What’s in this article
There are a few business structures in Malaysia available for you to choose from when setting up a business here. 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 Business Structure
As a matter of fact, a sole proprietorship is the most common and simplest legal business structure in Malaysia. Another key point is that the Companies Commission of Malaysia, abbreviated as SSM (Suruhanjaya Syarikat Malaysia), governs it along with the Registration of Businesses Act 1956.
In order to open a sole proprietorship in Malaysia, you (as the sole owner) using your personal name or register a trade name as the name of the business. However, you must be a Malaysian citizens or Permanent Residents (PR) in order to qualify.
Partnership Business Structure
Like a sole proprietorship, partnerships are also registered with Companies Commission of Malaysia, abbreviated (Suruhanjaya Syarikat Malaysia, SSM), under the Registration of Businesses Act 1956.
However, unlike a sole proprietorship, a partnership in Malaysia 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.) Business Structure
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.
Similar to sole proprietorship, only Malaysia citizen or Permanent Resident (PR) can register such business structure.
Sole Proprietorships Business Structure 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]
- You, the owner, will incur low tax rates as the charge is based on your personal income, with a rate from 0% to 26%
- No general meetings are required to conclude decisions, thus your decision making is easier
However, this type of business structure also has its downside:
- All debts accumulated by the business will be will be personally liable towards you, the owner
- If bankruptcy occur, creditors can easily sue the owner to claim their debt owed
- 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 Business Structure 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)
Downsides of Partnership
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.) Business Structure 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 safeguarded 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 shareholders are 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 structure has 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’s 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 payout.
Great corporate tax advantages
The business will only be taxed based on the profit before tax with first MYR 150,000 at 15% 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 the Company
For paid-up capital less than MYR 2.5 million:
|
Sole Proprietorship VS Private Limited Company (Sdn. Bhd.)
As many might know, most Malaysians 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
- This business vehicle is commonly used in Malaysia and is perceived to be more professional and legitimate entity
- Potential stakeholders or clients have more confidence in dealing with this type of business vehicle compared to others
- Easier to secure finance with lesser risk, personally
- Limited liability
- It is treated as a separate legal entity and automatically safeguards the stakeholder’s personal wealth
- Bears responsibility on compliance matters and day-in-day-out operations as a ‘legal person
Our Insights
As a team who has dealt with many types of cases throughout the years, we can conclude that:
As a local, in order for me to run a home-based business, incorporating a sole proprietorship or partnership seems like the best option available. Not only am I, as the business owner can monitor clearly on the business operation but if I feel like the business is not generating income as much as I expected, I can always windup the Company when I deemed fit.
As a foreigner, even though I am not allowed to run a sole proprietorship or partnership Company in Malaysia, incorporating a private limited Company (Sdn. Bhd.) do come in handy for a business expansion at a foreign land. Not only does the advantages topples the disadvantages, but the registration and annual maintenance are manageable. If the business does not meet my expectation, I will not lose my personal wealth and can request for the appointed Company Secretary to file a strike off application.
FAQs
Malaysia’s company laws allow people of any nationality to set up a Sdn Bhd company there. Conversely, foreigners may not start a sole proprietorship or partnership in Malaysia.
Although a Sdn Bhd has everlasting business continuity, it may nevertheless be dissolved. Of course, all the steps of company dissolution must be completed before such may take place.
All Sdn Bhd companies are required to have shareholders before they many conduct business operations. It is illegal for such a company to operate if it does not have any shareholders.
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.
The primary advantage of owning a private company limited by shares lies in the fact that it confers its owner with limited liability. Thus, those who are more risk-averse tend to start such companies. This benefit causes many to be interested in setting up these companies.
A WRT License applies to companies owned by foreign non-residents in Malaysia. It regulates the participation of foreigners in the country’s distributive trade sector. It also promotes fair and balanced development across businesses in Malaysia.
Each business type which can be started by foreigners living in Malaysia will have different business activities. These different business activities will naturally require differing amounts of money to be spent. Therefore, the paid-up capital requirements are different to account for such discrepancies.
