TOURISM & HOSPITALITY LAW

LAW438

TOPIC 8 – LEGAL ASPECTS OF BUSINESS

ORGANIZATION
Content Outline
• Basic definition and characteristics
• Differences between sole proprietorship, partnership
and company
Introduction

• Law is a means or device to regulate the economic

and social behaviour of the society.
• Law also aims to preserve the economic and social
welfare; and control day-to-day activities of individuals
and businesses.
• Specifically, business law controls commercial
enterprises and activities.
Determining Business Entity

• When someone is planning to form a business, the common problem that

he may encounter is the type of business entity to choose.
• In Malaysia, there are 3 main types of business entity:

Partnership

Sole proprietorship Company

1. Sole proprietorship

• A sole proprietorship is where one individual person is in business for

himself (sole trader). He is the sole owner of the business.
• This is the simplest and popular type of business entity.
• A sole proprietor has to provide his own skill, labour, capital, and other
resources to run the business, either alone or with the help of family
members or workers.
• The liability of the owner is unlimited. If a business fails or he is declared
bankrupt, the owner will be personally liable.
• The creditors can sue the sole proprietor personally for all debts of the
business. All personal assets, personal income, and employment income
of the sole owner are all liable.
1. Sole proprietorship (cont’d)

• Reasons why sole proprietorship is popular:

• Full ownership- A sole proprietorship is owned 100% by a single
person. As such, the owner receives all profits and makes all executive
decisions for the business.
• No corporate tax imposed- As the sole proprietorship is not a
separate legal entity from the owner, it will not get taxed as such.
Instead, the profit made will come under the regular income tax the
owner pays.
• Low cost- registration costs are minimal. And out of all the legal
structures, this has the lowest annual fee as well.
• Setting up and shutting down is simple- you may simply shut it
down at SSM office or not renew the license.
1. Sole proprietorship (cont’d)

• Risks of sole proprietorship:

• All debts are to be borne by the owner
• The sole proprietorship is only active during the lifetime of the owner
• A sole proprietorship can only be registered by a Malaysian or a foreign
national who has a permanent residency permit in the country.
1. Sole proprietorship (cont’d)

• Registration process of sole proprietorship:

1 Choose a This name can be the same as the name on your identity card or can be a
business name different name. If it is different, you must give three potential names to be
vetted. In addition to this, you will also have to complete the Business Name
Approval Form (Form PNA.42) if your business name is different.
2 Complete Form The next step is to fill in the business registration form. This is titled ‘Form A’.
A It requires the following details to be completed:
• The Business Name
• The type of business to be registered
• The date the business began commencement
• The main address for the business
• Information regarding the owner (this includes clear copies of the owner’s
ID card or PR permit)
1. Sole proprietorship (cont’d)

• Registration process of sole proprietorship: (cont’d)

3 Submit the In order to submit the application, you will need the following:
application • Completed Form PNA.42 and Form A
• A document detailing all business activities proposed
• Any relevant permits
4 Pay the fees The registration of a sole proprietorship is liable to the following fees:
• RM 60 as a registration fee
• RM 10 for the printout of business activities
• RM 30 as a naming fee if you are not using the name on your identity
card.
Once all relevant fees are paid, you will receive your certificate of registration
within the day, or on the following business day.
1. Sole proprietorship (cont’d)

• Non-registration of business:
• General penalty under S 12A Registration of Business Act 1956 –
• a fine not exceeding RM10,000 or
• to imprisonment for a term not exceeding one year or
• both.
• According to the Companies Act 2016, if the owner fails to register the
business within 30 days of the date of business commencement, they
will face these penalties as follows:
• A fine of up to RM 50000
• Jail time of up to two years
• A combination of both in severe cases.
1. Sole proprietorship (cont’d)

• Renewal of business registration:

• Submit Application for Renewal of Business Registration. (FORM A1)
• Certificate of business registration may be renewed at any time before the expiry date
up to twelve (12) months after the expiry date.
• Renewal fees:
• Sole proprietorship using personal name as in identity card – RM30.00
• Sole proprietorship using trade name - RM60.00
• Registration of branches – RM5.00 for each branch
1. Sole proprietorship (cont’d)

• Closure of sole proprietorship:

• Where a business registered has been terminated, the person responsible for the
business shall within thirty (30) days of the termination notify the registrar in the
prescribed form (Form C).
• Business may be terminated for the following reasons:
• Cessation of the business
• Bankruptcy of the owner
• Death of the owner
• Pursuant to Court Order.
• Registered business that has not expired is allowed to submit Notice for Termination
of Registered Business.
• If the closure is due to owner’s death, the Notification as a result of death must be
submitted within four (4) months from the date of demise.
• For business that had expired, Confirmation Letter on expired business can be
requested with payment of RM10.
2. Partnership

• Partnership comes into existence when two or more persons pool their
skills, labour, capital and other resources together to form a business.
• A partnership is governed by Partnership Act 1961.
• S 3(1) PA 1961 defines partnership as “the relation which subsists
between persons carrying on business in common with a view of profit”.
2. Partnership

• Elements of a partnership:
Relation between The relation between the partners depend on the partnership agreement. For normal
parties partnership, the number of partners must be between 2 – 20 persons. For professional
partnership (lawyers, dentists, doctors etc.) the maximum number of partners is 50. [s 47(1)
[PA 1961]
Carrying business Business includes every trade, occupation or profession [s 2 PA 1961]. There must be a
commercial venture. Therefore, clubs and non-profit making associations cannot be
considered as business.
In common The business requires participation of the partners for the common object. The Federal
Court in Chooi Siew Cheong v Lucky Height Development Sdn Bhd held that a joint venture
between a landowner and a housing developer does not create partnership as each party to
the agreement intended a wholly separate business. No business in common for a view of
profit.
With a view of Profit must be intended when a partnership is established – to make money.
profit
2. Partnership

• Relations which are not partnership:

• Joint tenancy or co-ownership of property [s 4(a) PA]
• The sharing of gross returns does not in itself create partnership [s 4(b) PA]. In Cox v Coulson,
the defendant – a manager of a theatre entered into an agreement with Mill where Mill would
prepare and pay for the theatre show while the defendant would prepare and pay for the rent
and lighting services for the show. It was agreed that the defendant to receive 60% of the gross
returns; while Mill to receive the balance of 40%. The court held that the sharing of gross
returns did not make them partners as they both had separate responsibility and liability.
• Payment of debt out of business profits to creditor does not make the creditor a partner [s
4(c)(i) PA]
• Remuneration to servant or agent out of profit [s 4(c)(ii) PA]
• Payment of annuity or portions of profits to a widow or child of a deceased partner [s 4(c)(iii)
PA]
• Payment of loan advanced for the purpose of business [s 4(c)(iv) PA]
• Payment to a seller of the goodwill of a business in the form of share of profits of business [s
4(c)(v) PA]. In Rawlinson v Clarke, a doctor sold his business and introduced his clients to the
buyer. He received certain payment out of profit of the business within the first year. He was not
a partner.
2. Partnership

• Formation of a partnership: The partnership agreement must fulfill elements of a

valid contract including consideration, capacity, lawful purpose, and free consent.
• Lawful purpose: A partnership is said to be illegal if it is formed with the intention of
carrying out business against the law.
• Capacity: To become a partner, one must be an adult, of sound mind and has not
lost capacity to contract under any laws. However, a minor can be a partner but shall
not be liable for all firm’s debts and liabilities. In William Jacks & Co v Chan & Yong
Trading, the court held that the adult partners were liable for goods bought by minor
partner.
• Partnership agreement: Can be in oral or in writing. In absence of a partnership
agreement, the provisions of Partnership Act 1961 shall apply to all partners
regarding their rights and liabilities.
2. Partnership

• Registration of partnership:
• Must be registered with SSM under Registration of Businesses Act
1956
• Application must contain the date of operation of business, name of
business, name of partners, registered address for business, nature
and type of business.
• Any changes to the above particulars must be informed to the SSM.
• However, failure to register a partnership does not make a contract
entered into by a partner of the form void. In Arci Enterprise v Selinsing
Mining Sdn Bhd, the court held that non-registration or invalid
partnership or default in registration does not make a contract entered
into by a partner void ab initio.
2. Partnership

• Relations between partners and 3rd parties:

• Since a partner is an agent of a firm, his act or omission committed binds the
other parties if it is committed within the ordinary scope of the firm’s business
[s 7 PA].
• Partners are also bound by acts on behalf of the firm [s 8 PA].
• In Chan King Yue v Lee & Wong, the plaintiff lent RM35,000 to her husband
who was a partner in a firm. The husband issued a receipt under the firm’s
name and used the money to pay the firm’s debt. The plaintiff took an action
to recover her money but other partners refused to pay on the ground that the
plaintiff’s husband had no authority to borrow money. The court held that the
partners were liable as the loan was important for the firm’s continuous
business.
• A partner who misuses the trust given by the firm to make a debt which is not
connected with the firm’s business shall be personally liable [s 9 PA].
2. Partnership

• Liabilities of partners:
• In contract – every partner shall be jointly liable for debts and obligations while he is being a
partner; and after his death if the debts or obligations were incurred during his term as a
partner [s 11 PA].
• In tort – tort committed by a partner (negligence, nuisance, trespass, or defamation) binds the
other partner if it is committed within the ordinary course of business or with authority of co-
partners [s 12 PA].
• Improper use of trust property – other partners will not be liable except if they have notice of the
breach [s 15 PA].
• Liability for holding out – a person who is not a partner may be liable for the firm’s debt if he
represents or allows himself to be represented as a partner of the firm [s 16 PA].
• Criminal liability – other partners shall not be liable unless it can be proved of their participation
in the crime
• Incoming partner – not liable for debts incurred before he becomes a partner [s 19(1) PA].
• Retiring partner – remains liable for debts incurred before his retirement [s 19(2) PA].
2. Partnership

• Rights and duties of partners: In the absence of specific partnership agreement, the rights and
duties are specified under s 26 PA:
a. Entitled to equal share of capital and profit, and contribute equally to losses
b. Every partner who made any payment or incurred personal liability in the course of firm’s
business must be indemnified
c. Every partner who made any advance for the purpose of firm’s business beyond the capital
amount he subscribed is entitled to 8% interest p.a. from the date payment of advance
d. No partner is entitled to interest of capital before ascertainment of profits
e. Every partner may participate in the management of the firm
f. No partner is entitled to remuneration for acting in partnership business
g. No partner to introduce a new partner without the consent of other partners
h. The majority of partners may decide any differences as to ordinary matters but the changes in
the firm’s business must be made with the consent of all existing partners
i. The partnership books are to be kept at the place of business or principal place is there is
more than one business places
2. Partnership

• Obligations of partners to act in utmost good faith:

• Every partner must act honestly because a partnership is based on the
principle of uberrimae fidae (utmost good faith).
• S 30 PA – Every partner to render true accounts and full information of all
things affecting the partnership
• S 31 PA – To account for secret profit or benefit derived from any transaction
concerning the partnership
• S 32 PA – Not to compete with the firm’s business of the same nature without
consent of the other partners
2. Partnership

• Dissolution of partnership:
• By expiration of term or notice [s 34 PA]
• By death, bankruptcy or charge of any partner, unless partnership agreement stated otherwise
[s 35 PA]
• By supervening illegality [s 36 PA]
• By court order [s 37 PA]:
a. When a partner is lunatic or permanently unsound mind
b. When a partner become incapable of performing his part in partnership contract
c. When a partner has been guilty of any conduct affecting prejudicially the carrying on
business
d. When a partner willfully or persistently commits breach of the partnership agreement
e. When the business is carried out at loss
f. When it is just and equitable to dissolve the partnership
2. Partnership

• Limited Liability Partnership (LLP)

• Introduced by LLP Act 2012
• Limited liability for each partner
• Governed by tailor-made partnership agreement
• Unlimited number of members
• Must appoint compliance officer
• A combination of features of company and partnership
• Separate legal entity status
• Flexible in organisation and management
3. Company

• A company is a separate legal entity created under Companies Act 2016.

• A company shall have [s 9 CA]:
• A name
• One or more members having limited or unlimited liability for the obligation of the
company
• In the case of a company limited by share, one or more shares; and
• One or more directors
3. Company

• S 14 CA – Anyone who desires to form a company must make an

application to the Registrar specifying:
a. Name of the proposed company
b. Public or private company
c. Nature of business
d. Proposed registered office
e. The name, identification, nationality and place of resident of each member of a company. If the member is a body
corporate – the corporate name, place of incorporation, registered number and office
f. Particulars of director
g. Particulars of secretary
h. In the case of company limited by shares, the details of class and the number of shares taken by each member
i. In the case of company limited by guarantee, the amount up to which the member undertakes to contribute in the event of
winding up
j. Statement from director and promoter confirming his consent to act and not disqualified by the Act
3. Company

• Effect of incorporation:
• A company incorporated under CA is a body corporate and shall have legal
personality separate from its members and continue to exist until it is removed from
the Register [s 20 CA].
• A company may purchase property and enter contracts in its own name.
• A company may sue and be sued in its own name.
3. Company

• Types of company based on members’ liability:

Limited by share Limited by guarantee Unlimited
Liability of members is Members are not required There is no limit on
limited to the amount on to contribute capital while member’s liability [s 10(4)
unpaid on his shares [s the company is operating. CA].
10(2) CA]. In the event of the In the case of company’s
Members who have fully company being wound assets not enough to
paid his shares are not up, the member is only to cover the debts upon
required to make further pay the amount limited to winding up, the members’
contributions [s 435(2)(b) his guarantee. [s 10(3) liability is unlimited.
CA]. CA]
3. Company

• Types of company based on public status:

Private company Public company
Function Small or medium size business. Large business. Bhd.
Sdn Bhd.
Type Limited by shares only Can be limited by shares,
guarantee or unlimited
Transfer of shares Restricted Freely transferable
Number of members Min 1, Max 50 Min 2, No Max
Issue of shares Prohibited to issue to public Allowed to issue to public
Minimum director 1 2
Meetings Not mandatory to conduct AGM Must conduct AGM
Commencement of business Once received notice of registration May not borrow unless comply with
CA
3. Company

• Winding Up:
Winding up

Compulsory winding
Voluntary winding up
up – by the court

Members voluntary
winding up – when
company is solvent

Creditors’ voluntary
winding up – when
company is insolvent
3. Company

• Grounds for compulsory winding up:

• Company by special resolution decided to be wound up by court
• Company defaults in lodging statutory declaration under s 90(3)
• Company does not commence business within 1 year or incorporation or suspends
business for 1 year
• Company has no member
• The directors acted in own interests which appear to be unfair or unjust to the
members
• Company unable to pay its debts
• It is just and equitable to wind it up
• Company used for unlawful purpose
COMPARISON BETWEEN SOLE PROPRIETORSHIP,
PARTNERSHIP & COMPANY
 Sole proprietorship Partnership Company
Definition One person doing Two or more persons Body corporate separate
business carrying business in from its members
common for profit
Governing statute(s) Registration of Businesses Partnership Act 1961 Companies Act 2016
Act 1956
Name Any name approved by Any name approved by End with Sdn Bhd or Bhd
ROB ROB
Owner Sole proprietor Partners Members or shareholders
hold shares that give
them certain rights
Internal regulation NA Partnership agreement Constitution – MOA &
AOA
Legal status No separate legal entity No separate legal entity Separate legal entity
Limits of liability Unlimited Unlimited Limited to shares or
guarantee
Number of members 1 2 – 20 1 – 50 (private company)
2 – 50 (professionals) 2 – no limit (public
company
 Sole proprietorship Partnership Company
Lodgment of annual NA NA Financial statement &
return report must be lodged to
Registrar once in every
financial year
Audit Not compulsory Not compulsory Compulsory. Financial
statement must be
audited and circulated to
members.
Meeting NA Not compulsory Public company –
mandatory to hold AGM
Private company – not
mandatory but decision
must be made by written
resolution
Dissolution By the sole proprietor or By agreement of partners Winding up (liquidation)
court order or court order
Death or bankruptcy Automatically dissolves Automatically dissolves Does not affect the
the business the business unless there company. Company is for
is agreement to the perpetual succession.
contrary
REFLECTIONS
What are the advantages and disadvantages of the following
business entities?:
1. Sole proprietorship
2. Partnership
3. Limited liability partnership
4. Company