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KKKF 4134 – ENGINEERINGMANAGEMENT

1A- Choosing a Form of Business

Ownership

1B- Entrepreneurship1C - Starting a Business

By Ir Ishak Arshad19 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 StudyGroup – Pearson Prentice Hall



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5-

Business in Malaysia can be

registered under one of the following

Acts

Source: US Internal Revenue Service

1) Business Registration Act 1956 (Amendment 1978) and

Procedures of Business Registration 1957:

• Sole Proprietorship

• Partnership2) 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



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5-

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

http://www.ssm.com.my/

http://www.ssm.com.my/



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5-5

Types of Ownerships

(in USA)


Type of Ownership Number Sales

Sole Proprietorship 72% 6%

Partnership 8% 13%

Corporation 20% 81%



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5-6

Types of Ownerships

(in Malaysia)


Type of Ownership Number Sales

Sole Proprietorship % %

Partnership % %

Corporation % %



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5-7

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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5-8

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 don’t

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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5-9

Sole ProprietorshipDisadvantages:

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 growthLimited 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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5-

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 businessand jointly own the business

Partners share the capital, profits & losses



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5-11

Partnership Advantages:•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 forbetter management

• Longer survival

• No Special Taxes. As in SP income tax is notimposed on the partnership but on the ownersas individual

• Equity can be increased through enlistingadditional partners



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5-12

Partnership

Disadvantages:• Unlimited liability – liability may involve personal assets of all

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 anagreement 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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5-

REGISTRATION OF SP AND PS


• A SP can be registered with the Business Division of the

Companies Commission of Malaysia (SSM,SuruhanjayaSyarikat 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



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5-

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



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5-15

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 StockExchange

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 Company’s Secretary

• SSM approval on the use of the proposed name



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5-16


Private Limited Company – continue….

• Companies Act 1965

• Has legal entity• Liability of members is limited by shares (Creditors

are not entitled to take a member’s personal assetsin satisfaction of company’s liabilities)

• It’s identity is separate from the companiesmembers



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5-17

Private Ltd Companies

• Limited liability – limited to the capital, shareholders’ personal assets are not affected –all share holders are legallyprotected by law

• More money for investment – funds are easy to acquire thruexchange 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

company’s share holders

Advantages



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5-18

Private Ltd Companies

• Extensive paperwork – more rules & regulations by theCompanies Commission of Malaysia (SSM)

• Must pay corporate tax• The qualified Auditors must audit the company’s yearly

financial statement and the statement must be complete andregularly updated

• Termination difficult -

• The Company’s share cannot be transacted thru share market

• The cost of setting up a company is high – paid up capital – professional fee (company’s secretary & auditors), filing fee,printing the MOA and Articles of Association, sharecertificates & company’s seal.

• Possible conflict with Board of Directors

Disadvantages



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5-19


Private Company

• Documents required to form a company are mainlysimilar to the private company

*



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5-20

The Difference Private-Public

Companies

Private Public

a) Name of company

End with ‘Sdn Bhd’ End with ‘Bhd’

b) Commencement

of business

As soon as they

incorporated

After the issue of the

Certificate for Commencement of business

c) Statutorymeeting

Doesn’t apply Must hold a StatutoryMeeting & lodge a report

with SSMd) Issue of share No prospectus Must issue prospectus

e) Age limit No age limit Director must retire at 70

f) Removal of Director

As in Article of Association

By ordinary resolution

*



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5-21

World’s Largest

Corporations1. Citigroup

2. General Electric

3. American Intl Group

4. Bank of America

5. HSBC Group

6. ExxonMobil

7. Royal Dutch/Shell

8. BP9. ING Group

10. Toyota Motor

11.UBS

12.Wal-Mart Stores

13.Royal Bank of Scotland

14.JP Morgan Chase15.Berkshire Hathaway

16.BNP Paribas

17.IBM

18.Total

18.Verizon Communication

20.Chevron Texaco

Source: Forbes, 2005

*



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5-22

America’s Largest

Private Companies

1. Cargill / agricultural commodities, food $66,669

2. Koch Industries / chemicals, energy, tech 60,000

3. Mars / candy, pet food electronics 19,100

4. PricewaterhouseCoopers / accounting 18,700

5. Publix Supermarket / supermarkets 18,686

Revenue 2004

(In Millions)

Source: Forbes, 2005

*



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5-23

America’s Oldest

Companies

Company Year Started Type of Company

J. E. Rhoads & Sons 1702 Conveyer Belts

Covenant Life Ins. 1717 Insurance

Philadelphia 1752 InsuranceContributorship

Dexter 1767 Adhesives & Coatings

D. Landreth Seed 1784 SeedsBank of New York 1784 Banking

*



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5-24

How Owners Affect

Management

*



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5-25

Limited Liability Companies

• Limited Liability

• Tax Choice• Flexible Ownership

Rules

• Flexible Profit &Loss Distribution

• Operating Flexibility

• Limited Life Span?

• Fewer Incentives

• Taxes

• Paperwork

Advantages Disadvantages

*



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5-26

Special Forms of Business

Ownership

1. Franchises2. Cooperatives

*



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5-27

1) Franchise System

• Franchisor – sell the right to use thebusiness names to sell product or

service to Franchisee

• Franchise Agreement – the agreement

between Franchisor and Franchisee

• Examples: McDonald’s, Baskin-Robin,Seven-Eleven, Piza Hut, A&W

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5-28

Franchise Contract

Franchisor, Inc.

Franchisee

BrandedProduct/Service

Performance

Monitoring

$$$$$

*



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5-29

Franchisor

• Assigns Territory

• May Provide

Financial Aid/Advice

• Offers Merchandise/Supplies atCompetitive Price

• ProvidesTraining/Support

• BusinessExpansion

*



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5-30

Franchisee

• Pays Up-Front Costs

• Makes Monthly Payment to

Franchisor • Runs Business by Franchisor’s

Rules/Procedures

• Buys Materials from Franchisor/Approved Supplier

*



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5-31

Franchises

• Management & marketing assistance – no problem with

advertisement

• Personal ownership – your store – your own boss- getincentives 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

Advantages

*



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5-32

Franchises• 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

Disadvantages

*



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5-33

Cost of Fast-Food

Franchise

Company Initial Fee(USD)

Royalty

Burger King $50,000 8.5%

McDonald’s $45,000 5%

Wendy’s $25,000 8%

Domino’s None 8.5%Subway $10,000 11.5%

Krispy Kreme $40,000 5.5%

*



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5-34

MCDonald MalaysiaCost 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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5-35

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 upfranchise

4. Review franchise contract & threemost recent financial statements

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5-36

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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5-37

Franchising & E-Commerce

• Technology- Faster Customer Service

• Access to InternationalMarkets

*



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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