Understanding Business Entities In Malaysia

Types of Business Entities in Malaysia

Question:

Identify And Discuss the Features of Business Entities in Malaysia, Explained the Concept of Separate Legal Entity and Evaluate the Application of Section 181 (1) of the Companies Act, 1965.

A business entity can be described as a voluntary organization that has been formed and organized for the purpose of carrying on the trading of goods or services to the consumers for a profitable or altruistic purpose. This is decided by the business plan of the entity as the result of its operations and its major activity. Nearly all business entities are owned privately and are controlled by an individual or comprise a few persons. In case of Malaysia, generally the common types of business entities are sole proprietorship, partnership and private limited companies. There is a difference in all these types of business entities regarding the level of control that is exercised by the ultimate owner of the business on the business. However in all these types of business entities, the private transactions of the owners are not mixed up with the transaction and the business accounts.

As is the case with several other countries, in case of sole proprietorship, one individual solely owns the business. In case of Malaysia, only the citizens of Malaysia or the permanent residents of the country can register as the owners of sole proprietorship. The law allows personal name/trade name to be used as the name of the business. The applicant of the business name should be filled in the associated entity, which is Registrar of Business (ROB) acting under the Companies Commission of Malaysia (CCM) prior to the registration of business. In case of sole proprietorship, the liability of the owner of the business is unlimited. Consequently, in case the business fails or it has been declared bankrupt, the curators of the business have the option to sue the owner of sole proprietorship regarding all the debts of the business. The effect of this situation is that the personal income and the personal assets of the owner of sole proprietorship are also liable.

However, it is the easiest way to start a business. As compared to private limited companies, only annual fee is payable by the sole proprietors to the Companies Commission of Malaysia for the purpose of renewing the business from year to year. In case of a sole proprietorship, there is no annual audit filing requirements. As mentioned above, the most significant danger present in case of sole proprietorship is that of unlimited liability. This means that if the sole proprietorship fails to fulfill its liabilities, the creditors have the option to recover from the personal assets of the owner. In this way, the personal assets of the owner of a sole proprietorship do not have any protection. The reason is that in case of a sole proprietorship, no distinction is made by the law between the owner of the business and his personal assets. The profit made by the business in case of sole proprietorship is treated as the business income of the individual.

Sole Proprietorship in Malaysia

A partnership can be described as a legal form of business in which there are two or more owners. In this case, there should be a legal agreement between the partners which mentions the way profit will be shared, decisions will be made, how the disputes will be resolved between the partners, how the partners can be added to the business in future and so on. Although it is difficult to break up a partnership when the business has just started but it has been seen that many partnerships come to an end during a crisis (Aghion, Bolton and Tirole, 2000,). Therefore, in the absence of a defined process, it could result in greater difficulties to dissolve the partnership. Generally, the business structure of a partnership is used for the purpose of establishing professional firms like auditors and lawyers. In case of a partnership, the liability of all the partners is unlimited.

In this way, in case of a partnership, two or more persons (at least two persons and maximum 20) combine their resources for the purpose of carrying out a legal business in Malaysia and with a view to make profit. As is the case with sole proprietorship, only the citizens of Malaysia or permanent residents can register a partnership. Generally the partnership agreement is drawn by legal counsel. This agreement defines the liabilities and responsibilities of each partner (Anderson, Gary and Tollison, 1983). In case of a partnership, the profits and the liabilities of the business are shared by all the partners.

General partnership: In case of a general partnership, the partners share responsibility regarding the management of the business and also the liabilities of the business. Similarly, the profit or the loss of the business is also shared by all the partners in accordance with the partnership agreement. Generally it is assumed that all the partners have an equal share unless something different has been mentioned in the written agreement created between the partners.

Limited partnership: the meaning of a limited partnership or a partnership with limited liability is that the liability of most of the partners to the business is limited to the extent of the investment made by them. Similarly, these partners have limited input related with the decisions concerning the management of the business. However, the creation of a limited partnership is more formal and complex as compared to the formation of a general partnership (Salim, 2006).

Partnership in Malaysia

Another business structure, available in Malaysia is that of a company. The Companies Act, 1965 is applicable in case of the companies operating in Malaysia. This legislation provides protection to the rights and interests of the shareholders and investors. Similarly, this legislation also contains the regulations related with the incorporation of companies, the Constitution of the company, management and closure of companies. In case of the business structure of a company, limited liability is available to the shareholders. However, at the same time, certain restrictions also placed on the ownership of the company, which have been introduced to prevent any hostile takeover attempts. In the eyes of law, a limited company enjoys a special status (Beck, Demirguc-Kunt and Maksimovic, 2004). After registration, a company has its own legal identity. Consequently, the law permits the corporation to sue in its own name. Similarly, a company can also own assets in its own name. The ownership in case of a limited company is divided into equal parts which are known as shares. A person owning one or more shares of the company is known as a shareholder of the company. As a result of the distinct legal identity offer limited company, the law provides that the owners of the company cannot be held personally liable regarding the debts of the company. Therefore, as compared to sole proprietors and partners, the shareholders of the company enjoy the benefit of limited liability.

Company limited by shares: the companies limited by shares can be described as the most common type of business entity that is incorporated in Malaysia. In this case, the liability of the members of the company is restricted to the amount that has been mentioned on their unpaid shares. Therefore, in case the company becomes insolvent and goes into liquidation, the members of the company are not required by the law to pay the debts of the company unless a personal guarantee has been given by any member of the company (Salim, 2005). In the same way, in this case, the private property of the members of the company is not legally responsible for the debts of the corporation.

Sendirian Berhad (SDN BHD) can be described as a private limited company. In this case, any invitation to the public to subscribe to the shares of the company or to deposit money with the company for subscription or investment is prohibited. The minimum number of members required, in case of a private limited company is two and the number of members can go up to fifty.

Limited Companies in Malaysia

Berhad (BHD) can be described as a public limited company where the shares of the company can be offered to the general public for a fixed period as well as other forms of subscription. The minimum number of members in this case is two and the maximum number is unlimited. Generally this type of entity is created by large businesses.

Companies limited by guarantee: These types of companies are generally used for clubs, charities, societies and community projects etc. Therefore, most of the companies limited by guarantee are not for profit companies. This means that these companies do not distribute their prophet among the members but either the profit is retained by the company or it is used for some other purpose. In case of this type of business entity, it is mentioned in the Articles of Association and the Memorandum of the company that the liability of members is restricted to the amount that has been "guaranteed" or undertaken during winding up, which is the amount mentioned in the Memorandum and agreed and signed by all the members. Such companies do not have share capital, therefore there are no shareholders.

Unlimited companies: These types of companies are rarely formed. An unlimited company is a hybrid corporation that is either with or without share capital. Such company is similar to a limited company, but in this case, the members or the shareholders do not enjoy limited liability. This means that the members of the company have a joint, several and unlimited liability for fulfilling the insufficiency in the assets of the company in case of the liquidation of the company to settle its outstanding liabilities, if any. However and their former liquidation, the unlimited company is same as its counterpart limited company where there is no direct liability of the members towards the creditors of the company during the formal course of business.

The principle according to which a company is treated in the eyes of law as a separate legal entity that is distinct from its members has been provided in Salomon v Salomon & Co Ltd. (1897). According to this principle, after a company has been incorporated, it is considered as an artificial person. Therefore, the company is considered to have all the rights and responsibilities that are present in case of a living person. This principle has been widely accepted and applied in the business world in Malaysia. After a company has been incorporated by complying with the procedure prescribed in this regard, a new entity comes into being and it is considered as being a separate legal entity that is different from its members and officers. As a result of this principle, a major difference is present between a company and a partnership. Therefore, a company is treated by the law as being a separate person that is different from its members, or effectively the owners and the directors, who control the company and manage the business. Being a distinct legal entity, the law permits the company to sue or be sued in its own name.

Because of the decision given in Salomon v Salomon (1897), it has been confirmed that after its incorporation, a company has to be treated as a separate legal entity that is different from its members. In this regard, he does not matter if the company has purchased business from its subscribers, and it continued to operate as before, or that the third parties who are dealing with the same persons, and that the same persons have been receiving the profits that is made by the business, while previously in their capacity as partners and now as the members of the company.

Shares allow voting rights but if a person is not a majority are substantial shareholder, then it is likely that such person may be outvoted regarding a matter that could be crucial for such person. The question may arise if the person can take any action if he or she feels that the directors or the majority shareholders have done something wrong. The general answer to this question is a no. In this regard, it is a rule known as the Foss v Harbottle rule. According to this rule, it has been mentioned that the proper plaintiff regarding a wrong that has been committed against the company is the company itself and not shareholder. Under such a situation, if a person feels that the directors are the majority shareholders of the company have done something wrong, they have committed the wrong against the company and not against the person. Hence, the entity that has the right to take action is the company itself and not the person. However, sometimes the application of this rule may result in certain problems. How can the company take action than the wrongdoers (the majority shareholders) are having control over the company. Certainly they will never allow the company to take action against themselves. Under these circumstances, the question arises, what can be done by a minority shareholder.

Conclusion:

The answer is provided by section 181 of the Companies Act. It provides the remedy in cases of oppression faced by minority shareholders. However, it needs to be kept in mind that this remedy is not available in each and every case. When a person becomes a member of the company, he should be aware of the fact that he may be outvoted. This is known as the majority rule. It simply means that the will of the majority needs to prevail, as in the case of democracy. Therefore, not every decision can be challenged under this section. Only if there has been some "oppression", this section allows a minority shareholder to challenge the decision.

In Re Kong Thai Sawmill (Miri) Sdn Bhd [1978], the court has tried to describe the circumstances that may amount to oppression in terms of the Companies Act. The court stated that only the fact that one or more of the members managing the company have a majority of voting power and, relying on such power they have made policy or executive decisions that are not favorable to the complainant, cannot be described as oppression. The persons having interests in the companies’ limited by shares are required to accept majority rule (Re Coliseum Stand Car Service Ltd., 1972). Only when the majority rule had crossed over to the role of minority oppression or disregarded their interests, the provisions of section 181 can be invoked. For establishing oppression, there should be some visible leaving of the standards of fair dealing (Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd., 1980). Similarly, there should be a breach of the conditions related with fair play that could have been reasonably expected by the shareholders before making a purchase of oppression.

References

Aghion, P., Bolton, P and Tirole, J., 2000, Exit options in corporate finance: liquidity versus incentives,” Working Paper, Princeton University, Princeton, NJ.

Beck, T., Demirguc-Kunt, A., and Maksimovic V., 2004 “Financial and Legal Constraints to Firm Growth: Does Size Matter,” Journal of Finance, forthcoming.

Chia, B., ‘‘Forum: A turning point in company law’’, The Edge, Malaysia, July 16–22, 2007

Gary M. and Tollison, R.D., 1983, The myth of the corporation as a creation of the state, International Review of Law and Economics 3, 107-120.

L.S. Sealy, “Foss v. Harbottle—A Marathon Where Nobody Wins” (1981) 40 C.L.J. 29

Salim, M.R., 2005, Shareholders’ Rights and Remedies in Malaysia, PhD thesis, Lancaster University

Salim, M.R., 2006, ‘Legal Transplantation and Local Knowledge: Corporate Governance in Malaysia’, 20 Australian Journal of Corporate Law 55

Case Law

Foss v Harbottle (1843) 67 E.R. 189

Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd [1980] 1 MLJ 45

Re Coliseum Stand Car Service Ltd [1972] 1 MLJ 109)

Re Kong Thai Sawmill (Miri) Sdn Bhd [1978] 2 MLJ 227

Salomon v A Salomon and Co Ltd [1897] AC 22