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

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.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

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 of Qiamah 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 to pay 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.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

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 1. To do company business, it 1. must be registered with the Registrar of Companies. Partnership Business To do partnership business, the partnership should be registered with some other government

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

department, known as Registrar of Business. 2. After registration a company 2. becomes an artificial legal person. 3. The maximum shareholders 3. By registration, a partnership does not become artificial legal person. In a partnership, the maximum number of partners might be 20.

can be fifty (50) in a private company. 4. To register a company a 4.

To register a partnership there is a simple procedure and it is not expensive. A partnership firm cannot sell shares in the share market. Partners in a partnership firm do not enjoy limited liability. In a partnership firm, the partners are personally and jointly liable to creditors but the partnership organization is not liable.

complex procedure must be followed and it is expensive. 5. A public company can sell 5. shares in the share market. 6. Shareholders in a company can 6. enjoy limited liability. 7. In a company, directors usually 7. are not personally liable for debts to creditors. Only the company is liable. 8. Companies succession. 9. To register a company, it must 9. prepare Memorandum and Article of Association. 10 enjoy perpetual 8.

Partnership

does

not

enjoy

perpetual succession. For Partnership business,

Memorandum and Article of Association not needed. general meeting and

Annual general meeting and 10. Annual

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

statutory

meeting

are

statutory firm.

meeting

are

not

compulsory for a company.

compulsory for a partnership

11 .

Accounts must be filed with 11. No need to file accounts of the Registrar of Companies. partnership to any government office.

12 .

A company must appoint one 12. No need to appoint auditors for or more auditors. partnership business, but it is recommended that a partnership firm can appoint an auditor on part-time basis.

13 .

Board of Directors manages 13. All partners or some of the companys day to day business. partners by agreement may manage the partnership business.

14 .

Companies pay income tax on 14. Partnership firm pay income tax higher rate. 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

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

conducting company business. Business students and company executives will get the following benefits after studying company law. i. ii. iii. They will learn about the legal procedure of incorporating a company. They will learn relevant legal provisions in the Companies Act 1965. 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. viii. They will know how to maintain account books for the company. 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

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

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 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 To call for information; To conduct inspection; To conduct investigation; To call for examination; To compound offences; 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.

DR. MD. ABDUL JALIL, COMPANY LAW, 2013

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.