Have you been working from home for way too long during the pandemic and began to think, “It’s time I quit my corporate job and set up a café selling overpriced coffee and cakes”.
And let’s say you eventually summoned the courage to resign from that corporate job and pursue your dream. What happens next?
You would very likely start to source for food supplies, hunt for an outlet, decide on the café’s marketing plan and put in place a branding strategy. There are however, less exciting, but important legal issues to be considered from the get-go to set your business up for success.
One of the very first decisions you would have to make as an entrepreneur is to decide on the type of business entity you wish to register officially – whether a sole proprietor (e.g. Amy’s Hipster Café), or a private limited company (Amy’s Hipster Café Sdn Bhd).
It is important to understand the differences between both these business entities given the different legal implications tied to each of these entities. For example, if you decide to register a sole proprietorship, the costs and hassle are minimal but there is no legal distinction between you and your business. This means that in the event your business owes money, you would potentially be sued in a court of law in your personal name. In the event a judgment is obtained against you which you are unable to pay off, you might be made a bankrupt.
However, if you register a private limited company, the company is a separate legal entity in the eyes of the law. This effectively means that if the company is in debt, the creditor can only sue the company and not you personally. Your company’s financial exposure does not extend to you directly (other than in exceptional circumstances).
Assuming you really like the idea of the company having a separate legal identity, you then head off to the Companies Commission of Malaysia to set up your RM1 private limited company. Congratulations! You’re now a director and shareholder of the company – Amy’s Hipster Café Sdn Bhd. At this point, you would have to engage the services of a company secretary for the management of the secretarial and corporate records of the company.
Further down the line, you might have a friend that shows interest in your business. He/she expresses his/her interest to invest in it, become a shareholder and director but does not want to participate in the running of your café. A common mistake which people usually make here is that they do not clearly set out their respective roles and responsibilities in writing. Not doing so at the start of this business relationship could precipitate avoidable problems in the future especially if there is a fall out between you and your business partner owing to the lack of clarity in roles and responsibilities.
A prudent entrepreneur would enter into a shareholder’s agreement to regulate the legal relationship, roles and responsibilities between the shareholders of the company. It also ensures that the constitution of the company is tailored to the specific company, the relationship of the business partners, as well as the business’ needs.
You might be tempted to just download templates off the internet, to save costs. Saving costs in this manner may not be wise as it could result in disputes that would costs a lot more to resolve later on. A budding entrepreneur ought to consult a lawyer before executing any agreement so that the legal implications of each term in such an agreement is considered carefully by a trained professional and advice given accordingly.
Now, with that all in place, your café’ should be off to a sound start. Ti auguro il meglio!
About the Author
Rachel is an Associate of the firm who graduated with honours from the University of Reading, United Kingdom. She handles corporate drafting and advisory work. Rachel has a genuine curiosity for learning and likes to be intellectually challenged.
