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Olympia College Diploma in Business Management 1. Types of Business Forms 1.1 Introduction to Business The word ‘business’ derived from middle English ‘businesse’. ‘businesse’. A business is formed when there are exchanges of goods, services or any other desires. A business is not necessary to be equitable. Business started since Stone Age when the barter trade system established. It started with inequitable exchange of goods such as an egg for a goat, a bowl of sugar for a bucket of rice. Then, the society formed with a common monetary system for better trading for their goods. Generally, business trader runs a business to earn profit. However, business does not have to form to earn profits. There are also non-profit businesses formed to contribute to the social without any payback requested. Majority, they do the business for charities to the social and education field. Those setup a non-profit business known as non-profit organization (NPO). Commonly, Non-profit organization does not have private ownership. There is a group of  members, managers to run the non-profit business. Example of NPO in Malaysia: Yayasan Salam Malaysia, National Kidney Foundation, Mercy Malaysia and etc. Profit-based businesses consist of sole proprietorship, partnership, cooperation and limited liability company. Trace back to stone age when the barter system first established, the ‘business’ deals with exchange goods between both parties. Nowadays, business does not have to only deal with goods. There are also businesses which provide services to earn profit such as airlines, healthcare services and etc. Some business provide both goods and service to the consumer, such as restaurants (provide foods and serve consumers when they dining in the restaurant), pet shops (sell pets and provide pets beauty services). Introduction to Business Page | 1 Olympia College Diploma in Business Management 1.2 Factors of Business Formation In order to setup a business, there are few broad factors to concern: 1. Ownership: The trader have to decide whether he want to run the business by himself  alone, or get a few partners. 2. What kind of businesses tend to form: The trader has to establish a business concept to decide what goods or services to offer to the consumer. 3. The production method: After the trader decide the business concept, he has to gather resources such as labor, land, raw materials, and tools/machines that needed to run the business. 4. Capital: The trader has to prepare a sum of money as capital to get the resources stated above. Therefore, he has to get creditors if he does not have enough money to run the business. As a result, trader has to get bankers or financial intermediary to invest in his business. In additions, a business trader has to concern few exterior factors that influence the business: 1. Economy status: unemployment rates, income rates and natural resources of the area 2. Government policies: relevant government taxation, policies and subsidy for the business 3. Consumer taste: latest trend directions, consumer desires and demand of the products Introduction to Business Page | 2 Olympia College Diploma in Business Management 1.3 Business Operation Departments After a business had been setup, the business generally being managed by few major sectors/department: 1. Management Department: a.) Plans strategy to lead the business to earn more profit. b.) Direct the all performances of the business. c.) Control on employments d.) Sets goals for future years 2. Marketing Department: a.) Identify customer desires b.) Organize products promotion c.) Control the pricing and quality of the products d.) Research and develop new ideas to enhance the product 3. Financial Department: a.) Manage, admeasure and control capitals to business activities b.) Investigate profitability of each projects of business c.) Plans the payback for debts 4. Accounting Department: a.) Provide internal and external financial statement reports b.) Measure financial ability of the business Introduction to Business Page | 3 Olympia College Diploma in Business Management 1.4 Sole Proprietorship Definition of sole proprietorship: The business owned by single person. It is the most popular ownership in business field. It is the simplest legal ownership. A sole proprietor manages and run the business alone, but he may have a large group of employees to assist his business. In Malaysia, sole proprietorship and partnership must be registered with the Companies Commission of Malaysia (CCM) in compliance with the requirements of the Registration of Business Act, 1956 (Revised 1978) Advantages of sole proprietorship: 1. Easy to startup: The business is easy to register and setup. The owner just has to decide the name for the business, where to run the business and what to do for the business before register to the related government body to get a legal business license. 2. Lesser government policies applied : There are lesser rules and regulations imposed to the sole proprietor 3. Fully Control of the business : The sole trader has the fully control of the business. The owner does not have to request for other permission to make a business decision. 4. Absolute profits earned : The sole trader may enjoy the exact profits earned from the business. 5. Free from extra government taxation : A sole proprietor does not have to pay extra government and state business taxations. Introduction to Business Page | 4 Olympia College Diploma in Business Management Disadvantages of sole proprietorship: 1. Large-scaled of liabilities : The sole proprietor takes care of all the important decision on business. The sole trader has to bear with the risks of the business alone and take the responsibility of all the decision made. 2. Income Taxation: The complete amount of profit earned will fully added into the owner individual income tax. The sum of money to hand over for income taxation will be larger as it cannot distribute to other shared-owners. 3. Lack of specialist and professional : The sole proprietor has to deal with all specialskilled requirements in the business such as the sole proprietor has to manage financial, accounting and marketing decision by himself  4. Business depends on the owner : if the owner is not available, sick or away from the business. No one else can make a decision for the business. The business will collapse if  the owner passed away and does not make a will for anyone to inherit the business. 5. Limited capital and resources : Sole proprietor has limited capital and resources to run the business. All the resources and money depends on the owner himself. If the owner has limited capital or resources, he cannot extent the business to larger scale. 6. Debts and Assets rely on sole trader : When the owner does not have enough capitals, he needs to get creditors to invest in his business. The sole proprietor has to mortgage his own assets to apply loans for the business. If the owner cannot payback the debts, the creditors might take over the assets mortgaged and even the business itself. Introduction to Business Page | 5 Olympia College Diploma in Business Management 1.5 Partnership Definition of Partnership: A business owned by two and more people which do not exceed the amount fixed by the government. Although the formation of a partnership business is not as easy as sole proprietorship, it still considers easy to setup and registered to get a legal license. In order to start a partnership business, involved parties have to prepare and signed an agreement which bounded by partnership law. This agreement is signed to secure involved parties’ benefits and stated the obligations of each involved parties. The agreement stated the total amount of sum invested by each partner, duties of each partner (whether each partner assigned with certain obligations), clause when any partner want to withdraw from the partnership and profits and dividend distribution for each partners. The partnership in Malaysia is bounded by the partnership law, Partnership Act 1961(Revised 1974). Generally, partnership is common for specialist, professional business, such as lawyer firms, accountant firms, clinics, architecture firms and etc. Introduction to Business Page | 6 Olympia College Diploma in Business Management Generally, there are three types of partnership: 1. General Partnership: All the partners get involved in the decision making and share the responsibilities of the business operations. 2. Limited Partnership: Some partners have the responsible to run the business while the other partners have no full rights and liabilities in the business operations. It commonly formed when sole proprietor expend the business and get partners to raise capital. The one who contribute or invest more money in the business have priority in decision making while the other invest lesser sum have lesser liabilities on the business. 3. Limited liabilities Partnership : This kind of partnership often formed by the professionals, specialist expert such as lawyers, accountants, architects, engineers and etc. Although they registered under the same license and agreed with the partnership. Each partner has independence business operation. They are similar with the sole proprietor; they enjoy the profits of their own business operation. They also not responsible for other partners negligence Advantages of partnership: 1. Easy to startup: Although partnership is not as simple as sole proprietorship, it is still easy to setup. The partners just have to sign a partnership 2. Few government policies imposed: similar with sole proprietorship, partnership has less government business regulation imposed. 3. Diversity : The partners may provide variety of business ideas and these ideas help to operate the business better. 4. Professional consultancy: The partners can afford to hire specialist in relevant sectors of  the business. Introduction to Business Page | 7 Olympia College Diploma in Business Management 5. Larger capital: Partnership may have greater capital to run the business as to compare with sole proprietorship. 6. Income Taxation: The income taxation imposed individually and profits/dividend distribute to each partners. Therefore, the partner pays lesser income taxation as to compare with sole proprietorship. 7. Absence one of the owners: The business is not fully depends on sole owner. When one of the partners is not available, the other partners can still operate the business. Disadvantages of Partnership: 1. Unexpected liabilities: Partnership differ from sole proprietorship, one has to bear the consequences of the other partners’ negligence, wrong decision and mistakes. If the other partners’ actions causing a great loss, the rest of the partners also have to share the loss (expect for limited liabilities partnership). 2. Shared control of the business: One does not have the full control of the business. Every business decision made with the agreement of the other partners. However, different people might have different ideas. Therefore, partnership sometimes is difficult to avoid argument and conflict between each partner. 3. Shared profits: Sole proprietor may enjoy the complete amount of profits while the partnership has to share the profits. The profits distribute to each member according the sum invested in the business. 4. Dissolves of partnership: If one of the partners withdraw or pass away might terminate the partnership unless they made an agreement with a clause to resolves this issue before they started the business. Introduction to Business Page | 8 Olympia College Diploma in Business Management 1.6 Corporation Definition of Corporation: A corporation is a legal entity which separate from all its members. In other word, a corporation like a person by itself while all the other members even the original owner is completely separated from it. A corporation can be owned by shareholders, creditors and investors. Normally, a corporation formed by medium company who decide to raise capital and extent the The company offering the new common stocks to the public though the financial market, Initial public offering (IPO) market. After the first offering in IPO, the corporation is established. Then, the corporation can deal with investors to trade stocks, bonds and other financial instruments through capital market. The common stockholders have the right to vote for the board of management to operate the business. The power of ownership admeasure according to the total rates owned by each stockholder. Generally, the owner started the business will have primary shares of the corporation which ensure his priority benefit in the business. The dividend will distribute to the stockholders according to the percentage of stock owned. In Malaysia, the formation of corporation is governed by the company law, Companies Act 1965. The Companies Act 1965 states that the corporation may sue and be sued in its own name; it may own land and the liabilities of its members may be limited. The corporation must enter an agreement with the Kuala Lumpur Stock Exchange (KLSE) to list their stocks on the Listing Agreement. The Corporation must registered under the following bodies: Companies Commission of Malaysia (CCM), Kuala Lumpur Stock Exchange (KLSE), Securities Commission (SC) and Pengurusan Danaharta Nasional Berhad. Introduction to Business Page | 9 Olympia College Diploma in Business Management Advantages of Corporation: 1. Limited liabilities : The liabilities of each stockholder are limited. When the corporation facing a loss, stockholders do not bear the full loss. Besides, when the corporation  bankrupt, stockholders’ personal assets will not affected. 2. Large capital: The corporation usually has largest capital compare with sole proprietor and partnership. The corporation can always raise capital by offering shares to investors 3. Rich of professional: As the corporation has large-scale of capital, it can afford to hire many specialists. 4. Permanent operation: The corporation will continue even one of the stockholders passed away or withdrawn. 5. Easy to transfer: The stocks of the corporation are transferable. Disadvantages of Corporation: 1. Conflicts: It is difficult to meet all the desires of both board of management and stockholders. Usually, the board of management may concentrate on enlarge the business scale while the stockholders concerns only on the profits gain. 2. Difficult to setup : In order to setup a corporation, it has to go through a lots of  procedures and takes a very long time to get a license. 3. Lots of government policies imposed: Due to the size of the business, which is large and may influence the country’s economy. There are many regulations imposed to the corporation and causing lots of limitation to the business operation 4. Extra Taxation: The corporation is imposed with taxation by both state government and federal government. In other words, the corporation has to pay twice for the taxation. Introduction to Business Page | 10 Olympia College Diploma in Business Management 1.7 Conclusion Before one getting starts with his business, he has to decide whether he want to form the business in sole ownership, partnership or run the business with corporation. It is impossible that one form of ownership can have all the advantages and without disadvantages. Therefore, there are few issues that might influence the one to choose what kind of ownership he wants for his business: 1. Control of the business : The owner has to figure out whether he willing to share the control power with other or he prefer complete control on the business operations. 2. Profits of the business: It is also important to understand whether the owner wants to have all the income alone or he willing to share profit earns from the business to the other. 3. Capital of the business: If the capital and resources available to the entrepreneur is not enough to startup the business. The entrepreneur has no choice but get a partner to raise capital to start the business. 4. Specialist of the business : The needs of professional and specialist in specify performance of the business also one of the factors that influence form of ownership of a business. 5. Scale of the business: The scale of the business desired also influenced the decision of  ownership formation. The larger number of owners leads to larger amount of capital. As a result, the business also can expend to a larger scale. Introduction to Business Page | 11 Olympia College Diploma in Business Management 2. Difficulties of Sole Proprietor and suggestions to overcome 2.1 Introduction of Sole Proprietorship Sole proprietorship is a business which owned by one person. When one comes to an idea to start a business, he/she just has to go to Companies Commission of Malaysia (CCM), take a form and filled up with a trade name and states the services or goods provided by the business, the related body takes only few minutes to register a legal license for the person. In other words, sole proprietor is very easy to setup and cost a small sum to get a legal license. Although sole proprietorship has single owner, the sole trader can hire any number of employees. Sole proprietorship is the most popular form of ownership. Some partnership businesses and most of the corporation also started with sole proprietorship. The government imposing only few regulations to sole proprietorship and sometimes even providing subsidy to sole proprietor to startup a business. As to compare with other large-scaled business, sole proprietor does not have to pay double taxation. All large-scaled business has to pay taxation to state government and federal government at the same while sole proprietor is free from it. Sole proprietor may have the exact profits earn from the business while the other business ownership forms have to share profits. As there is only one owner in the business, sole proprietor may have more flexible business operations compare with the other. For example, if the sole proprietor feels exhausted and want to get some rests, he can always close the shop for few days without permission of other owners. Generally, sole proprietor also owns the complete control in the business. He may operate the business in any ways, methods and forms he desired as long as it is legal. Introduction to Business Page | 12 Olympia College Diploma in Business Management 2.2 Details of sole proprietor interviewed In order to understand further the difficulties faced by sole trader, I had interview a hair salon owner to study the troubles faced by her as a sole trader in business. Owner: Mrs. Lam Business operated: Hairdressing salon Ownership: Sole proprietorship th Business started: 25 October 1984 Employees: 1 senior hairstylists, 2 junior hairstylists and 4 shampoo girls. Operation time: 10.30am to 8.30 p.m 2.3 Difficulties faced by sole proprietor interviewed 1. Large amount of responsibilities load on her: As she is the only owner of the business, she has to bear all the pressure of business. She alone has to make decision on purchasing of goods, hires employees, trains workers, settle financial matters, promotes business and arranged duties to each staff. 2. Bear all the losses alone : As the business rely on her alone; sometimes when the business faced some losses, she has to bear those losses alone. When the machine had broken and need to repair, she has to pay alone from her individual account. Introduction to Business Page | 13 Olympia College Diploma in Business Management 2.3 Difficulties faced by sole proprietor interviewed (continued previous page) 3. Financial difficulties and risk : Trace back years ago, before the business is stable. She was difficult to apply loans from banks as she did not any assets to mortgage. Now, though she able to apply loans from banks easier than last time, she had to mortgage her assets to the banks in order to get the loans. In other words, if she failed to pay back the debts, her assets will be frozen and even forced to bankruptcy. 4. Lack of skilled employees: A senior hairstylist need a basic salary around RM 1200 without commission added. She only affords to hire one senior hairstylist in her business. The other employee is junior hairstylist and shampoo girls. As a result, sometimes it is difficult to meet customer satisfaction for better services. 5. Business fully depends on the sole proprietor : As all the important decision depends on her. When she is not available, the business operations have not function properly. For example, she is away to settle the bills and leave the salon. One customer comes into the salon, she wants to have hairdo and she ask the price for the service. However, no staff knows the pricing as different customer might be charged differently according to their current hair conditions. Then, the customer decided to go to other salon. She indirectly faces a loss in business. Introduction to Business Page | 14 Olympia College Diploma in Business Management 2.4 Suggestion to overcome difficulties of sole proprietor Although there are few difficulties of sole proprietor that is not avoidable, the sole proprietor still can takes action to resolve the issues. 1. Problem: Large amount of responsibilities load on her Suggestion: The owner may try to increase usage of technology such as computer, inter- network system to reduce workloads. Steps 1: She should setup a database for business goods and operations by computer. Explaination: The owner had setup a database for the goods in stocks. Whenever, she need to what items is going to out of stocks, she just has to check through computer database, and don’t have to go to the stores room to check one by one. Steps 2: She should go to related bank to make an auto-transfer for the payments of goods, bills and etc. Explaination: The owner go to bank and ask the bank to do auto-transfer for the payment of  bills, debts and rental. Every month the bank will do all the monetary transfers to creditor, landlord and even government taxation. Therefore, the owner does not have to run here and there to make payments. Introduction to Business Page | 15 Olympia College Diploma in Business Management 2. Problems: Bear all the losses alone Suggestion: Get Business owner policy (BOP), a kind of business insurance for small business owner. Explanation: Business owner policy is an insurance policy which designed for small business trader. This policy consists of: 1. Property insurance: recover business property losses such as equipment breakdown 2. Fire insurance: recover business losses which caused by fire in the shop 3. Premise liability insurance: recover injuries and damage of owner in business environment 3. Problem: Lack of skilled employees Suggestion: As Mrs. Lam had more than 25 years of experience in hairdressing field and qualified with SKM1-3 which approved by government, she can transform her business into hair studio academy. Explanation: A hair studio academy is form of hairdressing business which function like general hair salon while it is legally to takes apprentices who wants to learn hairdressing and charged each apprentices with a tuition fee. As a result, Mrs. Lam can get ‘free’ apprentices who even have to pay her for teach them in hairdressing skills. In the other hand, Mrs. Lam can use the tuition fee collected from apprentice to hire more senior hairstylists. Introduction to Business Page | 16 Olympia College Diploma in Business Management 2.5 Conclusion Sole proprietor is still considers the best choice to form a business. It is more flexible compare with partnership. Although it has smaller capital and business size, it often easier to survive no matter how the economy condition had changed. Sole proprietorship also can avoid unnecessary arguments as to compare with partnership. This is very important because sometimes if partners could not solve the disputes, it might leads to termination of partnership. Furthermore, there are few minor negatives of a sole proprietorship that can be easily resolved. In Malaysia, a developing country, in order to increase economy growth, the government encourage business trader by providing subsidy to many small business trader while bankers  provide services and loans which able to settle sole proprietor’s financial difficulties. In conclusion, a sole proprietor is an easiest, simplest and cheapest form of ownership. It is more flexible and suit most of the businesses whether it is restaurant, cinema, salon, firms and etc. Introduction to Business Page | 17