FORMATION & CLASSIFICATION OF ORGANISATIONS Introduction to Business

FORMATION & CLASSIFICATION OF ORGANISATIONS Introduction to Business BM004-4-0-ITB

Learning Outcomes Distinguish the different forms of business ownership To describe the advantages and disadvantages of each business form

TWO TYPES OF OWNERSHIP PRIVATE Own by individuals Registered with Registrar of Business PUBLIC Own by the Government

PRIVATE SECTOR UNINCORPORATED BUSINESS SOLE PROPRIETORSHIP PARTNERSHIP

SOLE PROPRIETORSHIP The only owner Unlimited liability Associated with small businesses e.g. Barber shop, grocery store, launderette, food stall Characteristics: For more information, please refer to the following links: http://www.readycompanies.com/SoleProprietor.htm (brief explanations) http://www.lawyerment.com.my/library/doc/biz/slprsp/ (detail procedures)

SOLE PROPRIETORSHIP (continued) Easiest to form Least legal requirements Simple to manage Incentives are maximized (i.e. profits solely enjoyed) Retained flexibility Advantages:

SOLE PROPRIETORSHIP (continued) Limited capital, skill & available resources Unlimited liability for debts Lack of continuity (expansion) Working hours and conditions Disadvantages:

PARTNERSHIP Two or more person become associates of a business (partners) Not more than 20 persons Partnership Act 1890 Registered with Registrar of Business Articles of Partnership (legal written agreement) 1. Characteristics : For more info, please click the following link: http://www.lawyerment.com.my/library/doc/biz/prtnsp/

PARTNERSHIP (continued) 2. Characteristics : Unlimited liability Limited partners cannot take part in running of business New partners can replace withdrawn or retired partner Partnership dissolved by death, mutual agreement or court orders Common among small enterprises e.g. family businesses & professional services (lawyers, doctors, engineers)

ARTICLES OF PARTNERSHIP Strictly private agreement between the partners and not open to public The initial capital to invest Ratio of profit/loses shared Division of managerial responsibilities Salaries to be paid among partners Duration of partnership Terms for its dissolution (Breakup)

PARTNERSHIP (continued) Pooling of capital & expertise Lack of legal requirements Simple to form & manage More efficient to manage Advantages :

PARTNERSHIP (continued) Disadvantages : Unlimited liability Decision making is not easy Business continuity is not ensured Limited expansion Share of control Profit sharing

Video – Sole proprietorship & Partnership http://www.youtube.com/watch?v=S51EQS9ykqQ

PRIVATE SECTOR 2. INCORPORATED BUSINESS also known as a COMPANY Characteristics: Formation, operation and dissolution of company are governed by the Companies’ Act Exclude public authority or agency, sole corporation, cooperative society and trade unions Limited liability, commonly by shares More available capital Ownership through issues of share certificates Incorporate through Memorandum of Association, Article of Association and other legal documents

PRIVATE SECTOR (continued) 2. INCORPORATED BUSINESS Memorandum of Association Contents: Name of the company Company’s objectives / principal activities Company’s registered office address Stated liability of shareholders Amount of capital Nominal & Authorized Capital Name & address of each subscriber & the division of shares

PRIVATE SECTOR (continued) 2. INCORPORATED BUSINESS Articles of Association Regulates internal affairs Contents: The right of shareholders Transfer of shares Procedures at meetings Powers & duties of directors The keeping of accounts Declaration of dividends & reserves

PRIVATE SECTOR (continued) 2. INCORPORATED BUSINESS TWO TYPES OF COMPANY: PRIVATE LIMITED COMPANY PUBLIC LIMITED COMPANY For detailed explanations on the two type of companies and on actual procedures, please click the following link: http://www.lawyerment.com.my/library/doc/biz/corp/

PRIVATE LIMITED COMPANY Limited to maximum of 50 shareholders Minimum two directors without retirement age Must have word “Sdn. Bhd.” on its name Cannot offer shares for sale to the public (no common shares) Restricted rights to transfer its shares Characteristics :

PRIVATE LIMITED COMPANY (continued) Limited liability Easier acquisition of new shareholders. More responsibilities in controlling operations & decision making Selling shares privately Double Taxation. Advantages : Disadvantages :

Double taxation occurs because corporations are considered separate legal entities from their shareholders. As such, corporations pay taxes on their annual earnings, just as individuals do. Double taxation:

PUBLIC LIMITED COMPANY At least 7 shareholders but larger numbers of investors Minimum two directors with retirement age at 70 Can invite public to subscribe capital via prospectus Freely trade shares through the Stock Exchange (Bursa Malaysia) for listed companies. Characteristics :

PUBLIC LIMITED COMPANY (continued) Easy transferring of shares (portion of ownership) Limited Liability. Too many shareholders Less control on the business Double Taxation. Advantages : Disadvantages :

Franchise agreement- An arrangement whereby someone (franchisor) with a good idea for a business, sell the rights to use the business name & to sell a product or services (franchise) to others (the franchisee) in a given location. Franchise

Franchise 1. Franchise a license to sell another’s product and to use another’s name in business or both. 2. Franchisor a company that sells a franchise. 3. Franchisee a person who buys a franchise.

Advantages: Management and marketing assistance: Personal ownership (your own business) Nationally recognised name & reputation. Financial assistance & advice Lower failure rate. Franchise

Franchise Disadvantages: High start-up cost and franchise fee. Additional fees may be charged for mkt. Share profit from gross sales. Little freedom on management procedure. 5) Restriction on selling. 6) Possible fraudulent

Franchise Websites : http://www.mfa.org.my/ http://www.mcdonalds.com.my/

Key Terms you must be able to use If you have mastered this topic, you should be able to use the following terms correctly in your assignments and exams: SOLE PROPRIETORSHIP PARTNERSHIP PRIVATE COMPANY PUBLIC COMPANY FRANCHISES

Q & A Question and Answer Session

http://www.youtube.com/watch?v=pPVkG9kr OMI