Starting and Running an E-Commerce Business

Starting and Running an E-Commerce Business

In December 2014, it was reported in the news that the Ministry of Domestic Trade, Cooperatives and Consumerism had said that under the Consumer Protection (Electronic Trade Transactions) Regulations 2012 (“Electronic Trade Regulations”), online traders must first register themselves with the Companies Commission of Malaysia before they can start selling and trading on online marketplaces or their own e-commerce websites.

The e-commerce industry is booming.

The Alibaba Group, a Chinese e-commerce company founded by Jack Ma, claimed the title for the largest global IPO ever when it got listed on the New York Stock Exchange in September 2014. On the date of its IPO, Alibaba’s market value was measured at US$ 231 billion. In this part of the world, Malaysia and Singapore generate almost half of total online retail sales in Southeast Asia, and both countries are expected to record double-digit growth over the next few years.

This article is therefore intended to set out some basic legal aspects that every online trader/operator should take note of, before venturing into, or continuing with, the e-commerce business.

The Electronic Trade Regulations apply to individual person and business that sells and supplies goods or services via a website or an online marketplace (e.g. an online trader), as well as online marketplace operator (e.g. an e-commerce/marketplace website operator).

One of the requirements under the Electronic Trade Regulations is that the individual person or business must disclose the business name (either the name of the owner, business or company) and the registration number of the business or company, if applicable.

Furthermore, since Malaysian laws view online business as no different from physical business i.e. both are accorded with the same kind of legal treatment, it comes as no surprise that the Government now requires all online traders/operators to follow the same steps like what a physical trader/operator would take. As a matter of fact, doing business online includes many of the same business/legal risks and challenges that any brick and mortar business faces.

Registration of business

Apart from coming up with a business model that can be monetized, the first step that every online trader/operator would usually take is to register his business. There are several legal structures that an online trader/operator can choose, with each of them attracting different legal implications.

Examples of the legal structures are such as sole proprietorship, partnership (general or limited liability), limited company (e.g. Sdn Bhd or Bhd) as well as a foreign company. Issues such as transferability, management, number of members, shares ownership, constitution, capital and liability, borrowing powers, security over assets and dissolutions must be thoroughly considered and discussed before deciding which legal structure to form.

Accounting, taxes and other record-keeping requirements

An e-commerce business, like any other business, must keep and maintain accurate records of its business transactions and accounts, and make sure that the business and accounting records are completely separated from personal financial records. An online trader/business may also enter into various types of online contracts for online services that he procures in order to conduct business. Copies of these contracts must be kept for future reference.

Such records must also be kept in accordance with the minimum retention periods as prescribed by the relevant laws (for example, the Companies Act 1965, the Income Tax Act 1967 and the Goods and Services Tax Act 2014 requires that certain records must be kept for at least 7 years whereas the Customs Act 1967 requires that records pertaining to importation of goods must be kept for at least 6 years), so that in the event of an audit or investigation, the online trader/operator would be able to produce the records as evidence.

Depending on the legal structure that an online trader/operator chooses, he may have to follow certain annual processes and procedures as required by law to keep the structure active and valid. For example, every limited company must file an annual return (accompanied by copies of documents, certificates, financial statements) with the Companies Commission of Malaysia within one month after the Annual General Meeting every year.

Every company must also keep at its registered office a register of its directors, managers and secretaries containing all personal particulars and information relating to shareholdings, charges, accounts, minute books, share certificates book as well as a set of company common seal. The online trader/operator must also pay taxes to the Inland Revenue Board and the Royal Malaysian Customs Department, where applicable.

Online Contracts

Website terms of use and privacy policy are the two most common documents that will usually be put up on an e-commerce website. Website terms of use contain terms that essentially work as a form of contract that governs the terms under which users use the website. The terms of use should set out the responsibilities of both users and website operator; how users can use the website (including the materials on the website); the copyright ownership of the website (including the user-generated contents); the liabilities disclaimer and the limited warranties/indemnities that the website operator is willing to give as well as a refund/cancellation policy (if it is an e-commerce website) or a social media and comment moderation policy (if the website allows user reviews or it hosts a blog/forum).

A privacy policy, on the other hand, sets out the manner in which the users’ personal data will be collected, processed and disclosed.

If website cookies are used to collect personal data, that must also be disclosed accordingly in the privacy policy. All online traders/businesses must make sure that they comply with the obligations set out under the Personal Data Protection Act 2010 if they collect and process personal data in Malaysia (regardless of whether their users are Malaysians or non-Malaysians).

The website terms of use and privacy policy are essentially online contracts that bind both the user and the trader/operator. Like any other contracts that a trader/operator would sign in the physical world, the contracts must be properly drafted and vetted. This is to make sure that the terms are consistent with applicable laws, and that the underlying processes are indeed put in place. That explains why one must not “copy and paste” the website terms of use or privacy policy found on other people’s website.

The courts have long recognised clickwrap contracts if the website operator provides clear and conspicuous notice of all the terms; requires users to scroll through to the bottom of the terms and then click an “I Agree” button. Not all website terms of use are automatically enforceable just because they have been clicked accepted by the users. If the terms contain unfair or illegal terms, the court may strike down the terms in the interest of protecting the consumers’ rights.

Consumer protection law, sale of goods, advertising code, trade description, misrepresentation

There are certain areas of law where the law of the country in which the consumer is located will still apply, even though the parties may have expressly agreed to a choice of governing law.

For example, the Consumer Protection Act 1999 expressly states that the Act will apply even if the governing law of the contract is a foreign law. The Consumer Protection Act 1999 and the Sale of Goods Act 1957 specifically deal with defective goods or services, misleading price indications as well as the sale of goods or services by description. If the goods or services are not up to the acceptable quality, the consumer has a right to reject any claim for refund.

The Trade Descriptions Act 2011 makes it an offence to apply a false or misleading statement on goods or services.

A consumer who has been induced to enter a contract by virtue of misrepresentation has the right to rescind the contract. If the website allows the third party to run advertisements, the website operator should ensure that the advertisements comply with the rules on online advertisements as set out in the Malaysian Communications and Multimedia Content Code.

Last but not least, the very nature of the Internet enables the e-commerce website to be accessible by anyone from any location in the world.

As the e-commerce business grows, the online trader/business should bear in mind the potential liability under the local law of all countries in which the website is accessible and he must seek to update the information (especially the legal terms) on the website from time to time.

About the author:
This article was written by Edwin Lee Yong Cieh, Partner of LPP Law – law firm in Kuala Lumpur, Malaysia. 
This article was first published in CHIP Magazine Malaysia.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.
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