CHAPTER

ON
LEGAL ASPECTS OF
BUSINESS ORGANISATION
PREPARED BY:
IZYAN FARHANA ZULKARNAIN
UITM SAMARAHAN II

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 BUSINESS
ORGANISATION

1. Sole
2. Partnership 3. Company
Proprietorship

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 1. SOLE
PROPRIETORSHIP

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NATURE OF SOLE PROPRIETORSHIP:
• A business structure wholly owned by one person
• It has no separate legal entity from the person who conduct the
business
• No special legal documents required for its creation
• It must be registered with the Registrar of Business under Registration
of Businesses Act 1956

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• Limit on size: 1 Person
• Management and Ownership
✓Sole proprietor is the only boss
✓No need to report to the Board of Directors or Shareholders or to
Partners
✓ Easy to make decision
✓ Easy to run the business
• Formalities
✓ Easy to set up
✓ The simplest form of business organization with minimal requirement
• Property
✓Business property is owned by the sole proprietorship
• Transfer of interest or shares
✓ Easily transferred to another person

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• Liability for debt
✓Unlimited liabilities
✓Owner is responsible for all debts of the business
✓Liable to pay debts, to the extent of his assets
• Legal rights and legal actions
✓A sole proprietor can sue and be sued in his own name
• Disclosure of accounts and other documentation
✓Public disclosure of accounts is not required
✓Business affairs can be kept private
• Capital and raising of capital
✓Main source of funds is usually the savings
✓Can raise capital by way of loans and by utilizing properties

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• Audit
✓Do not have to audit the account
✓Proper account book must be maintained
• Income tax
✓Has to maintain an account books and to render accounts
✓Has to submit income tax returns
• Duration and dissolution
✓Once the owners dies, the business ceased

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Law of partnership is governed by the Partnership Act 1961

Section 3 (1) – Partnership refers to the relationship which

subsists between persons carrying on business in common with
a view of profit

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 Characteristics:
a) There must be more than one (1) person to constitute a partnership
✓Minimum number: 2 Partners
✓Partnerships are limited to 20 persons (Section 47 (2) of
Partnership Act 1961)
✓Some professional partnerships are allowed to have a greater
number: Section 14 (3)(a) and (d) of the Companies Act 2016

Tan Teck Hee v Cheng Tian Peng [1915] 2 FMSLR 161

 Court: It was declared that a firm with 25 Person could not take a legal
action in court, as it was not a valid partnership

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b) The parties who wish to form a partnership must have agreed (either
expressly or impliedly) to carry on business in common:

✓ Section 2 – Business includes every trade, occupation or profession

✓ The term “business” refer to commercial or professional undertaking
that are carried on in usual commercial sense
✓ The words “…carry on a business” implies that the business must be
exist. No partnership can be construed where persons concerned were
merely preparing to carry on business

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Gulazam v Noorzaman and Sobtah
(1957) 23 MLJ 45

Facts: Both parties made an agreement to

form a partnership to purchase, breed and
sell cattle. The defendant looked after the
cattle and sell them. Later, the plaintiff
asked for the account from the
defendants. However, the defendants have
no account to be disclosed. Plaintiff sued
for the account to be rendered and for the
defendant to pay any sum due to him

Held: Partnership exist because of the

existence of the business. Therefore, the
plaintiff should succeed in his claim

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 Keith Spicer Ltd v Mansell (1970) 1 WLR 33

• Facts: Mansell and Bishop decided to open up restaurant. The restaurant had
not yet operated. Bishop ordered goods from the plaintiff for the restaurant but
did not pay for the goods

• The plaintiff sued Mansell for the unpaid goods stating that Mansell should be
responsible for the conduct of Bishop because partnership exists between them

• Held: There was no evidence that partnership existed because business has not
yet started. The plaintiff failed in his claim

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c) Parties agreed to carry on business for profit

• Effect: Each partner is an agent or a principal

for the business. Therefore, if A and B form a
partnership, both are the agents and
principals for their partnership business

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 Cox v Coulson (1916) 2 KB 177

• Facts: Coulson agreed to provide his theatre for One Mills

Production. Under the agreement, Coulson was to receive 60% of
the gross taking while Mill receive only 40%. During the play, the
plaintiff was shot by the other actor. She sought to make Coulson
liable because she thought that Coulson and Mill were partners

• Held: They were not partners because they were not sharing
profits but sharing gross returns

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Partners pool their capital and work together in business
Associations and charitable organizations cannot be partnerships
Not a legal entity separate from its members
Partnership must be registered
Relationship among partners is governed by the Partnership Act 1961
and partnership agreement
Partnership Act 1961 refers the partners as a “firm”

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✓ Types of Partners:

a) General Partner - Partner in fullest sense

b) Active Partner – A person who is actively participates in the
management of the business
c) Dormant or Sleeping Partner - A partner who takes no active part
in the management but is liable for the debt
d) Quasi Partner - A person who is not a partner but will be liable for
debts of partnership as a consequence of ‘holding out’ - i.e. Causing
people to believe he is a partner

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• Management and ownership:
✓All partners take part in management of partnership business
✓Partners may appoint one of them as managing partner

• Formalities:
✓The legalities required to set up a partnership are minimal
✓It can be formed with or without a written agreement. A partnership is easier
to form than a company
✓Anyone who has legal capacity is capable of entering into a partnership
agreement
✓It is advisable to have formal partnership agreement drawn up by solicitor
✓The agreement should state the responsibilities of each partner, procedures for
dealing with disputes between partners

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• Property:
➢ Partnership property is owned by all partners collectively
➢ Each partner has an interest in the assets of partnership

• Transfer of interest or shares:

➢A partner can assign his share in the partnership
➢Consent of all other partners is needed before he can assign his share
➢Retiring partners remain liable for debts of the partnership incurred while
they were partners, unless the creditors agree to release them

• Liability on debts:
➢Unlimited liabilities
➢Each partner is personally liable for debts of the partnership
➢Each partner is liable to use their private resources to settle the firm’s debt
➢Partners cannot limit their liability to creditors of the partnership

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• Relationship between Partners and 3rd Party:

✓Partners are agent of the partnership firm, therefore any act or omission
committed by one partner binds the rest of the partners if it is carried out within the
ordinary scope of the firm’s business

✓Section 7 - “Every partner is an agent of the firm and his other partners for the
purpose of the business of the partnership…unless the partner so acting has in fact
no authority to act for the firm in the particular matter and the person with whom
he is dealing either knows that he has no authority or does not know or believe him
to be a partner”

✓In order for a 3rd Party to hold the partnership liable, the following conditions
must be met:
• The act must be done for the purpose of partnership business;
• The act is done in the ordinary course of the business;
• Act must be done by a partner of the firm in his capacity as partner and not in
his own personal capacity

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 Chan King Yue v Lee & Wong [1962] MLJ 379

• Facts: Plaintiff’s husband borrowed money from her for RM35,000.00 as a

loan to the firm in which he was a partner. The money was paid into the
partnership account and was utilized by the firm to pay off some of its
debt. Plaintiff filed an action to recover the loan. The other partner of the
firm contended that the plaintiff’s husband was not authorized by the firm
to borrow money
• Held: The borrowing was an act necessary for the carrying on of the
business of the partnership

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• Section 8 – Partners are bound by the acts on behalf of the firm
• In Hock Hin Chan v Ng Kee Woo [1966] 1 MLJ 223, the court held
that since one of the partners has apparent authority to issue a bill of
sale on behalf of the firm, all other partners are bound by his act

• Section 9 – If a partner is using credit of the firm for a purpose not

connected with the firm’s ordinary business, the firm is not bound
unless the act is specially authorised by other partners

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• Legal rights and legal actions:
✓Partnership can sue and be sued in its firm name
✓A partner is able to bring an action enforcing rights of the partnership in
the name of all partners
✓Creditors can sue the firm itself or sue any one of the partners for the
firm’s debt
• Disclosure of accounts and other documentation:
✓No need to publish or disclose any financial records
✓The accounts should be maintained

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• Capital and raising of capital:
✓Section 26 – All partners are entitled to share equally in the capital and
profits of the business and must contribute equally to the losses whether of
capital or otherwise
✓Capital contributed by partners can be in cash or non-cash form of capital
✓Land and building will be valued and credited as capital
✓A partnership may raise capital by the partners contributing further
capital or making loans

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• Audit:
✓No need to appoint an auditor unless there is a specific legislation to that
effect
✓Example: A partnership of solicitors who conduct a trust account for their
clients must have their accounts audited

• Income Tax:
✓Each partner is individually assessed to tax on his share of the partnership
profit
✓Individual partners submit their income tax returns individually

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• Rights and duties of Partners (in the absence of agreement):

a) All partners are entitled to share equally in the capital and profits of the business
and must contribute equally to losses;
b) The firm must indemnify every partner in respect of payments made and personal
liabilities incurred by him;
c) A partner is entitled to 8% interest per annum if he make any advance or payment
beyond the amount of capital which he agreed to subscribe;
d) No partner is entitled to interest on capital before the ascertainment of profits;
e) Every partner may take part in the management of the business;
f) No partner is entitled to remuneration for acting in the partnership business;
g) No person may be introduced as a partner without the consent of all existing
partners;
h) Any differences connected with the partnership business may be decided by a
majority of the partnership, but no change may be made in the nature of the
partnership business without the consent of all existing partners;
i) The partnership books are to be kept at the place of business of the partnership or
the principal place if there is more than one place of business

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• Duration of Partnership:

✓A partnership may exist for a fixed period and its comes to an end at the
expiry of the period

✓Partners may agree to renew the partnership for another fixed period

✓A partnership for an indefinite duration will continue until dissolves

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• Dissolution of partnership may occur in the following ways:

a) By agreement – Mutual consent or expiry of the term agreed upon in the

partnership agreement – Section 34
b) By death or bankruptcy of a partner – Section 35 (1)
c) By illegality of partnership – Upon the happening of an event which
makes it unlawful for the business of the firm to be carried on – Section
36

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d) By court order – Section 37
A partnership may be dissolved by a court order on the application of
partner in the following situations:

➢ Insanity of a partner
➢ Permanent incapacity of a partner other than the applicant
➢ Conduct of the partner prejudicially affected the carrying on of the
partnership business
➢ Breach of partnership agreement
➢ When the business of partnership can only be carried on at a loss
➢ When it is just and equitable, in the opinion of court to dissolve the
partnership.

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• Advantages of a partnership:

1) Easy and cheap to set up

2) No requirement for registration
3) All partners may take part in management of the firm
4) Capital financing by partners’ contribution
5) Sharing of profit and losses
6) No requirement for mandatory reporting or lodging of documents with
the authority

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• Disadvantages of partnership:
1) Limited membership – Maximum of 20 for ordinary partnership
2) Liability of partners are not limited
3) Automatic dissolution by operation of law
4) Decision requires consensus of the partners
5) Partners’ act may bind the firm

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 What is a
company?

A company is an
artificial person created by law.
A company exists
independently of the
individuals who at any given
time are the members of the
corporate body

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• Law applicable is the Companies Act 1965
• Limit on size:
✓Minimum number of members – 2 Persons
✓Public limited company – No Limit
✓Private limited company – Maximum of 50 Members

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• Registration of A Company:
✓The most important document that must be lodged is the
Memorandum of Association (Company’s Constitution) - Section
16 (1)
✓It contains the company’s name, its objects, the amount of its
share capital and whether the company is limited or unlimited
either by shares or guarantee
✓First directors must be named in the MOA and Articles of
Association – Section 122 (3) & 16 (7)
✓MOA must be signed by persons called the ‘Subscribers’ (usually
the Promoters) in the presence of witnesses – Section 181 (2)

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✓If the company has share capital, the subscriber must agree to take
at least one share each. They will be the first members of the
company

✓Also contain an incorporation clause stating that the subscribers

are desirous of being formed into a company – Section 18 (1) (h)

✓Upon registration of the MOA, the Registrar will issue a

Certificate of Incorporation, certifying that the company is
incorporated from the date specified. [Section 16 (4)]. This
Certificate of Incorporation is the company’s birth certificate

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 Management and Ownership:
✓ The policy of the Companies Act 1965 is to separate the
management and ownership of the company
✓ Must appoint directors, whose task is to manage the company
✓ Must have at least 2 Directors at all times
✓ Power of the directors are set out in the Articles of Association
(AOA)
✓ Wide powers of management are conferred on them
✓ Retirement and removal of the directors does not affect the
company’s continuance
✓ Members do not have the power to participate in management of
the company
✓ Directors are accountable to shareholder
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• Formalities:
✓A prescribed procedures must be followed for the incorporation of a
company and it involves expenses
✓During the existence of a company, formalities related to keeping of
accounts, register and minutes must be complied with
✓An approved auditor or auditing firm must be appointed for the purpose of
reporting to the shareholders on the accounts of the company
• Transfer of interest or shares:
✓ The shares are freely transferable
✓ The company may impose restrictions on the transfer of its shares in its
memorandum of articles
✓ Example: Shares can be transferred at the discretion of the Board of
Directors or offer the company shareholders the first option to buy shares
✓ If the shareholders dies, his shares may be pass on to his beneficiary
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• Liability for debt:
✓The company members are not responsible for the debts of the company
✓The liability of members of a company depends on the type of company:
➢Companies limited by share – Public limited companies and private
limited companies
➢Companies limited by guarantee
➢Unlimited companies
✓Common type of companies is companies limited by shares and the
liability of members is limited to the amount, if any, unpaid on the shares
✓As for the unlimited companies, members are fully liable

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• Legal rights and legal actions:
✓The right of a company can only be enforced by the company itself
✓Company may sue or be sued by its own member
✓Company can sue anyone of its shareholders who owes the money to the
company
• Disclosure of accounts and other documentations:
✓Act requires a company to file copies of its balance sheet, profit and loss
account and other documents with the Registrar
✓This information is available for inspection by anyone paying the
appropriate search fee

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 Capital and raising of capital:
✓A company is able to raise funds
✓A company is able to borrow money, raise funds by the issue of shares and
debentures
✓Act regulates the raising of funds from the public
✓Section 38 – Prohibits a company from offering to the public for
subscription of shares or debentures and the deposit of money, unless they
are accompanied by a registered prospectus
✓A company is able to raise funds by issue of debentures secured by a
floating charge over assets

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 Audit:
✓All companies are required to appoint an independent auditor
 Income tax:
✓Section 108 of the Income Tax 1967 – Every company resident in Malaysia
is required to deduct income tax at the prevailing rate from any dividend
paid to any shareholders
 Duration and dissolution:
✓A company has continued existence and is not affected by the death or
incapacity of one or more of its members
✓Members may come and go but the existence of the company is unaffected

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• Company as A Body Corporate:
✓Once it is formally registered, the law shall regard the company to be of a
body corporate – Section 16 (5)
✓The registered company is now a corporate personality
✓A fundamental concept of corporate personality is that the corporation is
in law a separate legal entity distinct from its members and controllers
✓The case that established the concept of separate legal entity is Salomon
v Salomon & Co. Ltd (1897) AC 22

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 Salomon v Salomon & Co. Ltd (1897) AC 22

• Salomon ran a boot manufacturing business as a sole trader. After the business was
established, Salomon incorporated a company in which he and members of his family
were the only shareholders, and he sold the business to the company

• The company paid Salomon a part of the purchase price for the business immediately
and agreed to pay the remainder overtime. In order to secure its obligation to pay, the
company gave Salomon security over its asset in the form of a company charge

• The company faced difficulties and Salomon unable to save the company. The company
went into liquidation, and it did not have enough assets to pay off certain creditors
including Salomon himself. Creditors sued Salomon

• Held: The company once incorporated was an entirely separate legal person from
Salomon himself and therefore, he was not liable to indemnify the company against the
creditor’s claims; that there had been no fraud committed on the creditors or
shareholders and that the company was not entitled to rescind the original purchase
agreement

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Salomon’s Principle: A company exists independently and separate
from its members

• Effect of incorporation of a company under Section 16 (5):

a)Company has a separate legal personality distinct from the person
managing the company;
b)Company may sue and be sued in its own name;
c)Company has perpetual succession
d)Company has ability to own property
e)Liability of the members may be limited

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 a. Separate Legal Personality

• The law treats a company as being a separate person from its members
and those who manage its operation. It is an artificial legal person

• When a company incurs a contractual obligation or a liability, that

obligation or liability is the company’s and not an obligation or liability
of its members or officers

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 Lee v Lee’s Air Farming Ltd [1960] UKPC 33

• A formed a company and managed the company.

A owned 99% shares in the company. Later, A
was killed while flying for the company. A’s wife
made a claim under a workmen compensation
scheme
• Court: A registered company was a separate legal
entity distinct from its founder, A. The company
could enter into a contract of employment with
A. A was therefore a worker for the purpose of the
Workers Compensation Act 1922. Therefore, A’s
wife was entitled to the claim

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 b. A Company Can Sue and Be Sued in Its Own Name

• Since a company is a separate legal entity, it follows that it may

enforce rights by suing. It can also incur liabilities and be sued by
other parties in respect of the liability so incurred
• Reason: The liabilities are not the liabilities of the members but of
the company
Foss v Harbottle (1843) 2 HARE 461, 67 ER 189
• Directors of a company misapplied property belonging to the
company. 2 shareholders took an action on behalf of the company
• Court: Since the company suffered injury, it alone could take action
against the persons who had misapplied its property, not other
people

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 c. A Company has Perpetual Succession

• The company is a continuing entity in law with its own identity regardless of changes
in its membership

• The company continues in existence until it is deregistered under the statutory

procedure set out in the Companies Act 1965

Re Noel Tedman Holdings Pty Ltd [1967] QDR 561

• The company had only two shareholders, a husband and a wife. Both died in a car
accident leaving behind an infant. The court held that even though all the directors
and members were dead, the company still existed

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 d. Company has Ability to Own Property

• As a result of the separate entity rule, a company may own property distinct
from the property of its members

• The members of a company have no proprietary (legal or equitable) interest in

the company’s property. They therefore have no “ownership” rights in respect of
it

• Change in the membership of the company will have no affect on the ownership
of assets or property of company

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 Macaura v Northern Assurance Co. Ltd [1925] AC 619

• Facts: Macaura owned an estate in Ireland. He sold all the timber

on the estate to a company whereby he owned majority of the
shares of the company. Macaura insured the timber that he sold
to the company in his own name. The insurance policy was not
transferred into the company’s name

• The timber was destroyed in a fire. Macaura claimed for the loss
but, the insurance company refused to pay

• Held: When Macaura sold the timber to the company, he gave up

his interest in it and the company had become the owner of it. He
had no interest in the timber that he could insure. Therefore, the
insurance company was not obliged to pay

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 e. Liability of Members May Be Limited

• Once a company is incorporated, it is liable for its own debts and

obligations. The members are not responsible for it. So, from this flows
one of the prime advantages of incorporation, members can limit their
liability. However, this would depend on the type of company being
established

• Example: In a company limited by guarantee, members are liable to

contribute to pay off the company’s debts in situation where the
company is unable to settle its debts. But, his liability would be limited
to the amount that he has agreed to contribute in such event

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 1. Numbers of
members 2. Fraudulent
below 2 trading
6. Taxation and
nationality
rules
Exceptions to
Salomon’s
Principles
(Lifting the
Corporate Veil)

5. Evasion of 3. Publication
legal obligation of name
4. Holding and
Subsidiary
Companies

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1. Number of Members below 2:
• Company with a single member can only carry its business for 6
Months, if it continues to operate after the period of 6 months then
the sole member will be personally liable for the debt incurred by
the company after that 6 months. Both the member and the
company will be found guilty of an offence under Section 36 of
Companies Act 1965

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2. Fraudulent Trading

• If any business of company is carried out with an intention to defraud

the creditors, the person who defrauds will be personally liable for any
debts or liabilities of the company – Section 304 (1) of the Companies
Act 1965

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3. Publication of Name
• If any officer of a company e.g – the Director or Secretary issue and
sign a cheque on behalf of the company without mentioning the
company’s name, then both the officer and company are guilty of an
offence – Section 121(2)
• Section 121 (1) – It requires the name of the company together with
the company’s no. to appear on any letters, cheques and etc.
• Section 121 (1A) – It requires the company which has changed its
name to insert the company’s previous name beneath its present name
in all documents, letters, cheques and etc. for a period of 1 Year from
the date of the change

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4. Holding and Subsidiary Companies
• Generally, a holding and subsidiary companies are treated as
separate legal entities. But, sometimes the court did not treat both
companies as separate. E.g – When the holding company needs to
produce group accounts – in such situation, the assets and liabilities
of the subsidiary are consolidated to that of the holding company

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5. Evasion of Legal Obligations or Abuse of Legal Rights
• If a person has been prevented or restricted from doing something
by law, he cannot use his company to do what he is prevented from
doing. E.g – Restrain of trade

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6. Taxation and Nationality Rules

• At times of war, foreign nationality of members may affect the

national status of company

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THANK YOU

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