHIP
 Lack of continuity – partnership arrangement
ceases if any one partner withdraws, dies or
becomes insane.
 Shared profits – any profits earned will have
be shared among all partners
 Shared control – disagreements among
partners can delay the decision –making
process.
LIMITED COMPANIES
What is a limited company?
Every limited company has shareholders.
The term limited company refers to the
fact that if the company goes into debt
each shareholder risks losing only the
amount he has invested and his personal
belongings are safe and can’t be touched.
 PRIVATE COMPANY
The most common type of company or corporation
formed by small or large-scale entrepreneurs is the
Company limited by shares.
 A company can also be classified as either a private or a public
company. Under the CA 2016, a private company is required to
have the following characteristics:
 It is a company limited by shares (s42(1))
 It has not more than 50 shareholders (s42(1))
 It restricts the transfer of its shares (s42(2))
 It cannot offer its shares or debentures to the public (s43(1)).
 It cannot allot shares or debentures with a view of offering them to the
public (s43(1)).
 It cannot invite the public to deposit money with the company (s43(1)).
 Other than the above characteristics, s25(1) mandates that the
name of a private company should end with the words ‘Sendirian
Berhad’ or its abbreviation ‘Sdn. Bhd.’.
 PUBLIC COMPANY
 In the case of a public company, its name should end with
the word ‘Berhad’ or its abbreviation ‘Bhd.’.
 Apart from the name, the other main differences between
a private and public company prescribed in the CA 2016
are as follows:
 First, the statutory minimum number of resident directors
for a private company is only one, whereas a public
company is required to have at least two resident
directors.
 Second, only a private company may pass a written
resolution (s290).
 Third, only a public company is mandated to hold its
annual general meeting (s390).
 Fourth, certain categories of private companies are
exempted from having its accounts audited (s255).
LIMITED COMPANIES - PTE
The advantages of a PTE
 Limited liability – members’ liabilities are limited
to the amount of capital contributed to the
company. Their personal assets are not affected.
 Perpetual life – the lifespan of the business is not
dependent upon the age/resignation of its
members.
 Attracts skilled employees – because the
company’s life span is guaranteed.
 Ease of expansion – easier to expand & develop a
pte because of its simplicity in equity
participation.
LIMITED COMPANIES - PTE
The advantages of a PTE
 Independent of the members and directors
– the responsibility of managing and running
the business is held by the BOD who are
appointed by the shareholders
 Ease of raising capital – funds are easily
acquired by exchanging shares of ownership
or obtaining loans from financial institutions.
LIMITED COMPANIES - PTE
The disadvantages of a PTE:
 High costs – incorporating and operating a company
comes with initial start-up costs (eg. incorporation costs)
and recurring costs (eg costs of engaging a company
secretary and auditor every year)
 Taxation – A company is subject to tax at the applicable
corporate tax rate.
 Limited membership – maximum no of members is 50
(individual & body corporate)
 Lack of freedom in the transfer of ownership –any
transfer of members’ shares is subject to the BOD’s
approval.
 Regulations – A pte is subject to the Companies Act 2016
and rules and regulations set by the CCM/SSM.
 No privacy – The company’s financial affairs will be
accessible by the public.
LIMITED COMPANIES - PLC
Advantages
 Limited liability – the maximum amount a
shareholder can lose is the amount that he/she
has invested in the company.
 Perpetual life- the company has a separate and
distinct life from its members and can continue
for an indefinite period.
 Transfer of ownership – shares can be easily
transferred without any restrictions.
 Ease of expansion – a plc normally has great
potential for expansion.
LIMITED COMPANIES - PLC
 Economies of scale – operational output is
bigger which enables the company to enjoy
economies of scale.
 Relative ease of securing capital in large
amounts – capital can be acquired through a
public issue of shares, short-term or long term
loans charged against the assets (fixed or
floating charge) of the company.
 Increase in ability and expertise – the
company is able to draw on the expertise and
skills of the directors, major stockholders &
managers in the company.
LIMITED COMPANIES -PLC
 Disadvantages of PLC
 High set up costs- a large amount of expenses is
needed to set up a plc especially for a listed plc.
 High taxation –various taxes must be paid by the
company
 Agency problem – Since the company is normally run
by directors & managers, their interests in managing
the company may not always be parallel with the
interests of the owners.
 Regulations – Compliance with government (state &
federal) regulations & reports often result in a great
deal of paperwork & bureaucracy.
LIMITED COMPANIES
 Financial disclosure – When the stocks of a
company are publicly traded, investors have
the right to examine the company’s financial
data within certain limits. Thus, the
company may have to disclose more
information about its operations and
financial data than it would desire.
COMPARISON BETWEEN A SOLE
TRADER, PARTNERSHIP AND LIMITED
COMPANY
 Features of a sole trader, partnership &
Limited Company
 1. Structure
 2. Registration
 3. Transferability
 4. Management
 5. No. of members
 6. Constitution
COMPARISON BETWEEN A SOLE TRADER,
PARTNERSHIP AND LIMITED COMPANY
 7. Capital and liability
 8. Borrowing powers
 10. Rules, procedure and information to
public
 11. Dissolution
 12. Mode of taking legal proceedings
FACTORS TO CONSIDER WHEN STARTING A
NEW ENTREPRENEURIAL VENTURE
 1. capital – entrepreneurs must have sufficient
funds to initiate and run a business. Sources of
capital are personal funds, funds from family &
friends, retirement accounts & banks.
 2. Location of business – entrepreneurs must
choose a strategic location for the business.
 3. Interest, knowledge and experience –
Entrepreneurs must have a strong interest in
the business. Knowledge & experience can be
enhanced by reading, attending short courses
& networking with suppliers & other
entrepreneurs.
FACTORS IN STARTING A NEW
ENTREPRENEURIAL VENTURE
 4. Size of business - the size of the business
needs to be in line with the available capital,
knowledge, and experience to control and
manage business activities.
 5. Competitors – entrepreneurs must know the
size of the competitors and their strengths and
weaknesses.
 6. Law and regulations – entrepreneurs must
know and update himself on law, regulations,
and acts related to running a business in M’sia.
Eg. The type of licences that are required to set
up a business.
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE
 I. START-UP COMPANY
 - a venture whereby an entrepreneur creates a
completely new business starting from scratch.
 - a new venture goes through 3 phases:
 i. Pre-start phase – begins with an idea and a
desire to start a business . Also entrepreneur
needs to make an assessment on the business
opportunity and his own abilities to run the
business.
 Ii. Start-up phase – (survival phase) – during this
phase, the entrepreneur might be getting zero
revenues or just achieving break-even point.
ALTERNATIVES IN STARTING A
NEW ENTREPRENEURIAL VENTURE
 Iii. Post Start-up phase – ends when the
venture is terminated, closed or the
entrepreneur loses control over the survival
of the business entity.
ADVANTAGES & DISADVANTAGES OF
START-UP COMPANY
 1. Complete  1. Long process
freedom  2. Maximum risk
 2. Tendency to be  3. Difficulty in
creative obtaining funds
 3. Authority  4. Extra effort
 4. Free from  5. No historical
intervention record
 5. Immediate
operations
Advantages Disadvantages
ALTERNATIVES IN STARTING A
NEW ENTREPRENEURIAL VENTURE
 II. BUYING AN EXISTING CO/ACQUISITION
 - involves purchasing an existing business by
buying or acquiring either the shares of the
existing company or all the assets in an
existing company or business.
 - Five factors to consider before buying an
existing business:
 1. Conducting self-assessment -
entrepreneur needs to analyse his skills,
abilities, and interests to determine the
types of business to be considered.
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE – CONT’D
 II. BUYING AN EXISTING CO/ACQUISITION
Factors to consider – cont’d
 2. Evaluating business opportunities – Entrepreneurs
should know more about the business first (from
financial reports, history, price, and reasons for
selling the business) before deciding to buy over a
business.

 3. Reviewing a potential target – the potential

target must be closely examined ( income tax
returns, inventory, profitability, customer base,
physical condition and competitors) to determine
how well it has been managed and maintained.
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE – CONT’D
 4. Exploring financing options –
entrepreneurs can look into several funding
options to acquire the business.
 5. Ensuring a smooth transition –
entrepreneur should communicate openly
and consider asking the seller to serve as a
consultant until the transition is complete.
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE – CONT’D
 II. BUYING AN EXISTING CO/ACQUISITION
 The acquisition process involves seven steps:

 1. Identify type of business – decide whether to seek

a business that is profitable and stable or one that
is losing money and in need of new management.
 2. Sign non-disclosure document – secrecy of the
negotiations is maintained.
 3. 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.
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE – CONT’D
 II. BUYING AN EXISTING CO/ACQUISITION
- cont’d
 4. Conduct due diligence/investigation – the
buyer must conduct an investigation in order
to make sure that the business is of good value
before signing the contract. Due diligence
describes a general duty to exercise care in
any transaction.
 5. Draft/preparation of purchase
agreement/formal agreement – a formal
contract is prepared to purchase the business.
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE – CONT’D
 II. BUYING AN EXISTING CO/ACQUISITION
 - cont’d
 6.Close the final deal/ matters – the buyer
and seller have to sign a purchase agreement
containing all the details of the agreement.
 7. Begin the transition/ready for business –
After signing the contract, the entrepreneur
now owns the business and the real challenge
begins.
BUYING AN EXISTING CO/ACQUISITION
 1. Immediate
 1. Business may be
operations
overpriced
 2. Existing intangible  2. Equipment and goods
assets/equipment may be obsolete or
installed & productive inefficient
capacity is known  3. ‘Inherited” employees
 3. Supplier may be unsuitable
relationships  4.Uncollectible
 4. Less competition receivables
 5. Outstanding contracts
 5. Easier financing
 6. Inherent problems
 6.Quick cash flow  7. Location may have
 7. Continuous success become unsatisfactory
Advantages Disadvantages
ALTERNATIVES IN STARTING A NEW
ENTREPRENEURIAL VENTURE
 III FRANCHISING
 A business structure which comprised of semi-
independent business owners that pay fees and
royalties to a parent company in exchange for the
right to sell its products and services under the
franchiser’s trade name and often use its business
format and system.
FRANCHISING AND THE
ENTREPRENEUR
FRANCHISING
 A franchisor is a business with a product /
service idea that does not want to sell to
customers directly.
 The franchisee is the person who buys the
idea from the franchisor and sells it to the
public.
 The franchisee pays the franchisor an initial
fee, then monthly fees to cover advertising
etc.
 The franchisee pays the franchisor a
percentage of their profits.
 Examples: The Body Shop, McDonalds.
 TYPES OF FRANCHISE

 Trade name franchising

 Product distribution
 Pure (Business format)
TYPES OF FRANCHISE
 Three types of franchising:
 1. Trade name franchising – allows the
franchisee to use the franchisor’s trade name
without distributing the products exclusively
under the franchisor’s name.
 2. Product distribution franchising – involves
a franchisor licensing a franchisee to sell
specific products under the franchisor’s
brand name and trademark. Eg. Pepsi cola,
Chevrolet, Tyres stores
TYPES OF FRANCHISE
 Pure/business format/system franchising –
most common type of franchise. The
franchisor expands by supplying the
franchisee with an established business,
including its name and trademark. In return
the franchisee pay fees and royalties. Eg Fast
food restaurant such as McDonald’s , KFC and
Pizza Hut.
BUYING A FRANCHISE
 Steps that will help entrepreneurs in making
the right choice when buying a franchise:
 1. Self evaluation
 2. Conduct market research
 3. Consider the franchise options
 4. Ask the franchiser some tough questions –
e.g. what type of support to assist the
franchisee, how effective is their marketing
system, whether the start-up costs
projections are practical.
BENEFITS OF A FRANCHISE
OPERATION
 There is a brand name appeal for the product or service
being sold.
 The franchisee receives assistance from the franchisor
in terms of advice and training.
 There is normally centralized buying so all the
Franchisees benefit from the discounts associated with
buying in bulk
 The franchisee benefits from the franchisor's marketing
which boosts his sales and revenue.
DRAWBACKS OF A FRANCHISE
OPERATION
 There is normally a requirement to follow
standardized operations.
 The line of products is restricted.
 The franchisee has to pay royalties (fees) to the
franchisor.
 A franchisee may suffer from the negative
activities of other franchisees or the franchisor
CHARACTERISTICS OF A
FRANCHISE
 It is formed when a successful idea is sold or rented
to other people known as franchisees.
 It is an already existing business idea.
 Franchises normally operate in many different
countries and are usually large in number.
 An initial fee and regular royalties are paid to the
franchisor.
 The franchise is identical to the original company.
 WHY BUY A FRANCHISE?
 Franchisees benefit from the franchiser’s
experience.
 Franchisees get a proven business system and avoid
having to learn by trial-and-error.
 Franchisees earn a great deal of satisfaction from
their work.
Before buying, ask: “What can a franchise do for
me that I cannot do for myself?”
BENEFITS OF FRANCHISING
 Management training and support
 Brand name appeal
 Standardized quality of goods and services
 National advertising program
 Financial assistance
 Proven products and business formats
 Centralized buying power
 Site selection and territorial protection
 Greater chance for success
DRAWBACKS OF FRANCHISING
 Franchise fees and profit sharing
 Strict adherence to standardized
operations
 Restrictions on purchasing
 Limited product line
 Unsatisfactory training programs
 Market saturation
 Less freedom
WHAT SHOULD YOU LOOK FOR?
 A unique concept or marketing approach
 Profitability
 A registered trademark
 A business system that works
 A solid training program
 Affordability
 A positive relationship with franchisees
FRANCHISING
Does a franchise work?
Answer: not all the time
 If there is a poor business plan this could
lead to both franchisor and franchisee to
be out of the business
 also if a franchisee provides poor quality
product this could have disastrous
consequences.