Sole proprietorships, partnerships, and Sdn Bhd companies are the business structures which a prospective business owner in Malaysia could possibly establish. Each has specific characteristics which serve to distinguish it from the other business structures of Malaysia.
Types of Business Structures Which Can Be Used for Company Incorporation in Malaysia
- Sole Proprietorship: This is a traditional and common business structure which can be found all over the world. For certain businesses, this structure is suitable because it is the simplest and least expensive business structure with regard to its setup.
- Partnership: This is a business which is owned by two or more separate entities.
- Sdn Bhd Company: The term “Sdn Bhd” stands for Sendirian Berhad. A Sdn Bhd company is a private limited company which cannot make its shares available to the general public. To incorporate or register a Sdn Bhd company in Malaysia, there must be a minimum of two directors. Shareholders and directors of a Sdn Bhd company do not risk losing any of their personal wealth or assets.
Importance of Selecting an Appropriate Business Structure
The selection of the business structure to be used is a crucial decision for all businesses. The most appropriate business structure which best suits the needs of the business ought to be selected. Business owners who select a suitable business structure will find that their business will soon be on a path towards success. The selection of an appropriate business structure will help a business reach its full financial potential. Conversely, if a business selects an unsuitable business structure, it will face significant difficulties while conducting its business operations.
Sole proprietorships are high-risk but high-reward business structures. Sole proprietorship are businesses in Malaysia which are owned by just one individuals. Owners of sole proprietorship experience unlimited liability which means that if the business fails to survive or declares bankruptcy, creditors will be able to sue the business owners for all the debts which are owed. Thus, the personal assets, personal income, and employment status of the owner are put at risk.
However, sole proprietorship owners who successfully overcome these risks stand to gain significant benefits. To successfully run a sole proprietorship less paperwork and fewer additional legal formalities are required, thus easing the registration process. The cost of incorporation is much lower; thus, profits are usually relatively high. The Malaysian government exempts sole proprietorship from certain audits. They are also not required to disclose their financial statements to the public. Furthermore, those who plan to convert their sole proprietorship into a Sdn Bhd company will find it easy to do so.
Partnerships are jointly owned by two or more individuals. They have similarities to sole proprietorships but differ in two ways. They differ because partnerships are to either have self-created partnership agreements or be governed by the Partnership Act 1961. Furthermore, sole proprietorship are run by one person, while partnerships are run between two and 50 people. In Malaysia, the businesses which make the best use of partnership structures are small and medium-sized enterprises (SMEs). This is because partnerships provide certain advantages for SMEs. These include a low startup cost, low maintenance costs, ease of incorporation with the Companies Commission of Malaysia (SSM), shared liability among all partners, and tax rates tailored to suit each partner.
However, partnerships also have certain disadvantages. The nature of a partnership prevents many partnerships from keeping proper accounting records. Tax planning with regard to a partnership may also be fairly difficult. The business continuity of the partnership will be affected if a partner dies, quits, or leaves the partnership in any other manner. In such a situation, the business could be closed or the beneficiaries might not receive what the departed partner left behind. Partnership owners also generally find it somewhat difficult to receive important bank loans.
A Sdn Bhd company is a business entity with limited liability. This business entity structure is the best choice for an experienced entrepreneur in Malaysia. Sdn Bhd companies also have certain unique benefits. For example, the liability of a Sdn Bhd company is limited. An entrepreneur’s personal wealth is therefore protected if the business suffers severe losses or fails. Another major advantage of Sdn Bhd companies is that of superior management and regulation. Tax planning is also easier because the company is a separate legal entity. A Sdn Bhd company’s business continuity never ends. This is because such a company will exist even if the primary owner dies, quites, or relinquishes ownership in any other manner. It is also relatively easy to get a loan to finance a Sdn Bhd company, and accounts of such companies are generally reliable and trustworthy.
However, it should also be noted that it is relatively expensive to set up a Sdn Bhd company when compared to the setup of other business entities. Another disadvantage suffered by Sdn Bhd owners which partnership owners do not experience is the fact that standard tax rates apply. Tax rates are not set in such a way so as to suit the owners’ own income levels. Incorporation of a Sdn Bhd company with SSM is also generally more complex when compared to incorporation of a sole proprietorship or partnership.
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Difference between SDN BHD, Sole-Proprietor and Partnership FAQs
The latest change to the Partnership Act took place in 1974. This update involved the amending of Act A240.
Every business in Malaysia cannot be categorized as more than one business structure. Therefore, businesses in Malaysia cannot make use of more than one business structure at the same time.