Incorporation – Various Types Of Companies
Previously, we’ve written about the types of business structures in Malaysia namely sole proprietorship, partnership, limited liability partnership and company. We have also discussed in depth that the member of the company cannot be made liable for the company’s debt (Also see Company’s Legal Personality). However that statement must be qualified by the type of the company’s liability structure.
The Companies Act 1965 provides for registration of three types of company where the members’ liability structure may be limited by guarantee or shares or provides that the member has unlimited liability in respect of the company’s debt.
Companies Limited By Guarantee
A company limited by guarantee is where the members of the company agree to undertake or make a guarantee in the company’s Memorandum of Association to contribute to a certain amount of assets or money when the company is wound up and need to repay its debt to the creditors.
A member of the company limited by guarantee does not need to pay anything be a member of the said company. He is only required to make the guarantee that he will pay a certain amount of money if the company is wound up.
If you are a member of a company limited by guarantee, there is a slim chance that you could obtain the company’s profit (in the form of dividends) without ever paying for anything, provided that the company is not wound up. However, one must keep in mind that the corporate world is full of risk, harsh and unpredictable. Always remember to only guarantee the amount that you are sure you can pay if the company does wind up. Otherwise, you might also go down together with the company.
Companies Limited By Shares
A company limited by shares is similar to the companies limited by guarantee where the liabilities of the members is subjected to the shares that he has subscribed or agreed to subscribe. Instead of giving a guarantee to pay a certain amount, the member made the payment in advance when the company is still a going concern. The amount paid shall then form part of the company capital which belongs to the company and can be used for the trade or to satisfy its debt.
If the member had fully paid the entire amount for the shares that he has subscribed, then he can no longer be made to pay for anything else if the company is wound up. However, if he has yet to pay the company for the amount of shares that he has subscribed, then, he may be called to pay to the company or its creditor the amount remain unpaid. However, he cannot be made to pay any more than the amount of unpaid shares.
An unlimited company is a company where the members’ liability to contribute to the assets of the company when the company is wound up is unlimited. In simple words, you can say the members are liable for the company’s debt. Therefore, if the company goes down, so will the members.
In corporate practice, this form of company is rarely used to trade. In fact, there is no commercial advantage at all for you to incorporate an unlimited company. You would’ve been better off trading as a sole proprietorship where it less costly to maintain.
The reason why unlimited company is incorporated by some people is in order to comply with certain rules or legislation. For example, under legislation provides that only unlimited companies will be given licence to operate in a certain industry. Therefore, any person who wants to be involved in the said industry would have no choice but to incorporate an unlimited company, with the assistance of a corporate secretary in Johor Bahru.