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When the time comes to choose which type of business entity is right for you, there are three common choices for you to consider.
Each type of entity has its own advantages and disadvantages.
A partnership is formed when two or more persons but not exceeding 20 persons agree to form a partnership to go into business jointly for profit. In Malaysia, you must register your partnership with the Suruhanjaya Syarikat Malaysia (SSM) not more than 30 days from the date of commencement of the business.
Partnerships are relatively easy to setup and this is why it is one of the more common forms of business. Although partnerships are easy to form, there are however disadvantages that need your consideration. A partner in a Partnership does not enjoy limited liability and this means that every partner in a firm is jointly liable with the other partners for all debts & obligations of the firm incurred while he or she is a partner.
A 'Partnership agreement' is usually used to state the rules and responsibilities within a partnership. However, if a partnership agreement is not made then all the rules of the partnership will be set out by the Partnership Act 1961. Most partnerships prefer to operate under their own rules, and the partnership agreement is used to formalise the structure in the way they want to run their business.
View sample of a Partnership agreement
You can register your partnership using a personal name or a trade name that is subject to approval according to Rule 15 of the Rules of Business Registration 1957.
What you need to do:
And that's it!
We recommend that you refer to SSM Guidelines for New Business Registration for the complete and latest information on the registration process and requirements.
Requirements to form a private limited liability company (a “Sdn. Bhd.”) in Malaysia:
The main benefit of a private limited company by shareholding or Sdn. Bhd. is that the liability of the people who own or control it is limited. This is mainly due to the recognition, legally, that the private limited company is a separate entity able act in its own right and on its own behalf.
As the private limited company is considered a legal '‘person’', the company can perform acts like the buying or selling of property, entering into legal contracts, sue and be sued in the courts of law. This also means that the finances of the company are separate from the people that own.
In addition, there are tax considerations to take into account. Companies in Malaysia are taxed at a lower rate when compared to the top income tax bracket for individuals. For Small Medium Enterprises or SMEs there are further tax incentives given where the tax rate is much lower. As tax rates change from time to time, it is recommended that you get the latest tax information from the Inland Revenue Board of Malaysia (LHDN).
A shareholders’ agreement provides clarity in terms of how a company is to be managed and describes shareholders' rights and obligations. Consider having a shareholders' agreement to address future issues that might arise and avoid possible disagreements that may impact on the operations of the company. Typically a shareholders' agreement will include information on the regulation of the shareholders' relationship, the management of the company, ownership of shares and privileges and protection of shareholders.
View a sample of a Shareholders' Agreement
A successful business manages their human resource and employment matters well. However, dealing with human resource and employment matters is not an easy task as there are many legal considerations that a business must take into account. Ensuring that you do not breach employment laws and other employee related regulations is crucial to being a successful employer and more importantly, avoid contentious matters that may bring about litigation.
In Malaysia, the Employment Act 1955 is the main legislation that governs the rights of certain categories of employees. Specifically, all employees earning up to RM2,000 per month fall under the Employee Act 1955. Other categories of employees have specific legislation and guidance depending on the industry they work in.
For employees that are not governed by the Employment Act 1955, the employment offer letter acts as the contract of employment where the rights and benefits afforded to the employee are set out and is subject to the employee’s agreement.
Do note that the Employment Act 1955 only applies to Peninsular Malaysia and Labuan. The East Malaysian states of Sabah and Sarawak have their respective labour laws that are specific to each state.
Understanding the employment laws and guidelines will ensure that when you offer employment to an individual, the terms and conditions contained therein complies with the applicable laws. In Malaysia, if the employment period of an employee exceeds 1 month, the employee has to be given a written contract of employment.
Some examples of key terms in an offer of employment are:
Note that the above minimum entitlements are for employees that are governed by the Employment Act 1955 but are typically used as a general guide for all categories of employees.
View a sample of a Permanent Employee Offer Letter
There may come a time when you will need the services of an external consultant to help you in your business, whether it is for marketing, Human Resource, IT or any other matter. When engaging a consultant you would want to set out the terms and conditions in writing in a Consultancy agreement.
What is a consultant? A consultant is an expert individual or company which offers specialised services. Usually a consultant is hired to perform a specific set of tasks or services. When engaging a consultant, it is advisable to ask the consultant for relevant certifications to ensure that the consultant is duly registered with the relevant professional body. For example, if you are engaging an engineering consultant, you would want to ensure that the consultant is registered or recognised by the Board of Engineers Malaysia.
Why it is important to have a Consultancy agreement? A 'Consultancy agreement' will allow you to set out the terms and conditions of engaging the services of an external consultant. This reduces the risk of disputes that may arise in future. Key terms for a Consultancy agreement are:
View a sample of a Consultancy Agreement
Disciplining an employee is not a simple matter and you should approach this knowing that there are a number of steps required for the compliant disciplining of employees. All employers must adhere to these steps if they are to avoid potentially expensive lawsuits.
In general, before any disciplinary action is taken, the employer must first establish the severity of the misconduct. A misconduct is defined as:
Severities of misconduct are generally split into 2 categories, minor and major. Normally a minor misconduct committed by an employee will not justify the punishment of dismissal. Only in cases where the employee commits the minor misconduct repeatedly would dismissal be considered justifiable. However in the case of a major misconduct, just a single act of misconduct by the employee may justify the punishment of dismissal.
There are recommended practices in conducting disciplinary actions against employees that should be followed. They include:
Verbal warnings and counselling
Generally a verbal warning and counselling are used when the misconduct is deemed as minor. In issuing a verbal warning, you normally would be bringing to the attention of the employee the act(s) that led to the deemed misconduct and what your expectations as the employer with respect to the cessation of similar future misconducts and any remedial action required by the employee. Counselling is used as a tool to advise and educate the employee towards proper conduct in a guided and managed manner.
The disciplinary meeting
When you summon the employee to the disciplinary meeting, you must have notified them in writing that they were being summoned to a disciplinary meeting. Disciplinary meetings are used as a formal mechanism to inform the employee of his or her misconduct. The outcome is typically recorded in minutes to the meeting or notes to the meeting.
Written warnings are typically recommended over verbal warnings as it provides a physical record that sets out the nature of the poor performance or misconduct and how the employee is expected to improve or change. Typically, a written warning when issued will specify a period of satisfactory conduct and/or performance after which it is disregarded for disciplinary purposes, after which the written warning must not be used to justify taking more serious action against the employee in the event of further misconduct.
Show cause letter
The employer must issue a show cause letter in the event dismissal is contemplated and the employee must be given an opportunity to respond to the letter.
View a sample of a Show cause letter
Prior to any decision to dismiss an employee, a domestic inquiry should be convened where the employee is given an opportunity to state their position and be given a fair hearing. As a general rule, it is important to remember that no employee should be dismissed for misconduct unless the employee concerned has been given an opportunity to defend themselves or has been given an opportunity to be heard.
The Domestic Inquiry must be held properly otherwise the employer risks that the Industrial Court may find that a dismissal carried out may be unlawful.
Check out your business legal health to protect its assets and reputation.
Our quick online questionnaire will tell you if your business is at risk in a number of ways including financial claim exposure and potential shareholder disputes.
Once your risk areas are identified, use our DIY legal templates to help you minimise those risks affordably, at a much lower cost than using a traditional law firm. For extra peace-of-mind, you have the option of having qualified legal specialists review your documents.
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Our Business Law Guide contains resources to help you understand the legal jargon that you may come across when running your business. Whether it is confidential agreements or debt recovery we have the resources that help you understand these subjects, and direct you to the relevant documents in our library that will help you resolve the issue.
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