To set up a business in Malaysia, there are a few business structures available for you to choose from. The most popular would be setting up a Private Limited Company (Sdn. Bhd.). Other options include sole proprietorship and partnership.
There are often varying reasons for business owners to decide setting up one of the options. We will discuss in detail on what are the differences between the three business structures and why business owners decide to choose such business structure.
Types of Business Structures commonly used in Malaysia
Sole Proprietorship
A sole proprietorship is the most common and simplest legal business structure in Malaysia. It is governed by Companies Commission of Malaysia abbreviated SSM (Suruhanjaya Syarikat Malaysia) and Registration of Businesses Act 1956.
A sole proprietorship is a wholly owned business by a single individual using his personal name or a trade name. However, it can only be registered by Malaysia citizen or Permanent Resident (PR).
Partnership
Similar to sole proprietorship, a partnership is also governed by Companies Commission of Malaysia abbreviated SSM (Suruhanjaya Syarikat Malaysia) and Registration of Businesses Act 1956.
However, unlike a sole proprietorship, a partnership is normally owned by two partners and not exceed twenty (20) partners at one time. The name registered must be a trading name and not personal name.
Similar to sole proprietorship, only Malaysia citizen or Permanent Resident (PR) can register such business structure.
Private Limited Company (Sdn. Bhd.)
A private limited Company or commonly known as “Sendirian Berhad” or “Sdn. Bhd.” is the preferred choice of business structure in Malaysia. It is governed by Companies Commission of Malaysia abbreviated SSM (Suruhanjaya Syarikat Malaysia) and Company Act 2016.
Unlike sole proprietorship and partnership, it can be solely owned by Malaysia citizen, Permanent Resident (PR) as well as foreigners alike. This type of business structure can acquire assets, go into debt, bind a contract and has perpetual succession until directors and shareholders decide to dissolve the Company.
Sole Proprietorships in Malaysia
Sole proprietorship is a high-risk high-return type of business structure where Malaysian start-up business owners admire. The unique features that this type of business structure offers include fast and easy registration, no corporate tax payments, less formal business requirements, easy to wind up and lowest annual maintenance.
- Simple and cheap registration [Registration fee is only MYR 30 for personal name and MYR 60 for trade name]
- Simple annual compliance procedure where owner only need to pay the annual fee for renewal purpose [Annual business renewal fees is only MYR 30 for personal name and MYR 60 for trade name]
- Tax rate is low as it will be charged against the owner personal income with a rate from 0% to 26%
- Decision making is easier as no general meetings are required to conclude such decisions
However, this type of business structure also has its downside:
- Owner is personally liable towards all the debts accumulated by the business
- If bankruptcy occur, creditors can easily sue the owner to claim their debt owed
- Tax rate is low as it will be charged against the owner personal income with a rate from 0% to 26%
- It is also not easy to encourage third party investor to fund the business as there is no share options within this type of business
- Only Malaysia citizens or permanent resident is able to register this business
The cost and annual compliance to maintain a sole proprietorship might be less compared to other type of business entities, however, the risk of the owner facing bankruptcy is definitely a lot at stake.
Partnerships in Malaysia
A partnership is actually similar to sole proprietorship except it can have more than one (1) owner but not more than twenty (20). This type of business is normally used for start-up audit firms or law firms.
In order to register a partnership, all business owners must visit Companies Commission of Malaysia abbreviated SSM (Suruhanjaya Syarikat Malaysia) personally. Do note that Secretarial firms are not able to register this type of business structure on behalf of the owners.
- Share responsibility – Registered partners will share the responsibilities of running the business. They have the option to split the tasks according to their specialised skills and make the most of their abilities to boost the business
- No corporate tax payments – Partnership is not a legal entity; hence all chargeable income will be split according to partnership percentage (%) and will be taxed based on their personal income
- Lowest annual cost – Partners only required to submit their annual renewal fees in order to continue running a business via partnership which only cost them MYR 30 for personal name and MYR 60 for trade name
- Winding up easily – Partnership can close their business immediately by visiting Companies Commission of Malaysia abbreviated SSM (Suruhanjaya Syarikat Malaysia)
Similar to that of a sole proprietorship, partnership also share several downsides which can be hasty for businessmen:
- Partners are personally liable towards all the debts accumulated by the business according to the percentage (%) agreed
- If bankruptcy occur, creditors can easily sue the owner to claim their debt owed
- It is not as easy to apply business loan with bank as they are sceptical with such business
- It is also not easy to encourage third party investor to fund the business as there is no share options within this type of business
- Only Malaysia citizens or permanent resident is able to register this business
The lack of stability within such business structure which can lead to loss of autonomy and chances for a partner to suddenly withdraw from the partnership will lead to a higher misfortune.
Private Limited Company (Sdn. Bhd.) in Malaysia
One of the most preferred legal business structures in Malaysia is the Private Limited Company otherwise known as “Sendirian Berhad” or “Sdn. Bhd.”. This business structure can be started by both local as well as foreigners in Malaysia.
The range of advantages Private Limited Company (Sdn. Bhd.) offers topple the other business structures available in Malaysia:
- Separate legal entity– Private limited Company (Sdn. Bhd.) is considered as a “legal person” which can purchase assets under its own name, bind a contract as well as sue another entity in courts. Stakeholders’ personal wealth are safe guarded and not personally liable towards debts accumulated by business
- Owning property – As a “legal person”, a private limited Company (Sdn. Bhd.) can purchase assets such as building, land, vehicles, and many more under its name.
- Ease in transfer of ownership– The shareholdersare at liberty to purchase, sell or transfer their shares to other existing shareholders or potential investors.There will be no direct impact towards Company’s daily operation if occur changes of shareholders
- Uninterrupted existence –This type of business structurehas a perpetual succession which means it will only cease to exist once it is legally dissolved. If any stakeholder departs or ceased, it will not affect the Company existence
- Better access to funding –As a “legal person”, the private limited Company (Sdn. Bhd.) can initiate a bank account opening and opt for the loan packages banker has to offer under its own name. The Company may also encourage third party investor to fund the business by offering their shares and plan the dividend pay-out
- Great corporate tax advantages –The business will only be taxed based on the profit before tax with first MYR 600,000 at 17% and a further of 24% on subsequent balance. Tax incentives such as pioneer status, investment tax allowance and SME Digitalisation Grant Scheme and Automation Grant are normally offered to private limited Company (Sdn. Bhd.)
- Manageable annual compliance – The Company Act 2016 has eased most of the annual compliance requirement such as the introduction of single member/director in the Company, abolition of the requirement to hold annual general meeting for private limited Company (Sdn. Bhd.) and the exemption to submit audited financial statement unless it meets the criteria
Differences between Sole Proprietorship, Partnership and Private Limited Company (Sdn. Bhd.)
The table below will highlight the differences of each business type:
| Sole proprietorship | Partnership | Private Limited Company (Sdn. Bhd.) | |
|---|---|---|---|
| Owner(s) of the business | Owned by single individual | Owned by 2 to 20 partners | Members (shareholders) invested into the Company have certain rights relation to the Company |
| Legal status | Not separate legal entities | Not separate legal entities | Separate legal entities |
| Liable party towards the debts | Owner | Partners | Company |
| Company Secretary | Not applicable | Not applicable | Qualified company secretary |
| Annual compliance | Annual fee required | Annual fee required | Annual return must be filed on each calendar year |
| Audit requirement | Not applicable | Not applicable | Not compulsory unless stated otherwise |
| Tax rate | Tax chargeable on owner (0% to 26%) | Tax chargeable on owner (0% to 26%) | Tax chargeable on Company For paid up capital less than MYR 2.5 million: On first MYR 600k – 17% Subsequent balance – 24% For paid up capital more than MYR 2.5 million: Flat rate 24% |
Sole Proprietorship VS Private Limited Company (Sdn. Bhd.)
As many might know, most Malaysian prefer to incorporate a sole proprietorship compared to a private limited Company (Sdn. Bhd.) due to the cheap cost and easy registration as well as cheaper cost to maintain the business annually. However, things can be rather difficult once business turn south, leading to their wish to incorporate a separate legal entity that a private limited Company (Sdn. Bhd.) offers.
- A separate legal entity where the Company is considered as a ‘legal person’ and owner personal wealth is not bonded for the business losses
- Can be solely owned by a person (local and foreign) which is similar to sole proprietorship
- Company Act 2016 has eased the annual compliance where it is not compulsory to file audited report until it meets a certain criterion
- Easier to open business bank account and exposed with different types of loan packages
- More tax incentives furnished by the In-Land Revenue Board (IRBM) such as pioneer status, investment tax allowance and SME Digitalisation Grant Scheme and Automation Grant
- Is perceived to be more professional and legitimate entity which will increase confidence for investors to invest within the Company
Partnership VS Private Limited Company (Sdn. Bhd.)
Similar to partnership, incorporating a private limited Company (Sdn. Bhd.) brings more advantages to business owners:
- Higher credibility
- Limited liability
- Better access to funding
- Ease of future business expansion
- Great corporate tax advantages
