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KKKF 4134 ENGINEERING MANAGEMENT

1A- Choosing a Form of Business Ownership 1B- Entrepreneurship 1C - Starting a Business

By Ir Ishak Arshad 19 Sept 2013

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1A- Choosing a Form of Business Ownership

Ref : 1) Understanding Business W.G.Nickels, JM McHugh etc- Ch 5 2) Fundamental of Entrepreneuship by UiTM Entrepreneurship Study Group Pearson Prentice Hall

* Business in Malaysia can be * registered under one of the following * Acts 1) Business Registration Act 1956 (Amendment 1978) and
Procedures of Business Registration 1957: Sole Proprietorship Partnership 2) Company Act 1965 (Act 125): a) Limited Company by Guarantee b) Limited Company by share: Private Limited Company (Sdn Bhd) Public Limited Company (Bhd) Foreign Company
Source: US Internal Revenue Service

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* Business in Malaysia can be * registered under one of the following * Acts continue. 3) Cooperative Act 4) Parliamentary Act or State Enactment Register with - Suruhanjaya Syarikat Malaysia (http://www.ssm.com.my)
At KL Sentral Check Guidelines from the website
Source: US Internal Revenue Service

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Types of Ownerships (in USA)

Type of Ownership
Sole Proprietorship Partnership Corporation

Number
72% 8% 20%

Sales
6% 13% 81%

Source: US Internal Revenue Service

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Types of Ownerships (in Malaysia)

Type of Ownership
Sole Proprietorship Partnership Corporation

Number
% % %

Sales
% % %

Source: US Internal Revenue Service

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Sole Proprietorship (SP)

Solely owned by one person The simplest business structure easy to register Require small amount of capital to start Does not mean to be small may have any number of employees Eg Kamdar Deparmental Store is a multi-million business as SP for a long time before became a Sdn Bhd company Other examples SP - restaurants, tailors, mini markets,

Engineering Consultants, Contractors (normally for Class F, E

and D)

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Sole Proprietorship
Advantages
Easy to start/manage/end Be your own boss - flexible Pride of ownership my own company ! Leave a legacy Retain profit to owner Not subjected much to government rules & regulations eq dont have to submit yearly financial statement to IRB, does not require account to be prepared by a qualified auditor No special taxes owner pay tax on his total individual income
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Sole Proprietorship
Disadvantages:
Unlimited liability if the business incur debts for which the business assets are not sufficient to cover, the owner have to settle the debts with his personal assets Limited financial resources eg limited source of capital Management difficulty only owner manage ! Time commitment only owner is solely responsible for carrying the task Few fringe benefits Limited growth Limited life span depends upon the age of the owner. The business will be dissolved if the owner pass away. New owner has to reregister the business under his name.

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PARTNERSHIP (PS) A Partnership is a legal business entity with two or more partners A person forms a partnership with one or more person (not exceeding 20) to carry out a business with a view of making profits. For Professional business eg legal firms, engineers, architects etc not exceeding 50) Partners agree to undertake a join business and jointly own the business Partners share the capital, profits & losses
Source: US Internal Revenue Service

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* * * Advantages:

Partnership

Easy to set up with few formalities More financial resources easier to get bank loan compare to SP

Shared management tasks among partners a lot of ideas, talents & skills can be pooled for better management Longer survival
No Special Taxes. As in SP income tax is not imposed on the partnership but on the owners as individual Equity can be increased through enlisting additional partners
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Disadvantages: Unlimited liability liability may involve personal assets of all

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Partnership

partners of the company The life span of the PS business depends on the life span of the partners. If any partners passes away or is declared a bankrupt, the business is automatically dissolved unless there is an agreement otherwise

Division of profits
Disagreements among partners risk to the company Difficult to terminate If no Letter of Agreement is being made, unethical or misconduct behavior may happen
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REGISTRATION OF SP AND PS

A SP can be registered with the Business Division of the Companies Commission of Malaysia (SSM,Suruhanjaya Syarikat Malaysia at KL Sentral), 7 days after the start of the operation. ( offices also located in all State Capitals) http://www.ssm.com.my Procedures: - search for business name FOC - Form A Registration of Business RM30 fee for using applicants names eg Ahmad Jurutera Perunding RM60 fee if using other names and PS eg Jurutera Perunding Cergas RM5 service charge
Source: US Internal Revenue Service

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REGISTRATION OF SP AND PS continue

Procedures: - Form D Certificate of Approval fine RM200 failure to display the certificate - Form A1 yearly renewal of registration fee RM30 or RM60 fine RM50,000 for failure to renew - Form B Notification of changes in business such as names, address & types of business fee RM20 - Form C - Notice termination of business fine RM1000 for failure

Source: US Internal Revenue Service

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* * COMPANIES/ CORPORATION * Private Limited Company a) limited by shares b) limited by guarantee not form for making profit (liability of members limited by Memorandum of Associations) eg- charitable bodies, Trade Association, Professional Societies, Sport Clubs etc- not Traded on Any Stock Exchange Documents to be submitted to SSM: Memorandum of Association & Articles Of Association Statutory Declaration as Directors Statutory Declaration of Compliance Declaration by a person as Companys Secretary SSM approval on the use of the proposed name

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COMPANIES/ CORPORATION
Private Limited Company continue. Companies Act 1965 Has legal entity Liability of members is limited by shares (Creditors are not entitled to take a members personal assets in satisfaction of companys liabilities) Its identity is separate from the companies members

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Private Ltd Companies

Advantages
Limited liability limited to the capital, shareholders

personal assets are not affected all share holders are legally protected by law More money for investment funds are easy to acquire thru exchange of ownership or bank loan Size greater potential for expansion Perpetual life life span of the business is not dependent upon the age or resignation of its members Ease of ownership change Ease of drawing talented employees Separation of ownership/mgmt-responsibility to manage & run the business is by Board of Directors appointed by the companys share holders
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Private Ltd Companies

Disadvantages
Extensive paperwork more rules & regulations by the

Companies Commission of Malaysia (SSM) Must pay corporate tax The qualified Auditors must audit the companys yearly financial statement and the statement must be complete and regularly updated Termination difficult The Companys share cannot be transacted thru share market The cost of setting up a company is high paid up capital professional fee (companys secretary & auditors), filing fee, printing the MOA and Articles of Association, share certificates & companys seal. Possible conflict with Board of Directors
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COMPANIES/ CORPORATION
Private Company Documents required to form a company are mainly similar to the private company

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The Difference Private-Public Companies

Private a) Name of company End with Sdn Bhd Public End with Bhd After the issue of the Certificate for Commencement of business Must hold a Statutory Meeting & lodge a report with SSM Must issue prospectus Director must retire at 70 By ordinary resolution
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b) Commencement As soon as they of business incorporated

c) Statutory meeting d) Issue of share e) Age limit f) Removal of Director

Doesnt apply

No prospectus No age limit As in Article of Association

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1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Worlds Largest Corporations

Citigroup General Electric American Intl Group Bank of America HSBC Group ExxonMobil Royal Dutch/Shell BP ING Group Toyota Motor 11. UBS 12. Wal-Mart Stores 13. Royal Bank of Scotland 14. JP Morgan Chase 15. Berkshire Hathaway 16. BNP Paribas 17. IBM 18. Total 18. Verizon Communication 20. Chevron Texaco
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Source: Forbes, 2005

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Americas Largest Private Companies

Revenue 2004 (In Millions)

1. 2. 3. 4.

Cargill / agricultural commodities, food Koch Industries / chemicals, energy, tech Mars / candy, pet food electronics PricewaterhouseCoopers / accounting

$66,669 60,000 19,100 18,700

5.

Publix Supermarket / supermarkets

18,686

Source: Forbes, 2005

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Americas Oldest Companies

Company J. E. Rhoads & Sons Covenant Life Ins. Philadelphia Dexter D. Landreth Seed Bank of New York Year Started 1702 1717 1752 1767 1784 1784 Type of Company Conveyer Belts Insurance Insurance Contributorship Adhesives & Coatings Seeds Banking

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How Owners Affect Management

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Limited Liability Companies

Advantages Limited Liability Disadvantages

Tax Choice Flexible Ownership Rules Flexible Profit & Loss Distribution Operating Flexibility

Limited Life Span?

Fewer Incentives

Taxes
Paperwork

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Special Forms of Business Ownership

1. Franchises 2. Cooperatives

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1) Franchise System
Franchisor sell the right to use the business names to sell product or service to Franchisee Franchise Agreement the agreement between Franchisor and Franchisee Examples: McDonalds, Baskin-Robin, Seven-Eleven, Piza Hut, A&W
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Franchise Contract
Franchisor, Inc.

Branded Product/Service Performance Monitoring

$$$$$
Franchisee

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Franchisor
Assigns Territory May Provide Financial Aid/Advice Offers Merchandise/ Supplies at Competitive Price Provides Training/Support Business Expansion

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Franchisee
Pays Up-Front Costs
Makes Monthly Payment to Franchisor Runs Business by Franchisors Rules/Procedures

Buys Materials from Franchisor/ Approved Supplier

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Franchises
Advantages

Management & marketing assistance no problem with advertisement

Personal ownership your store your own boss- get incentives and profit as Sole Proprietor/Sdn Bhd Company Recognized name local or international

Financial advice & assistance - by people with expertise in these areas

Lower failure rate
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Disadvantages High start-up costs a fee for the rights to the franchise cost of renovation, equipment & running the business Shared Profit or commission base on sales to franchisor Management regulation orders, directives and limitation by franchisor Coattail effects eg you could be forced out of business if fellow franchisor at existing outlet fail, due to your existence Restrictions on selling franchisor insist on approving new owner if you want to sell your business. Fraudulent franchisors especially for new and small franchisors
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Franchises

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Cost of Fast-Food Franchise

Company
Burger King McDonalds Wendys Dominos Subway Krispy Kreme

Initial Fee (USD) $50,000

$45,000 $25,000 None $10,000 $40,000

Royalty
8.5% 5% 8% 8.5% 11.5% 5.5%
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MCDonald Malaysia
Cost to open a new restaurant: Initial cost: USD 22,500 franchise fee RM50,000 security deposit

RM200,000-RM250,000 Pre-opening expenses RM1.7-RM2.5 mil kitchen equipment, fittings etc

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How to Avoid a Franchise Lemon!

1. Research officers & their business experience

2. Get summary of any bankruptcy & litigation

3. Estimate all costs to set up franchise 4. Review franchise contract & three most recent financial statements

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Benefits of a Home-Based Franchise

Flexible working hours Quality lifestyle Doing the work of your choice Opportunity to expand using technology Self-motivation
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Franchising & E-Commerce

Technology- Faster Customer Service Access to International Markets

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2) Cooperatives
A group of people form an organization to meet their needs for things. The organization is call a Cooperative Members elect A Board of Directors to manage the Cooperative Must register with Cooperative Commission of Malaysia (Suruhanjaya Koperasi Malaysia ) (SKM) Pay taxes different from Companies
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