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DPB3023: COMMERCIAL LAW

CHAPTER 3 LEGAL ASPECTS OF BUSINESS ENTITIES

COURSE LEARNING OUTCOMES


Upon completion of this course, student should be able
to;
Describe sole proprietorship

Describe partnership
Outline separate legal entity of a company

Assessment;
Test 1

INTRODUCTION
Three types of business entities;
Sole proprietorship (also known as Sole Trader)
Partnership business entity
Limited Company (Sdn. Bhd. / Sendirian Berhad / Berhad)

Other types;
Foreign companies
Limited Liability Partnership

INTRODUCTION
Laws that govern business organization;
Sole proprietorships
Partnerships

Business Registration Act 1956

Companies

Companies Act 1965

Limited Liability Partnerships

Limited Liability Partnerships Act 2012

SOLE PROPRIETORSHIP
Owned by 1
person and
must be
Malaysian
citizen
Requires
small amount
of capital to
established

Small and
family based
business

Characteristics
Name of the
owner can
be used as
business
names

No separate
legal
existence

Unlimited
liability

Advantages of Sole Proprietorship

Disadvantages of Sole Proprietorship

Easy to manage because the


owner/proprietor can make decisions by
himself

Limited source of capital that could limit


the business activity

Easy to form and dissolve with minimum


formalities

The liability of the business is unlimited

The owner pays income tax based on his


total individual income

The future development of the business is


limited and depends on the management
capability

All profits will go to the owner

The owner is solely responsible for carrying


out all the tasks

Not subjected much to government rules


and regulations

The life span of the business depends upon


the age of the owner and how efficiently
he manages the business

PARTNERSHIP
Partnership is governed by;
Partnership Act 1961 (Revised 1974)
Business Registration Act 1956 (Amendment 1978)

Definition of Partnership;
Section 3(1) of the Partnership Act defines;

the relation which subsists between persons carrying on business


in common with the view of profit

ELEMENTS OF PARTNERSHIP
Relation
*partnership agreement
is a contract

A Business

Between person

*Section 2 including
every trade, occupation
of profession

*at least 2 or more


persons but not
exceeding 20 persons

Carried on in common
*there must be 1 person
or more carry on the
business for himself and
on behalf of the others

With a view of profit


*the partner carry on
business jointly with a
view of profit is not
enough to make them
partners

TYPES OF PARTNER

General
Active

A partner in the fullest sense

A partner who actively participate in the


management of the business and is known to the
world as a partner

Sleeping

A partner who takes no active part in the


management but is nevertheless liable as a partner

Quasi-Partner

A person who is in fact not a partner but who is


liable for the debts of the partnership consequence
of holding out that causing people to believe he is
a partner

RIGHTS & DUTIES OF PARTNERS


(Section 26, Partnership Act 1961
Sec. 26 (a)

All partners are entitled to share equally in the capital and profits of the business
and must contribute equally to losses whether of capital or otherwise

Sec 26 (b)

The firm must indemnify every partner in respect of payments made and personal
liabilities incurred by him

Sec 26 (c)

A partner is entitled to interest at the rate of 8% per annum from the date of the
payment of the advance.

Sec 26 (d)

No partner is entitled to interest on capital before ascertainment of profit

Sec 26 (e)

Every partner may take part in the management of the business

Sec 26 (f)

No partner is entitled to remuneration for acting in the partnership business

Sec 26 (g)

No person may be introduced as partner without the consent of all existing


partner

Sec 26 (h)

No change may be made in the nature of the partnership business without


consent of all existing members

Sec 26 (i)

All partners have access to and inspect the partnership books. A partner may
employ an accountant to examine the books

FORMATION OF PARTNERSHIP

Form

Numbers of
partners

Can be formed with or without a written agreement

Sec 3 (1) PA 1961 must be a min of 2 partners in a firm


Sec 47 (2) PA 1961 max members is 20
Sec 14 (3) PA 1961 Professional partnership firms are
not subjected to any max limit on number of members

FORMATION OF PARTNERSHIP
Anyone who is legal capacity is capable of entering into a
partnership agreement
Majority Act 1971 18 years old is stated as the age of a major

Capacity

There can be a partnership between a minor and an adult. A


minor could be in a partnership for any duration of time until he
wanted to disaffirm it. Goode v. Harisson (1821) 5B & Ald. 147 at
p.157
A minor cannot incur or be responsible for any contractual
liability for the firms debts
On reaching the age of majority, a minor can discharge himself
from all future debts of the firm by terminating the partnership
Failure to repudiate the agreement will make the minor liable for
the partnership debt. William Jack & Co v. Chan & Yong Trading
Co (1964) 30 M.L.J.105

LIABILITIES OF PARTNERSHIP
Ordinary Tort

Sec 12 PA 1961 the tortious act must be committed by a partner either


in the ordinary course of the business of the firm or with the authority of
his co-partner.
Blyth v Fladyate [1891] 1 Ch 337

Misapplication

Sec 13 PA 1961 every partner is liable jointly and severally for


everything for which the firm, while he is a partner there in, becomes
liable under Sec 12 or Sec 13 abovementioned: Sec 14 PA 1961

Misappropriation

Sec 15 PA 1961 if a partner, acting in his individual capacity,


improperly makes use of trust property in the business of the firm, as a
general rule, his other partners are not liable to the beneficiaries

Contractual
Liability

Sec 11 PA 1961 all partners in a firm are jointly liable for all contractual
and other debts and liabilities, including tax and judgement debts
which are incurred while each is a partner

LIABILITIES OF PARTNERSHIP
Liability of Retired
Partners

After retirement, a partner is still liable to person who deal with the firm
after a charge in its constitution, unless he has given notice to such
person that he is no longer a partner under Sec 38 (1).
Re Siew Inn Steamship Co [1934] MLJ 180

Criminal Liability

Although partner are jointly liable in civil cases, they are not jointly liable
in criminal cases.
Chung Shin Kian & Anor v PP. [1980] 2 MLJ 246

Duration of Liability

Sec 19 (1) PA 1961 - New partner who has just been admitted into a firm
is not liable for debts incurred prior to his admission
Subramaniam Chettiar v Kader Mastan & Co [1934] MLJ 74

Liability of Persons
for Holding Out

Sec 16 PA 1961 persons may be liable by holding out.


William Jacks & Co (Malaya) v Chan & Yong Trading Co

DISSOLUTION OF PARTNERSHIP

Partnership
may be
dissolved by:

Without court
order
With court
order

DISSOLUTION OF PARTNERSHIP
(without court order)

Dissolution
by
agreement

If duration of the partnership has been specified in the


partnership agreement, the partnership is terminated on the
expiry of that period

If the partners mutually agree to dissolve the partnership


Sec 34 (1) (a) if the partnership was entered into for a fixed term
and the term expires

Dissolution
by operation
law

Sec 34 (1) (b) if the partnership was entered into for a single
adventure or undertaking, and that adventure or undertaking
terminates
Sec 34 (1) (c) if the partnership was entered into for an
undefined time, by any partner giving notice to the other partner
of his intention to terminate the partnership

DISSOLUTION OF PARTNERSHIP
(without court order)

By death,
bankruptcy
or charge

By illegality
of
partnership

Sec 35 subject to any agreement between the


partners, every partnership is dissolved as regards
all the partners by the death or bankruptcy of any
partner

Sec 36 a partnership is in every case dissolved by


the occurrence of any event which makes it
unlawful for the business of the firm to be carried
on or for the members of the firm to carry it on in
partnership

DISSOLUTION OF PARTNERSHIP
Sec 37 (a) - Insanity of a partner
Sec 37 (b) Permanent incapacity of any partner to
perform his duties

With court
order

Sec 37 (c) a partner has been guilty of such conduct as


in the opinion of the court is calculated to prejudicially
affect the carrying on the business
A partner willfully or persistently commits a breach of the
partnership agreement
When the business of the partnership can only be carried
on at a loss
In any circumstances have arisen which, in the opinion of
the court, render it is just and equitable to dissolve the
partnership

COMPANY
Companies Act 1965 regulate companies in Malaysia
Companies Regulations 1966 form the core in the regulation of a
companies

The act is modeled on the English Companies Act 1948 and the
Australian Uniform Companies Act 1961

COMPANY

Definition:
Sec 4 (1) CA 1965
defines Company as a
company incorporated
pursuant to the
Companies Act

COMPANY AS A SEPARATE LEGAL


ENTITY
A company is a separate legal entity as distinct from its members,
therefore it is separate at law from its shareholders , directors ,
promoters etc and as such is conferred with rights and is subject to
certain duties and obligations.
It has a distinct personality from whomever in the company,
including the members and its controllers.
It has its own rights and powers, which may be enforced and
exercised.

COMPANY AS A SEPARATE LEGAL


ENTITY
Case: SALOMON V. SALOMON & CO LTD [1897] AC 22
Facts: Salomon carried on business as a sole trader for 30 years, and his
total assets were in excess of his liabilities. He registered a co, S Ltd and
transferred his business assets into the co. Salomon took one share in the co
and his wife and family took the other six (though holding them as nominee
in a trust for S). When the co. got into financial difficulties, Salomon lent
money to the co on a secured debenture (loan certificate). When the co
went into liquidation, creditors argued that Salomon could not recover the
loan because he really was the co and the seven members were not
independent of the registered co.
Held: the co has a legal existence separate from the members so S could
be a creditor of the co with the priority rights as a consequence of the
debenture.

COMPANY AS A SEPARATE LEGAL


ENTITY
Case: SALOMON V. SALOMON & CO LTD [1897] AC 22
Notes: Accordingly, while organizationally and operationally the
business was managed solely by Salomon, in law he and the
company were separate persons.
This separateness is an incident of the incorporation of a company,
even if one person effectively owns and controls it.

COMPANY AS A SEPARATE LEGAL


ENTITY
The Company is Capable of Suing and Being Sued in Its Own Name.
It may enforce rights by suing and conversely it may incur
liabilities and be sued by others.
Requires the company itself to be the person enforcing its rights.

COMPANY AS A SEPARATE LEGAL


ENTITY
The Company has Perpetual Succession
A company is immortal; does not exist for a specified period of
time.

It does not die but continues to exist until its name is struck off by
the registrar of company.
Case: RE NOEL TEDMAN HOLDINGS PTY LTD
In this case, both the shareholders and directors were died in a traffic
accident, but however, the company still existed

COMPANY AS A SEPARATE LEGAL


ENTITY
The Company Has Power to Acquire, Hold and Dispose of Property
The property of the co is its own, not that of the members.
Case: MACAURA V. NORTHERN ASSURANCE CO LTD
The owner of a timber estate sold all the timber to a company which
was owned almost solely by him. He was the company's largest
creditor. He insured the timber against fire, but in his own name. After
the timber was destroyed by fire the insurance company refused the
claim.
The House of Lords held that in order to have an insurable interest in
property a person must have a legal or equitable interest in that
property. The claim failed as the corporator even if he holds all the
shares is not the corporation neither he nor any creditor of the
company has any property legal or equitable in the assets of the
corporation. (per Lord Wrenbury, at pg 633).

COMPANY AS A SEPARATE LEGAL


ENTITY
The Liability of the Members May Be Limited
If a company has incurred obligation it is primarily liable because
its debts are separate from the debts of its members.
The members of the company cannot be sued for the debts of
the company.
Only when the company has insufficient assets to pay its debt
that members may be liable. The most a member can be lose is
the amount that he has paid for his shares @ assets he has
guaranteed.

PRIVATE LIMITED COMPANY


Introduction
A private limited company is one of the business entities set up
under the Companies Act 1965.
As a corporate body, it has characteristics that differentiate it
from a sole proprietorship and partnership. This is because a
private limited company is a legal entity and its identity is
separate from the identity of the companys members.
The registration of a private limited company must use the
services of a company secretary. The company secretary will
then forward the form together with relevant documents to the
Companies Commission of Malaysia in the state in which the
operation will take place.

PRIVATE LIMITED COMPANY


Right and
Responsibility

Membership

Characteristics

Liabilities

Life Span

CHARACTERISTICS OF PRIVATE LIMITED


COMPANY
Right and
Responsibility

A company has a specific right and responsibility. It can acquire assets under its own name.
A company can also take legal action and face legal action under its own name.

Life Span

The life span of a company is not dependent upon the death or resignation of its members.
A company can be dissolved when its members are no longer interested in continuing the
business.

Liabilities

The liabilities of the members in a company are limited to the total shares contributed to the
companys capital. Personal assets are not affected regardless of what happens to the
company.

Membership

A company must have at least two members who are of Malaysian nationality. These two
members can act as a director and founder of the company.
The members of the company will appoint the Board of Directors who will manage and run
the business operation subject to the Companies Act 1965

TERMS & CONDITIONS OF PRIVATE


LIMITED COMPANY
The number of members does not exceed 50 people;
It has specific authority to transfer ownership of members shares with
the approval of the companys Board of Directors;
A company is not allowed to offer or sell any share or debenture to
the general public;
A company is not allowed to offer the general public to deposit
money within a stipulated time frame; and
A company must use the word Sdn. Bhd. or Sendirian Berhad at
the end of its name.

Advantages of Private Ltd. Co

Disadvantages of Private Ltd. Co

Funds are easy to acquire through the


exchange of share ownership or loan from a
financial institution.

A Private Limited Company is subject to more


rules and regulations compared with a Sole
Proprietorship or Partnership. A company must
always abide by the rules and fulfil the terms set
by the Companies Commission of Malaysia.

All shareholders are legally protected by law.

The companys shares cannot be transacted


through the share market.

Shareholders are not burdened with the


management of the business because the
responsibility to manage and run the business is
held by the Board of Directors, who are
appointed by the companys shareholders.

The company must pay corporate tax.

The liabilities of the companys members are


limited to the capital that they contribute to the
company. Shareholders personal assets are not
affected.

The qualified Auditors must audit the companys


yearly financial statement and the statement
must be complete and regularly updated.

The life span of the business is not dependent


upon the age or resignation of its members.

The financial affairs of the company must be


made transparent to the general

It has greater potential for expansion.

The cost of setting up a company is high

THE DIFFERENCES BETWEEN SOLE-PROPRIETORSHIP,


PARTNERSHIP & COMPANY
Notes page 15

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