Sole Proprietorship VS Private Limited Company (Sdn. Bhd.)
The sole proprietorship seems like the best option for most people due to:
However, what most people do not realise is that these simple ways also come with a considerable risk to take note off:
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
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
TIP: Most people are not aware that Sole Proprietorship still needs to prepare a simple accounting report consist of Balance Sheet and Profit Loss for the year. This will be required if the owner wish to apply for loan as a supporting document.
So why should you opt for Private Limited Company (Sdn. Bhd.) instead of Sole Proprietor?
Separate legal entity – a private limited Company (Sdn. Bhd.) is considered as a ‘legal person’ who can purchase assets under its own name, bind a contract as well as sue another entity in courts
Can be solely owned by a person (local and foreign)
Company Act 2016 has eased the annual compliance for private limited Company (Sdn. Bhd.) where it is not compulsory to file audited report until it meets a certain criterion
Easier to open corporate 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
A private limited Company (Sdn. Bhd.) is perceived to be more professional and legitimate entity which will increase confidence for investors to invest within the Company
Partnership and Limited Liability Partnership (LLP)
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.
Why most prefer the conventional partnership compared to limited liability partnership (LLP)?
Ease of registration – The registration fee is only MYR 30 for personal name and MYR 60 for trade name and can be done within an hour with any SSM branch or online via Ezbiz Online services
Less compliance requirements – Similar to sole proprietorship, a conventional partnership is subject to fewer compliance requirement. There is no statutory requirement for annual audit, annual general meeting, and annual return filing
Relatively lower tax – Similar to sole proprietorship, the annual tax is chargeable directly on the partner personal income tax where they can also enjoy personal tax reliefs and scaled tax rates
However, to those aiming for business vehicle which can carry out their business as partners but have the characteristics of private limited Company (Sdn. Bhd.), they will opt for a limited liability partnership (LLP).
The limited liability partnership (LLP) is a separate legal entity. It is considered as a ‘legal person’ who can purchase assets under its own name and offers protection towards partners’ personal assets from business debts and liabilities
It provides flexibility in the 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 Company (Sdn. Bhd.). A limited liability partnership (LLP) is only required to submit an annual declaration stating the business is able to pay its debts in normal course of business with a fee of only MYR 200.
NOTE: A limited liability partnership (LLP) still needs to keep their business accounting records to explain the business transactions and financial position. It is similar to private limited Company (Sdn. Bhd.).
Private Limited Company (Sdn. Bhd.) instead of Limited Liability Partnership (LLP)
Malaysia was ranked as the 12th easiest and friendliest place to do business by The World Bank with a score of 81.5%. One of the criteria that concludes the rank is the type of business used which is a Private Limited Company (Sdn. Bhd.).
Even though limited liability partnership (LLP) is almost similar to a private limited company (Sdn. Bhd.), there are still significant differences which opting to incorporate a private limited Company (Sdn. Bhd.) a better option:
1. 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
2. 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’
3. Better access to funding
- As a ‘legal person’ they can initiate a bank account opening on its name once the Company is successfully incorporated
- Bankers usually offer the best packages of loan to meet the requirement of the Company business plan and expectations
- Company is able to encourage third party investor to fund the business by offering their shares and plan the dividend pay-out
4. 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 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
- The business will not die down if one of the stakeholders resigned or ceased which proofs as an ongoing entity
5. Great corporate tax advantages
- 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.)
- 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 for the corporate tax rate.
As mentioned earlier, the Company Act 2016 has eased the annual reporting for private limited Company (Sdn. Bhd.). Previously, all accounts are compulsory to hold an annual general meeting, file audited financial statement and have memorandum and articles of association.
With the amendment of the Company Act, it has made it easier and unlocked opportunities for businessmen all around the world to expand their business in Malaysia.
NOTE: A private limited Company (Sdn. Bhd.) is not compulsory to file an audited financial statement unless it meets a certain criterion
Public Limited Company is an option to expand existing business
Most of the regulation in 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 meeting and filing audited report are compulsory
A more complex administration that can also lead to a slow decision-making process
However, despite the differences, there are advantages once a private limited Company (Sdn. Bhd.) wishes to expand their business and convert to public limited Company (Berhad):
Institutional investment – It is easier for public listed companies to attract institutional investment without having to go through hassle negotiations
Enhanced corporate profile and improved valuation – Listed companies can greatly elevate the Company profile which automatically enhance and increase business opportunities as there is elements of trust and credibility
Employees’ shareholding scheme – This type of scheme is able to boost the employee morale, retain long-serving and loyal employees as well as attract first-rate employees
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 prior to an exit, as it offers potential high pay-out