Question

- Explain the forms of business organization in Malaysia and List and explain the FIVE (5) advantages and FIVE (5) disadvantages of those organizations.

- Briefly explain what Agency Problem is and how to overcome it.
- Explain the definition of Bond and its characteristics.

- Differentiate between Common Stock and Preferred Stock
- Differentiate between Investment Decisions and Financing Decisions

Answer 1

Q1.

Main types of business entities in Malaysia which are

1.Sole proprietorship

2. Partnership

3. Limited Liability Partnership, also known as LLP

4. Private Limited Company, commonly known as Sendirian Berhad or Sdn Bhd

1.     Sole Proprietorship

One of the simplest and cheapest from of business organisation is sole proprietary.  This type of business is owned solely by only one individual, as his/ her liability is unlimited.

Advantages:

1. Simplest and cheapest from of business entity

2. Only required to pay an annual fee to the Companies Commission of Malaysia

3. Less amount of capital required.

4. Not required to audits business financial statements

5. Single person can manage whole business

Disadvantages:

1. Unlimited Liability

2. Lower Investment

3. Normally Small size business

4. Only Malaysian citizens or permanent residents are permitted to register under this.

5. High Risk

2.     Partnership

Partnership is like an extended version of sole proprietorship similar to sole proprietorship where is more than 1 owner can be. Partnership comprises of a joint-entity holder with 2 or more peoples.

Advantages:

1. Easy to get established.

2. Less formal with fewer legal obligations

3. More partners, more capital.

4. Better decision-making

5. Few person can manage whole business

Disadvantages:

1. The partners in a partnership business are bounded by unlimited liability

2. Chance of conflicts between partners

3. Mostly suitable only for professional firms

4. Only Malaysian citizens or permanent residents are permitted to register under this.

5. Shared Profit

3. Limited Liability Partnership(LLP)

The Limited Liability Partnership or LLP is a mixture of a partnership and private limited company. It is like the conventional partnership but with the advantages of a private limited company.

Advantages:

1.     It is a body corporate.

2.     a separate legal entity from its partners.

3.     The LLP is capable of suing and being sued

4.     LLP has fewer compliance requirements

5.     Suitable for large business setups.

Limitations:

1.     Public disclosure required.

2.     An LLP must have at least two members

3.     Profit can’t be retained like a company limited retained

4.     If one member chooses to leave the partnership the LLP may have to be dissolved.

5.     Income is personal income and is taxed accordingly.

4. Private Limited Company / Sendirian Berhad (Sdn Bhd)

A private limited company is known as Sendirian Berhad (Sdn Bhd) Company. This type of business is a separate legal entity from its owners, which means this company work as an artificial persona. Can buy or sell property, present into legal contracts, sue or get sued in courts of law.

Advantages

1.     Can issue securities

2.     Limited liabilities of shareholders

3.     Separate legal entity

4.     Up to 20% of tax saving

5.     Business continuity for infinite period.

Disadvantages

1.     Complex process for start ups

2.     High legal obligations

3.     Group of persons required to establish.

4.     Audit required

5.     The costs for incorporation is high

Q2. The agency problem arises in business when there is a conflicts between both parties. one party, known as the agent and another party, known as the principal. Conflicts of interest can arise if the agent personally gains by not acting in the principal’s best interest.

One can overcome the agency problem in your business by following ways:

1.     Full transparency in documentation.

2.     Placing restrictions on the agent’s capabilities,

3.     Well-being compensation structure for both parties.

Q3 What are Bonds ?

Bonds are normally issued by organizations for a time period of more than one year to raise money by borrowing.

Characteristics of a Bond

1.     A form of debt

2.     A defined time frame

3.     Fixed maturity date.

4.     Fixed interest on Bond

5.     Zero coupon interest rate bond also available.

Q4

1.     Equity shares represent real ownership in a company but Preference shares come with preferential rights.

2.     Shareholders receive dividends after all liabilities have been paid off but Preference shareholders are given more priority over equity shareholders.

3.     The rate fluctuates as per earnings but in case of preference dividend rate is fixed.

4.     Equity shareholders having voting rights but no voting rights to Preference shareholders.

5.     Equity share comes with the power to participate in the company’s management but preference shareholders does not.

Q5. Financial and Investment Decisions

         

Investment Decision: These are also known as Capital Budgeting Decisions. These are related to a company’s assets and resources. The firm puts its funds in procuring fixed assets and current assets is called Investment decisions

Financial decision: decisions about when, where and how should a business acquire fund is called financial decision. Financing decisions are all about allocation of funds and cost-cutting. Issue of shares, Debenture, Raising loans etc under financial decisions.