Chapter 1 - Business Organizations

7/27/2019 Chapter 1 - Business Organizations

1/9

LAW 3212: COMPANY LAW

CHAPTER ONE:

BUSINESS ORGANIZATIONS

Some people do business personally. They prefer it as business allows them to

have full control on it in terms of decision making. However, one person cannot

afford to provide large amount of capital to conduct large business. Hence, some

people like to do business in partnership or in company so that they can have

many partners or shareholders to provide large amount of capital to do large

business. There are different types of business organizations under which

businessmen operate their business activities. At present there are mainly three

types of business organizations in which businessmen are involved. They are:

1. Sole Proprietorship Business

2. Partnership Business

3. Company Business

SOLE PROPRIETORSHIP BUSINESS

Sole proprietor means only one owner. When only one person is the owner of a

business, it is known as sole proprietorship business. Usually sole traders manage

small businesses. It is easier to finance and manage the business in sole

proprietorship business. The sole trader has full control over the business. He can


2/9

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

alone exercise full power to take decision and implement the decision while

conducting the business.

The sole trader alone can run the business himself or he may run the business by

others. In that case other persons will work as his agent and the principles of

agency law will be applicable. Young entrepreneurs are encouraged to start sole

proprietorship business although they are welcome to manage other types of

businesses. But sole proprietorship business which is usually small business is

better for new entrepreneurs. Because, if there is loss in the business, the amount

of loss will be small in size in small businesses than medium or large businesses.

One thing must be remembered that in case of loss and closure of business, the

sole proprietor will be liable to the full extent to pay the debts to the creditors.

This is known as unlimited liability in business.

PARTNERSHIP BUSINESS

Partnership business means a business is conducted by more than one

businessman. When two or more persons do business jointly, the businessmen are

known as partners in business and the business is known as partnership business.

When one person finds it difficult to finance the business, two or more people can

form partnership to finance the business and run the business activities jointly.

Sometimes it may happen that few partners are active in the business and few are

not active.

The active partners manage the business and the inactive partners (known as

sleeping partners) do not participate in day to day business activities. In

partnership business the partners share the profit. The active partners are usually

given monthly salary as they actively participate in the management of the

business and they can also share profits with the sleeping partners.

2


3/9


As it is easier to invest large finance in partnership business, the partners may

have medium size or large business and can share the profit in proportion to their

share or capital contributed to the business. Honesty and trust on each other is

very important in partnership business. If one or more partners are dishonest and

are involved in corruption, the business will be affected and the mutual trust and

fiduciary relation will be lost.

The religion of Islam encourages doing business and emphasizes on becoming

honest and truthful businessmen. Our Prophet (S.A.W) said: The honest and

truthful businessmen will remain with the honest people, martyrs in Jihad and the

prophets in the Day of Qiamah. In other words, the truthful and honest

businessmen will be successful in the Day ofQiamah and will be rewarded with

Jannah.

In case of loss and dissolution of partnership business, the partners will be

personally and jointly liable to the creditors or other people to the full extent of

debt. This is known as unlimited liability of partners in partnership business topay all debts due to the creditors. In case of dissolution of partnership business,

the debts of the creditors must be paid in priority and if there is any extra money

left that should paid to the partners of the business.

There is limitation of number of partners in partnership business. The minimum

number of partners is at least two and maximum number of partners is twenty.

This has been prescribed in the Partnership Act to limit the number of partners. If

the partnership business wants to recruit more partners than twenty, it should

change the form of business and should form a company business.

Differences between Sole Proprietorship Business and Partnership Business

Students are required to get the answer from the text book.

3


4/9


COMPANY BUSINESS

Company is a larger business enterprise than partnership. To form a private

company at least two shareholders needed and maximum shareholders must not

be more than fifty. However, in public companies there is no limit of

shareholders.

In company business, it is possible to raise large amount of money. This large

amount of money can be used foR different business purpose. The profit in

company business is distributed to the shareholders as dividend from time to

time.

There are directors in company business. They are usually large number of

shareholders in the company. The directors and the board of directors actually

make policy decisions for the business and manage the company business.

Companies are of two types: private company and public company. Public

companies can sell shares in the open market but private companies cannot sell

shares in the open market. The liability of shareholders in the company is limited.

Limited liability means the shareholders are only liable to the extent of the value

of their share taken from the company. If a shareholder has paid all the value of

the shares he has taken, he will have no more liability to pay in case the company

is wound up (dissolved) for insolvency.

Differences between company business and partnership business

Company Business Partnership Business

1. To do company business, it

must be registered with the

Registrar of Companies.

1. To do partnership business, the

partnership should be registered

with some other government

4


5/9


department, known as Registrar

of Business.

2. After registration a company

becomes an artificial legal

person.

2. By registration, a partnership

does not become artificial legal

person.

3. The maximum shareholders

can be fifty (50) in a private

company.

3. In a partnership, the maximum

number of partners might be 20.

4. To register a company a

complex procedure must be

followed and it is expensive.

4. To register a partnership there is a

simple procedure and it is not

expensive.

5. A public company can sell

shares in the share market.

5. A partnership firm cannot sell

shares in the share market.

6. Shareholders in a company canenjoy limited liability.

6. Partners in a partnership firm donot enjoy limited liability.

7. In a company, directors usually

are not personally liable for

debts to creditors. Only the

company is liable.

7. In a partnership firm, the partners

are personally and jointly liable

to creditors but the partnership

organization is not liable.

8. Companies enjoy perpetualsuccession.

8. Partnership does not enjoyperpetual succession.

9. To register a company, it must

prepare Memorandum and

Article of Association.

9. For Partnership business,

Memorandum and Article of

Association not needed.

10 Annual general meeting and 10. Annual general meeting and

5


6/9


. statutory meeting are

compulsory for a company.

statutory meeting are not

compulsory for a partnership

firm.

11

.

Accounts must be filed with

the Registrar of Companies.

11. No need to file accounts of

partnership to any government

office.

12

.

A company must appoint one

or more auditors.

12. No need to appoint auditors for

partnership business, but it is

recommended that a partnership

firm can appoint an auditor on

part-time basis.

13

.

Board of Directors manages

companys day to day business.

13. All partners or some of the

partners by agreement may

manage the partnership business.

14

.

Companies pay income tax on

higher rate.

14. Partnership firm pay income tax

on lower rate that is the rate for

individual taxpayers.

HOW TO SET UP A NEW COMPANY BUSINESS?

Students are required to get the answer from the text book.

WHY STUDY COMPANY LAW?

It is very important to study company law especially for company executives and

business students. It helps them to understand relevant rules and procedure of

6


7/9


conducting company business. Business students and company executives will

get the following benefits after studying company law.

i. They will learn about the legal procedure of incorporating a company.

ii. They will learn relevant legal provisions in the Companies Act 1965.

iii. They will be able to comply with the provisions of Companies Act while

conducting business under the company name.

iv. They will be able to conduct company business in legal and acceptable

way.

v. They will know what actions are prohibited and what actions are allowed

under the Companies Act.

vi. They will be able to avoid legal action which might be taken against the

company or the Directors for non-compliance with company law

provisions.

vii. They will know how to maintain account books for the company.

viii. They will know when and how to offer and distribute dividends among

the shareholders.

ix. They will know when and how different meetings are to be held in the

company.

x. They will be able to become good and efficient executives and directors

in different companies.

INTRODUCTION TO MALAYSIAN COMPANY LAW

7


8/9


Introduction to Company law in Malaysia

Sub-points are:

1. Background of the Companies Act 1965 (Malaysia)

2. Reception of English common law, latest case law, rules of equity and

statutes of general application under section 3 and 5 of Civil Law Act

1956 (Malaysia).

3. Companies Commission of Malaysia (CCM)

3.1 Establishment of CCM under section 3 of CCMA 2002.

3.2 Disclosure of interest, Section 15(1) of CCMA 2002;

3.3 Power and function of CCM, S. 17 of CCMA.

3.4 Protection from Personal Liability

4. Registrar of Companies

4.1 Appointment of Registrar

4.2 Powers of Registrar

4.2.1 To call for information;

4.2.2 To conduct inspection;

4.2.3 To conduct investigation;

4.2.4 To call for examination;

4.2.5 To compound offences;

4.2.6 The role of Registrar in the securities industry.

Note: Students are required to study P. 1-24 from the textbook written by Chan,

Koh and Ling, Company Law in Malaysia for answer.

Sample Questions

1) Explain the following briefly.

8


9/9


a) Sole Proprietorship Business

b) Partnership Business

c) Company Business.

2) Write differences between partnership business and company business.

3) What are the differences between sole proprietorship business and

partnership business.

4) How to set up a new business?

5) Explain why we should study company law.

9

Documents

Chapter 1 - Business Organizations