A Complete Guide: Exploring the Various Types of Business Entities in Malaysia

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:

5 Different Types of Business Entities in Malaysia

1. Sole proprietorship [The simplest business]
2. Partnership
3. Limited Liability Partnership (LLP)
4. Private Limited Company (Sdn. Bhd.)
5. 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.

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’ personal 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.

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.

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 personal income.
• Decision making becomes easier as general meetings are not necessary to conclude decisions.
• Simple annual compliance procedure where owner only need to pay the annual fee for renewal purpose [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 acknowledgment and addressing.

• The owner bears personal liability for all 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.

Private Limited Company Over Sole Proprietor

So why should you opt for Private Limited Company (Sdn. Bhd.) instead of Sole Proprietor?

• A private limited Company (Sdn. Bhd.) is considered as a ‘legal person’, in other words, a separate legal entity. Basically, it can purchase assets under its own 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 Company (Sdn. Bhd.) where it is not compulsory to file 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 more professional and legitimate entity, as a result, this can increase the confidence of investors to invest within the Company
• Easier to open corporate bank account and exposed with different types of loan packages

Partnership and Limited Liability Partnership (LLP)

In similar fashion, 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 most prefer the conventional partnership compared to limited liability partnership (LLP)?

• Ease of registration – Registration is easy, with a fee of only MYR 30 for personal name and MYR 60 for 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 requirement. As a matter of fact, 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

Advantages of Limited Liability Partnership Over Partnership

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. Thus 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.

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 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 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 consequently offering their shares and plan 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 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 resigned or ceased which proofs as an ongoing entity.

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 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 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

Advantages of Transitioning From Private Limited Company to 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 public listed companies to attract institutional investment without having to go through hassle negotiations
• 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
• 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
• 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