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Firstly, there is the sole proprietorship. Here, the business owner is the one and only member of the business and therefore has absolute independence in the decision-making process of the business.
The second business structure is the partnership. This allows for two or more persons (with a maximum of 20) to own the entire business collectively as joint owners.
The above two business structures are considered unincorporated associations, in that there is no separate legal existence apart from the business owner.
The third form, however, is to incorporate the business as a company. Forming a company via incorporation means that a separate legal entity is established. The number of members in a company is unlimited (except for private companies where the maximum number of members is 50).
For the business owner, deciding which legal structure to use is a major decision. To assist in deciding which form of business to use, several criteria may be considered.
Ability to hold assets
Under the sole proprietorship, the business assets are the business owner's own personal assets. Under the partnership structure, the partners will collectively own all the assets to the partnership.
For the incorporated company, all assets owned by the company are registered in the company's name and do not belong to any one of the shareholders or members of the company. They therefore do not have any interest in the company's property.
Liability for debts
Under the sole proprietorship, the sole proprietor is entirely responsible for all the debts and risks of the business. Any liability incurred by the business may be claimed from his own personal property. Conversely, however, he can count his business profits as personal property and is exempted from business taxes (although personal income tax is still payable).
In a partnership, all the partners are jointly liable for the debts of the firm, if the debts of the firm cannot be discharged by its own assets, the members of the partnership must contribute from their own personal assets to discharge the firm's debts.
Due to the company's separate legal entity, the liability of the members is limited to the sum paid for their shares in the company. As such, if the company does not have sufficient assets to discharge its liability, the members are not required to contribute from their personal assets.
Sole proprietorships and partnerships have no separate legal personality. As such, legal action can only be instituted or defended in its member(s)' names.
As a separate legal entity, the company has the benefit of acting in its own capacity to take legal action (or defend an action). Members of the company have no right to institute any legal proceedings on behalf of the company and therefore, cannot be sued as well.
Dissolution of the business
Under the sole proprietorship, the moment the business owner dies, the business itself will be dissolved. Dissolving a partnership can be done by way of agreement, operation of law or in the event that any partner dies, resigns or becomes bankrupt.
However, the fact that the company is a separate legal entity means that it enjoys perpetual succession. The business will not be dissolved simply because any one of its members withdraws, dies or becomes bankrupt.
For sole proprietorships and partnerships, capital is raised through contribution of the owner or partners' personal assets or through loans.
Under the company structure, capital is raised through sale of shares. In private limited companies, shares are available for sale to anyone only by approval of the shareholders. For public limited companies, shares are sold to the general public.
Once the business owner has considered the different aspects of the various forms of business structures and has decided which structure to use, he then has to register his business.
With regards to sole proprietorships and partnerships, the Companies Act 1965 and Registration of Business Act 1956 makes it a requirement to register the business with the Companies Commission of Malaysia. The Commission's guidelines firstly, that the business owner obtain approval for his proposed name for the business. Subsequently, he is required to complete the Commission's Form A (Registration of a New Business). This includes detailing the application's particulars, the date at which the business commenced, the nature of the business and the branch (or branches) of the business.
Incorporating a company, however involves several more processes. Since these processes may be technical and complex, employing the services of a Company Secretary will ensure that all aspects have been taken care of.
A. Types of Business Entity
B. Requirements to Incorporate a Company in Malaysia (Companies Act, 1965)