Business Partnerships in Malaysia

There are many  types of business entities  which exist in Malaysia and one of the more popular ones is Partnership. The Companies Commission of Malaysia – Suruhanjaya Syarikat Malaysia (SSM) and the Registration of Businesses Act 1956 govern partnerships.

Definition of a Partnership

A partnership comprises two (2) to twenty (20) individuals owning a business entity. The law furthermore prohibits using an identity card name as a business name for such an entity. Only a local Malaysian or Permanent Resident (PR) can register a Partnership to operate their business.

Some of the unique features of a Partnership include:

• Fast and easy registration
• No corporate tax payments
• Less formal business requirements
• Easy wind-up process
• Lowest annual compliance cost

The aim of Partnerships is for start-up businesses to test their business strategy and explore a new market.

A legal appointment counsel typically drafts the partnership agreement, which clearly outlines the responsibilities and liabilities of each partner, along with the conditions for termination and the methods for resolving disputes that may arise between partners.

All partners have to share the profits and liabilities in the business depending on the percentage that they have.

Types of Partnerships in Malaysia

1. Conventional Partnership
   The Partnership Act 1961 specifically governs conventional partnerships. A partnership comprises 2 or more owners, with a cap of 20 owners who pool resources to pursue profit through shared business efforts. Partnerships, fitting for professional practices like auditors and lawyers, are exclusively open to Malaysian citizens and permanent residents. Partners share both profits and liabilities. The partnership itself avoids taxation, but individual partners are responsible for reporting their share of gains and losses to tax authorities. Similar to sole proprietors, partners face total liability for the partnership’s debts and obligations.
2. Limited Liability Partnership
   Governed by the Limited Liability Partnership Act 2012, a limited liability partnership (LLP) can be established by 2 or more individuals or corporations.
   Unlike a regular partnership, an LLP is a distinct legal entity with the ability to initiate legal actions, respond to lawsuits, and manage property ownership. Read more about LLP in our other article here

Advantages of Starting a Partnership in Malaysia

The reasons why a Partnership is the preferred entity for business owners in Malaysia are as follows:

1. Sharing of responsibility in a Partnership, the partners will need to share the responsibilities to run the business. This procedure allows each partner to fully utilise their individual capabilities and specialities, combining these skills to ensure the business runs smoothly and generates income.
2. No corporate tax payments Partnership is not considered as a legal entity, hence all chargeable income generated by the Company will be charged on all partners personal income tax instead of a corporate tax.
3. The lowest annual cost among other business structures in Malaysia, a partnership only requires an annual filing of MYR 60 to renew its trade name. It is relatively a simple submission to SSM.
4. Easy wind-up processIf the business is deemed no longer profitable for the partners, they are allowed to visit any SSM branch to wind up the Company. Also, if the Partnership did not file its annual renewal fee on time, SSM can automatically close the business as enacted in the Registration of Businesses Act 1956.
5. Minimum entry requirementsThe entry requirement for Partnerships is very simple as they only need at least 2 Malaysian citizens or permanent residents (PR) with legitimate Malaysia local residential addresses. The cost to start the business is only MYR 60 for a trading name.

Disadvantages of Starting a Partnership in Malaysia

Of course, there are also certain disadvantages when it comes to establishing a Partnership in Malaysia.

• A conventional partnership is not a separate legal entity. This means, the partners are jointly and severally liable towards the debts and liabilities accumulated by the business. If any of the partners has filed for bankruptcy, creditors have the right to sue the partners involved to claim the debt owned which will directly impact each partner’s wealth.
• The absence of a written agreement granting expulsion power during business formation prevents partners from unilaterally removing another partner, even in the face of disputes. This situation can exacerbate tensions and hinder sound decision-making for the business.
• As shared previously, the partnership is not liable towards corporate income tax. However, each partner is liable to disclose the profits they received from the business in their income tax filing. This will lead to a higher tax payable for their income tax.

Partnership Agreements

A partnership agreement is a formal contract which legally binds the partners. This agreement serves to delegate their respective rights, duties, and the division of profits and losses. Additionally, it establishes fundamental guidelines governing the partnership, encompassing aspects like capital contributions, withdrawals, and financial reporting. Although the Partnership Act 1961 does not mandate partnership agreements, it is strongly recommended to write partnership agreements to formally establish operational guidelines, enhance business efficiency, and mitigate potential disputes and misunderstandings among partners.

Partnership agreements commonly include among others – the partners’ assumptions, assets and capital accounts ownerships, profit and loss sharing, practice management, dispute matters, expulsion, death, disability or resignation.

In preparing a partnership agreement, the Malaysian Bar will create a checklist of details that includes.

Rights and Liabilities in a Partnership

Section 26 of the Partnership Act 1961 outlines the obligation of partners. By the partnership agreement, partners are obligated to fulfil the following duties, with exceptions only applying in specific circumstances as outlined within the agreement itself.

• Equal sharing of capital and profits, and equal sharing of losses regardless of contributions or efforts.
• Partnerships must reimburse partners for expenses and liabilities incurred in standard business operations or property preservation.
• Partners exceeding their agreed capital contribution earn 8% annual interest. (This clarifies that exceeding the agreed amount triggers the interest.)
• Partners only receive interest on their contribution capital after profits are determined. (This emphasizes the timing of interest payment.)
• Partners have the right to manage the business unless a designated manager handles daily operations. (This highlights the partners’ authority with a specific exception.)
• Partners do not receive compensation for their involvement in business operations. (This clarifies the lack of compensation for simply being a partner.)
• New partners require unanimous consent from existing partners.
• Ordinary business matters will be decided by a majority, major changes necessitate unanimous agreement.

Guidelines on Termination of Partnership in Malaysia

Regarding Partnership laws, every country has its own set of regulations; Malaysia is certainly no exception. A Partnership in Malaysia can be dissolved for any of the reasons below:

• Cessation of business
• Bankruptcy
• Death of owner
• Under court order

The procedure to proceed with the termination is as follows:

1. The owners have to complete the Notification of Termination Registered Business (Form C) accordingly. You can find it on the SSM official website.
2. Every partner involved must sign the completed form accordingly.
3. The form you need to submit over any SSM counter or via the online portal at ezbiz.ssm.com.my (only for cessation of business).
4. To initiate the termination process, here’s a list of the documents you’ll need to submit:
   • Business registration certificate
   • Clear copy of partners’ NRIC
   • Clear copy of the death certificate of the partner (if any)
   • Clear copy of court order termination (if any)
   • Verification of the owner’s bankruptcy may require documents (if any)

The registration fees:

• Notification of termination of registered business – No fees applicable
• Business information – MYR 10

Hence, following the completion of all essential arrangements, partners in Malaysia can then proceed with the termination of the partnership, as outlined in the following steps.

• You must register business termination within thirty (30) days from the date of closure.
• Businesses with valid registrations can submit a Notification of Termination of Registered Business.
• Furthermore, submit the Notification as a result of death within four (4) months from the date of demise.
• For a fee of MYR 10, the Companies Commission of Malaysia (SSM) will issue a confirmation letter verifying the expired status of a business.
• Results will come out within fifteen (15) minutes from the time submission date.

We know that incorporating a company in Malaysia can be challenging and choosing the right business entity is crucial to set up your business to success. Speak to us for a business consultation or more information on company incorporation in Malaysia!