Business Entity (Part 2): Company Limited by Shares
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In Malaysia, the most common type of limited companies is those limited by shares. These companies are incorporated and governed by the Companies Act, 1965. Companies limited by shares will carry “Sdn Bhd”, “Sendirian Berhad” behind their names according to Section 22(4) of the Act.
The meaning of private limited companies is that the liabilities of its members are limited to the amount of shares they hold in the company. For example, if Mr. Tan’s shares in a Sdn Bhd amounted to RM10,000.00, and he has fully paid for the shares, in general, he has no further liability with regards to the Sdn Bhd concerned.
A private limited company can only be incorporated if its memorandum and articles:-
- Restricts the right to transfer its shares subject to the approval of its directors;
- Limits the number of its members to not more than fifty (require a minimum of 2 natural persons, but allow another company to wholly own 100% of its issued shares).
- Prohibit any invitation to the public to subscribe for any shares or debentures of the company;
- Prohibits any invitation to the public to deposit money with the company for fixed periods or payable at call, with or without interest.
The most obvious advantage is the liability “protection” to its shareholders, limited their exposures to the amount of share capital that they subscribed for. Any amount of debts beyond their shareholdings, they are not liable but provided there is no fraud or other malpractice.
Another advantage is the simplicity to transfer existing shares or issue additional shares to new investors. Existing member can transfer his shareholding, wholly or partially, through selling of his shares (subject to directors’ approval, that is). Unlike sole proprietors or partnerships, there is no need to wind up the company in the event of death of its shareholders or directors.
- The company’s financial affairs will be accessible by the public.
- Compliance with the Companies Act, 1965. Although complying itself is not a disadvantage, the amount of effort required to comply with the Act is much more than a sole proprietor/partnership.
- The company had to perform annual audits on its financial statements.
- At least one company secretary is required to manage its statutory submissions and returns as well as attending and preparing minutes for board and shareholders’ meetings.
- Incorporation cost is high, and there are yearly recurring fees to be paid such as audit, accounting, company secretarial and tax fees.
Why are there still so many private limited companies being incorporated given the disadvantages?
As the business grows, revenue and business volume will increase. Customers will request for longer credit term and higher credit limit, hence an increased credit risk. In turn, the company will also request suppliers and bankers to extend their credit facilities, which means higher liabilities.
The limited liability “protection” given to the shareholders clearly outweighs all the operational and financial disadvantages listed above.
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