What’s in this article
- Categories of Business Entity Registration in Malaysia
- 5 Different Types of Business Entities in Malaysia
- Sole Proprietorship VS Private Limited Company (Sdn. Bhd.)
- Partnership and Limited Liability Partnership (LLP)
- Private Limited Company (Sdn. Bhd.) instead of Limited Liability Partnership (LLP)
- Public Limited Company is an option to expand existing business
- FAQs
Anyone who intends to start running a business in Malaysia, must go through their business registration with the Companies Commission of Malaysia, abbreviated as SSM (Suruhanjaya Syarikat Malaysia). It’s essential to grasp the functions of the different types of business entity available in Malaysia to align with your business plan and expectations.
Categories of Business Entity Registration in Malaysia
There are three (3) main categories of business entity registration:
Name | Registration of Business (ROB) | Registration of Company (ROC) | Limited Liability of Partnership (LLP) |
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Regulation | Registration of Business Act 1956 | Companies Act 2016 | Limited Liability Partnerships Act 2012 |
Legal status |
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Types of businesses |
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Limited Liability Partnership (LLP) |
5 Different Types of Business Entities in Malaysia
- Sole proprietorship [The simplest business]
- Partnership
- Limited Liability Partnership (LLP)
- Private Limited Company (Sdn. Bhd.)
- Public Limited Company (Berhad)
Below we will highlight the differences of each business structure:
Sole Proprietorship
A sole proprietorship is the simplest and most common business structure for Malaysians looking to start a business. Here’s a quick rundown of what you need to know:
- Ownership: You, as a single individual, will entirely own the business. There’s no legal distinction between you and the business entity.
- Liability: You are personally liable for all business debts and obligations. This means your personal assets are at risk if the business incurs debt.
- Registration: Setting up a sole proprietorship is straightforward and inexpensive. You can register your business with the Companies Commission of Malaysia (SSM) for a minimal fee.
- Compliance: You must pay annual renewal fees to maintain your business registration. However, there’s no requirement for a company secretary or annual audits.
- Taxes: Your business profit is considered your personal income and taxed accordingly (tax rates range from 0% to 26%).
In summary, a sole proprietorship offers a simple and low-cost way to start a business in Malaysia. However, the owner bears all financial responsibility.
Partnership
A partnership is a business arrangement between two to twenty individuals who share ownership, operation, and profits of the business. Here’s a breakdown of key features:
- Ownership: Multiple partners (minimum 2, maximum 20) can co-own the business. A partnership agreement should clearly define profit-sharing ratios and responsibilities.
- Liability: Similar to a sole proprietorship, partners are personally liable for the business’s debts and obligations. This means your personal assets could be at stake if the business encounters financial difficulties.
- Registration: Registering a partnership with SSM is a relatively simple process. However, it’s crucial to have a solid partnership agreement in place beforehand.
- Compliance: You must pay annual renewal fees to maintain your business registration. There’s no requirement for a company secretary or annual audits.
- Taxes: Each partner’s share of the business profit is considered their personal income and taxed accordingly (tax rates range from 0% to 26%).
In essence, a partnership allows for shared ownership and expertise but comes with the risk of personal liability for all partners.
Limited Liability Partnership (LLP)
The Limited Liability Partnership (LLP) offers a business structure that combines flexibility with limited liability protection for its partners. Here’s a breakdown of the key characteristics:
- Ownership: Partners own shares in the capital and profits of the LLP. A partnership agreement should define profit-sharing ratios, responsibilities, and management structure.
- Liability: Unlike sole proprietorships and partnerships, LLPs are separate legal entities from their partners. This shields partners’ personal assets from business debts, providing a substantial advantage.
- Registration: LLP registration with SSM involves appointing a qualified company secretary and adhering to specific regulations.
- Compliance: Annual filing of a declaration and a solvency statement is mandatory. Audits are not compulsory unless required by the SSM or under specific circumstances outlined in the LLP agreement.
- Taxes: The Malaysian government taxes LLPs based on their profits. The tax rate depends on the company’s paid-up capital:
- For paid-up capital less than MYR 2.5 million, a tiered structure applies (15% to 24%).
- 15% for the first MYR150,000.
- 17% for MYR150,001 to MYR600,000.
- 24% for MYR600,001 and over.
- For paid-up capital exceeding MYR 2.5 million, a flat rate of 24% applies.
- For paid-up capital less than MYR 2.5 million, a tiered structure applies (15% to 24%).
In summary, LLPs provide a good balance between flexibility for partners and limited liability protection. However, compliance requirements are more stringent compared to sole proprietorships and partnerships.
Private Limited Company (Sdn. Bhd.)
A Private Limited Company (Sdn. Bhd.) is a popular choice for businesses seeking a structured and established legal entity. Here’s a breakdown of the key features:
- Ownership: Members (shareholders) own the company, investing capital and holding shares representing ownership rights.
- Liability: Sdn. Bhd. is a separate legal entity from its members. This means the company’s assets and liabilities are distinct from shareholders’ assets. Thus, shareholders are usually liable only up to their investment in the company.
- Registration: Sdn. Bhd. registration involves a more complex process compared to simpler structures. Appointing a qualified company secretary is mandatory.
- Compliance: Annual returns must be filed with the SSM each calendar year. Audits are not compulsory unless required by the SSM, company regulations, or specific circumstances.
- Taxes: The Malaysian government taxes Sdn. Bhd. based on their profits. The tax rate depends on the company’s paid-up capital:
- For paid-up capital less than MYR 2.5 million, a tiered structure applies (15% to 24%).
- 15% for the first MYR150,000.
- 17% for MYR150,001 to MYR600,000.
- 24% for MYR600,001 and over.
- For paid-up capital exceeding MYR 2.5 million, a flat rate of 24% applies.
- For paid-up capital less than MYR 2.5 million, a tiered structure applies (15% to 24%).
In essence, Sdn. Bhd. offers limited liability protection for owners and a clear separation between business and personal finances. However, it comes with a more complex setup and higher compliance requirements.
Public Limited Company (Berhad)
A Public Limited Company (Berhad) is the most complex business structure in Malaysia, suited for large-scale businesses seeking access to public capital markets. Here’s a breakdown of the key characteristics:
- Ownership: Similarly to Sdn. Bhd., a Berhad is owned by members (shareholders) who invest capital and hold shares representing ownership rights.
- Liability: Berhad is a separate legal entity, offering limited liability protection to its shareholders. Shareholders’ personal assets are generally not at risk for the company’s debts, beyond their investment amount.
- Registration: The registration process for a Berhad is the most rigorous, with stricter regulations and higher initial costs compared to other structures. A qualified company secretary is mandatory.
- Compliance: Annual returns must be filed with the SSM each calendar year. Unlike other structures, audits are compulsory for Berhad companies.
- Taxes: The Malaysian government taxes Berhads based on their profits. The tax rate depends on the company’s paid-up capital:
- For paid-up capital less than MYR 2.5 million, a tiered structure applies (15% to 24%).
- 15% for the first MYR150,000.
- 17% for MYR150,001 to MYR600,000.
- 24% for MYR600,001 and over.
- For paid-up capital exceeding MYR 2.5 million, a flat rate of 24% applies.
- For paid-up capital less than MYR 2.5 million, a tiered structure applies (15% to 24%).
In summary, Berhad offers the strongest legal framework and access to public funding. However, it involves a demanding setup process, ongoing compliance requirements, and mandatory audits.
Sole Proprietorship VS Private Limited Company (Sdn. Bhd.)
The sole proprietorship seems like the best option for most people due to:
- Simple and cheap registration [Registration fee is only MYR 30 for personal name and MYR 60 for trade name]
- A low tax rate, given that it charges a rate of 0% to 26% against the owner’s income.
- Decision-making becomes easier as general meetings are not necessary to conclude decisions.
- Simple annual compliance procedure where owner only needs to pay the annual fee for renewal purposes [Annual business renewal fees are only MYR 30 for personal name and MYR 60 for trade name]
Risk Involved With Sole Proprietorship
However, many fail to recognize that these seemingly straightforward methods also involve significant risks that require acknowledgement and addressing.
- The owner bears personal liability for all debts accumulated by the business.
- If bankruptcy occurs, creditors can easily sue the owner to claim their debt owed.
- It is not as easy to apply for a business loan with the bank as they are sceptical about such a business.
- It is also not easy to encourage third-party investors to fund the business as there are no share options within this type of business.
- Only Malaysian citizens or permanent residents can register this business.
Private Limited Company Over Sole Proprietor
So why should you opt for a Private Limited Company (Sdn. Bhd.) instead of a Sole Proprietor?
- A private limited Company (Sdn. Bhd.) is considered as a ‘legal person’, in other words, a separate legal entity. It can purchase assets under its name, bind a contract, as well as sue another entity in court
- A single person, local or foreign, can own it entirely.
- Company Act 2016 has eased the annual compliance for private limited Companies (Sdn. Bhd.) where it is not compulsory to file an audited report until it meets a certain criterion
- 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
- A private limited Company (Sdn. Bhd.) is perceived to be a more professional and legitimate entity, as a result, this can increase the confidence of investors to invest within the Company
- Easier to open a corporate bank account and be exposed to different types of loan packages
Partnership and Limited Liability Partnership (LLP)
Similarly, a partnership structure is akin to a sole proprietorship, with the key distinction being its allowance for multiple owners, not exceeding twenty individuals. A popular business model commonly adopted by startup audit firms or law practices in particular.
Why do most prefer conventional partnerships compared to limited liability partnerships (LLP)?
- Ease of registration – Registration is easy, with a fee of only MYR 30 for a personal name and MYR 60 for a trade name. In addition, the registration can be done within an hour with any SSM branch, or online via Ezbiz Online services
- Less compliance requirements – Similarly to sole proprietorship, a conventional partnership is subject to fewer compliance requirements. There is no statutory requirement for annual audits, annual general meetings, and annual return filing
- Relatively lower tax – Similar to sole proprietorship, the annual tax is chargeable directly on the partner’s income tax where they can also enjoy personal tax reliefs and scaled tax rates
Advantages of Limited Liability Partnership Over Partnership
However, those aiming for a business vehicle which can carry out their business as partners but has the characteristics of a private limited Company (Sdn. Bhd.), will opt for a limited liability partnership (LLP).
- The limited liability partnership (LLP) is a separate legal entity. Thus it is considered a ‘legal person’, who can purchase assets under their name and offers protection towards partners’ assets from business debts and liabilities
- It provides flexibility in business management. A limited liability partnership (LLP) will require an agreement between partners on how the business should be managed, the percentage of profit for each partner as well as the roles of the partners within the Company
- Easier compliance requirements compare to private limited Companies (Sdn. Bhd.). A limited liability partnership (LLP) is only required to submit an annual declaration stating the business can pay its debts in the normal course of business with a fee of only MYR 200.
Private Limited Company (Sdn. Bhd.) instead of Limited Liability Partnership (LLP)
Malaysia has been recognized as the 12th easiest and friendliest place to conduct business by The World Bank, as can be seen by its commendable score of 81.5%. This ranking considers various factors, including the type of business entity utilized, notably the Private Limited Company (Sdn. Bhd.).
While the Limited Liability Partnership (LLP) structure shares similarities with a Private Limited Company (Sdn. Bhd.), opting for the latter presents notable advantages, making it a preferred choice.
Higher credibility
- This business vehicle is commonly used in Malaysia and is correspondingly perceived to be a 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’
Better access to funding
- As a ‘legal person’ they can initiate a bank account opening in its name once the Company is successfully incorporated
- Bankers usually offer the best packages of loans to meet the requirements of the Company’s business plan and expectations
- The company can encourage third-party investor to fund the business by consequently offering their shares and planning the dividend pay-out
Ease of future business expansion
- A private limited Company (Sdn. Bhd.) can always convert to a Public Listed Company (Berhad) once it grows to a level at which public funding brings significance to the Company
- Since this type of Company can be owned solely by a foreigner, it can be one of the ways to expand their business from their home country in Malaysia
- In addition, the business will not die down if one of the stakeholders resigns or ceases which proves to be an ongoing entity.
Great corporate tax advantages
- Tax incentives such as pioneer status, investment tax allowance SME Digitalisation Grant Scheme and Automation Grant are normally offered to private limited Companies (Sdn. Bhd.)
- The business will only be taxed based on the profit before tax with first MYR150,000 at 15%, then at 17% for MYR150,001 to MYR 600,000, and a further of 24% on subsequent balance over MYR600,000 for the corporate tax rate.
As previously mentioned, the Company Act 2016 has streamlined annual reporting requirements for Private Limited Companies (Sdn. Bhd.) in Malaysia. Previously, these entities were obligated to hold an annual general meeting, file audited financial statements, and maintain a memorandum and articles of association.
The amendments introduced by the Company Act have significantly simplified these obligations, thereby unlocking opportunities for entrepreneurs worldwide to expand their business ventures in Malaysia.
Public Limited Company is an option to expand existing business
Most of the regulation in a private limited Company (Sdn. Bhd.) applies to a public limited Company (Berhad) except:
- The Company shares can be sold to the public as an alternative to raise fund
- Strict compliance such as holding annual general meetings and filing audited reports are compulsory
- A more complex administration can also lead to a slow decision-making process
Advantages of Transitioning From a Private Limited Company to a Public Limited Company
Nevertheless, despite the disparities, there are notable advantages when a Private Limited Company (Sdn. Bhd.) decides to expand its business and transition into a Public Limited Company (Berhad).
- Institutional investment – It is easier for publicly listed companies to attract institutional investment without having to go through hassle negotiations
- Employees’ shareholding scheme – This type of scheme can boost employee morale, retain long-serving and loyal employees as well as attract first-rate employees
- Enhanced corporate profile and improved valuation – Listed companies can greatly elevate the Company profile which automatically enhances and increases business opportunities as there is elements of trust and credibility
- Profitable exit strategy – Making the Company public will provide a mechanism for owners to nurture and expand the business, working towards improving the entity’s share price performance and selling it before an exit, as it offers a potentially high payout
FAQs
You can appeal to the SSM in writing showing the compelling reasons why the SSM should consider your appeal. The SSM has the discretion to make the final decision.
Business licenses issued in Malaysia only pertain to businesses which have been set up there. Therefore, such licenses are not valid in countries other than Malaysia.
A Sdn Bhd company is one of the most common business entities in Malaysia. It is a type of private company which is limited by shares. The liabilities of a Sdn Bhd company are also limited.
SSM was established in 2002. It is a statutory body that functions under the auspices of the Malaysian government. Its primary purposes are those of assisting in company incorporation and business registration as well as providing information about companies and businesses in Malaysia to the public.
The punishments for failure to prepare audited accounts, annual returns, or both are not imposed on the company, but on the company’s director. The director of a company which fails to do so will be fined up to RM30,000, imprisoned for up to five years, or both.
SSM oversees all company registrations in Malaysia. Therefore, all company registrations have to go through SSM. It is impossible to register a company in Malaysia in any other way.
In Malaysia, a DP10 work permit is also known as a Professional Work Permit Visa. It is valid for two years but can have its validity extended by up to 10 years. It is meant for foreigners deemed to be skilled workers.
No, but business licenses are needed to operate legally.
This is dependent on several factors, but most businesses have managed to secure their licenses within 14 working days.
I want to open a private company in Malaysia. I think it needs 2 director and out of them one must be local. I don’t know anyone in Malaysia. Can your company help me to find a local director?
Hi P R,
Yes, we are able to assist on that. Do drop us a text on WhatsApp and our sales consultant will get back to you to discuss further: https://wa.me/6584833084
Thank you!
Joint name land title (both parents name) (palm oil) must register as partnership? or can register as sole proprietor?
Thank you.
Hi, please be informed that you can set up Sdn Bhd company with both parents name as shareholder and the company can purchase the land later
Please contact us via Paul Hype Page to discuss further.
Thank you for your question.
Warm regards
Paul
Can an LLP be set up with 1 owner ?
Hi Anura,
It is no possible because Partnership means more than 1.
Please contact us via Paul Hype Page to discuss further.
Thank you for your question.
Warm regards
Paul
can sdn bhd become shareholder of another sdn bhd?
Hi Lim
Yes it is possible for a company to do so. To discuss further, please contact us at Paul Hype Page.
Thank you for your comment.
Warm regards
Paul
Hi ,
Let’s say if it’s a LLP start up, and my name is in it. In the end, what if the company declares bankruptcy?
Would I have to bare any compensations and such?
Hi Blue
Unfortunately, as this pertains to legal liabilities, we are unable to advise you without better understanding the exact terms. Please seek legal advice from a lawyer familiar with corporate law.
Thank you for your comment.
Warm regards
Paul
Can foreigners be a director in BERHAD company?
Hi Hanisa
Yes, it is possible for foreigners to be directors of companies in Malaysia. There are certain restrictions depending on the nature of your business and if there are any Malaysian directors. To further discuss the requirements and the process for you to incorporate with us, please get in touch with us.
Thank you for your comment.
Warm regards
Paul
I am expat and i carry resident pass from my husband. We took 4 years ago because of my husband job. I would like to open a company. What kind of company i can open?
Hello Emel,
As a foreigner, you are permitted to open and completely own a Sendirian Berhad company according to Malaysia’s Companies Act of 2016. While owning this company, you may choose to avoid holding an annual general meeting, take advantage of the no par value share regime, and select a director who may also be one of the company’s shareholders. Should your company be eligible for one, you may also make use of an audit exemption.
Please contact us for further information on company incorporation and ownership in Malaysia.
Thank you for your question.
Paul