Setting Up a Business Koo Chin Nam & Co.

Introduction

There’s a saying that many famous inventors died poor and penniless. One example was Nikola Tesla, who despite being a genius, was forced to work for other, more savvy inventors. You’ve probably head about his rivalry with Thomas Edison: Nikola Tesla ended up penniless and broke, while Thomas Edison became a rich old man.

But Thomas Edison was more than just an ordinary patent-publishing inventor. He was also a gifted businessman who knew how to make a deal. He was gifted with vision and if he were alive today, he would probably be known as a thought leader. He also knew when to stop when he was ahead.

Thomas Edison and Nikola Tesla — On the left, Thomas Alva Edison. On the right, Nikola Tesla. One died rich. One died penniless.

During his lifetime, Edison belittled the patents of Nikola Tesla, who later sold his patents to Westinghouse. The AC current patents later proved to be a thorn in Edison’s side that ate up his market share and proved to be a real challenge.

For purposes of brevity, it’s best to reserve this very interesting piece of electrical history to a later post. Instead, I wish to focus on the setting up of businesses by inventors.

Inventors can make money from their invention, but not often. Many inventors work for others, and so their inventions are assigned to their employers. Other inventors are unable to set up a business to commercialize their business. Yet others do set up businesses, but they fail to commercialize their patents.

For the intrepid inventors who wish to (a) set up a business and (b) commercialize their patents, this post will address issue (a). Issue (b) will be addressed on another day.

How to Set Up A Business?

In Malaysia, a business can be incorporated in one of several forms:

As a sole proprietorship
As a partnership
As a company
As a limited liability partnership

Sole Proprietorships and Partnerships

Practically speaking, the sole proprietorship and the partnership are the most economical to set up. The sole proprietorship and the partnership can be set up under the Registration of Business Act 1956. In both cases, the business is incorporated and run in the name of the individual(s) that comprise the owner(s) of the business. The ease of setting up such a business means that you can get your business started immediately, quickly, and cheaply.

However, do remember that because the business is started in the name of the business owners, the business owners will be personally liable in law for any claims against the business. This means that the sole proprietor may be sued for bankruptcy, if the business owes money to its creditors that exceeds the threshold for bankruptcy proceedings.

When setting up a partnership, it is advisable to have a partnership agreement in place, to ensure that there will be no disagreements between the parties at a later date. Some of the items that may need to go into the partnership agreement may include percentage of the business owned, management of the business, and division of profits.

In some sole proprietorships, the individual has incorporated the name of the business using his own name. For example, the person’s name is Ali bin Abu. His business is ALI BIN ABU. Can he admit new partners into his business, which is using his personal name? The SSM (Suruhanjaya Syarikat Malaysia) website says that partnerships cannot use identity card names, which means that it’s most probably not allowed.

For partnerships, the maximum number of partners allowed is 20 persons. Any more than that, they may need to start a company instead.

Companies

When you set up a company, you establish an organization that is considered a separate legal entity. Shareholders own the company, and directors run the company. In many small companies, the shareholders and the directors are the same individuals. But, as companies begin to increase in value, and size, it is commonplace for shareholders to become less involved in the operations of the company, and leave its management to directors (who may be outsiders).

Companies can get complicated, and there are quite a number of rules to comply with. This is why you will need a company secretary. At the same time, companies also need to declare their annual returns, with audited accounts, for the SSM to examine. When companies fail to declare such returns, they may be fined. All these may add up to the cost of running a company. That’s why some company owners fail to pay their company secretary — big mistake. Company secretaries hold the key to updating shareholders information. So one day when they finally decide to sell the company, the company secretary rightfully looks at them in the eye and demands his/her payment, before allowing shareholder records to be updated.

Companies have different types of shareholders. There’s the ordinary shareholder, who also has ordinary shares in the company. He or she can vote as a shareholder. But there’s the preference shareholder, who has preference shares, which does not allow him or her to vote, but only to enjoy the profits of the company. Preference shareholders are also protected in case of a winding up of the company — they will get paid whatever they are supposed to be paid, before the ordinary shareholders.

Typically, if you set up a business, you might get an investor in, who will typically be offered preference shares in the company. His preference shares entitles him to a part of the profits in the company, while protecting you (the owners of the company) from him making decisions in the company. However, some preference shares are convertible, which means that the investor holding the preference shares can demand for them to be converted to ordinary shares. In which case, he becomes an ordinary shareholder. In other situations, the preference shares can be redeemable, which means that, if you have the money, you can buy out the shares (redeem) from the shareholder.

There are often tussles in companies — between shareholders, between directors, and sometimes between shareholders and directors. Nevertheless, running a business using a company, rather than a sole proprietorship or a partnership, signals to potential business clients that you are serious about doing business. After all, the cost of setting up a company, and keeping it running, is quite expensive compared to setting up a sole proprietorship or a partnership. However, as company information can be searched online, it is possible that your potential business clients or partners will not take it kindly if your company hasn’t had updated accounts for a number of years.

Where, once upon a time, Malaysia’s Companies Act 1965 required for a company to have a minimum of two directors and two shareholders, the new Companies Act 2016 required only a minimum of one director and one shareholder. This makes it very much easier for a company to be set up by a single individual, with all the protection of the company.

Limited Liability Partnership

Recently as well, in 2012, a new type of business entity was launched: The LLP. The Limited Liability Partnership was touted as the entity that could provide the separate legal entity protection of its owners from the LLP, while ensuring that the business could be operated easily.

There needs to be an annual declaration of returns, although the reporting requirements aren’t as strict as that for companies.

An LLP only requires a minimum of two partners, and may have an unlimited number of partners.

For that reason, in one recent conference, I had the privilege of asking some equity crowdfunding organizations about their clients. “How do you open up investments to more than 50 investors?” I asked innocently. “Doesn’t the law make it difficult for more than 50 people to invest as shareholders in a certain company?”

The equity crowdfunding platform promoters replied, “We have an innovative mechanism… investors become partners in an LLP, and the LLP becomes the shareholder in the invested company. So our clients only need to deal with one representative from the LLP…”

While it is not necessary for the partners of a limited liability partnership to have a partnership agreement, it is highly recommended.

Where Next to Set Up a Business

If you feel that you want to set up a business, you can easily approach a company secretary to help you. Many of them help individuals to set up companies and limited liability partnerships. For a reasonable fee, they can also help to form a sole proprietorship or a partnership.

We can help you to draft a partnership agreement, if you want one. We can also help you draft a shareholders’ agreement, if necessary.

Note: This post was also published here.