There is different type of business entities available in Malaysia. A business entity is an organisation formed voluntarily to carry out activities of trading goods or services to consumers for profitable gain or charitable purpose.
Most of the business entities are privately owned and administered by few individuals. One of the most preferred type of business entity is the private limited company. A private limited Company or otherwise known as “Sendirian Berhad” or “Sdn. Bhd.” is typically a small or medium sized enterprises with a straightforward registration process.
Private Limited Company (Sdn. Bhd.) in Malaysia
Malaysia has become one of the prime destinations in Asia for company registration amongst foreigners. It offers many advantages as an investment destination, favourable tax regime as well as strong government support.
With the revision of the Company Act 1965 to Company Act 2016, foreign investors are now allowed to solely own a Company (becoming a director and shareholder) without the need to appoint a local nominee director. This is allowed in the major vast of industries available in the country except for strategic sectors for national interest. The best structure to start a business is by incorporating a private limited Company (Sdn. Bhd.).
Advantages of a Private Limited Company (Sdn. Bhd.) in Malaysia
There are a lot of advantages incorporating a private limited Company (Sdn. Bhd.) in Malaysia can have and some of them:
Separate Legal Entity
- This business structure is considered as “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 safe guarded and not personally liable towards debts accumulated by business
- As a “legal person”, a private limited Company (Sdn. Bhd.) can purchase assets such as building, land, vehicles, and many more under its name
- Stakeholders have no rights to claim upon an asset owned by the Company as long as the Company is undergoing concern basis
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
- The private limited Company (Sdn. Bhd.) 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 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 pay-out
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
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
- The Company will be automatically operating under the Company Act 2016 framework instead of a Memorandum of Association (MoA) or Article of Association (AoA) unless stated otherwise by the shareholders
Disadvantages of incorporating a Private Limited Company (Sdn. Bhd.) in Malaysia
Even though there is a list of advantages incorporating a private limited Company (Sdn. Bhd.) can bring, there are certain downsides that entrepreneurs need to consider before incorporation.
Initially, setting up a private limited Company (Sdn. Bhd.) as a sole owner (director and shareholder) might come in handy. However, as time goes by and the business grows, more people might be involved with the decision making.
Even though the Company is exempted from annual general meetings, any decisions made by the appointed board of directors must still be written in circular resolutions which in turn will need the shareholder’s votes to conclude the matter. This can be a problem if there is conflict amongst the stakeholders.
Unable to appoint more than 50 shareholders at one time
Having investors within a Company is crucial to ensure the operation planning can be done in the long run. Funds injected by shareholders not only contributes to the daily operation, but also in adding the assets owned by the Company that in the end generate revenue for the year.
If the Company wishes to expand its business activities which might need more fund or investors, maintaining as a private limited Company (Sdn. Bhd.) might not be beneficial at this stage. As a private limited Company (Sdn. Bhd.), it is only allowed to appoint maximum of 50 shareholders at one time.
Unable to raise funds from the public
Another drawback by incorporating a private limited Company (Sdn. Bhd.) is that the Company is not able to sell its shares to the public as an alternative way to raise its fund. Their options remain by signing for loans from the bank, funds from their existing investors or selling off their existing assets.
Restricted share transfer options
It is well known that a private limited Company (Sdn. Bhd.) is formed by a close group of individuals such as business partners or family members. This also means, any decision to appoint an outsider to become one of the shareholders might be restricted.
Any newly issued shares issued shares must always be offered to the existing shareholders first before any outsiders can invest in them. The appointed board of directors will also have a say in this. They can decide whether the decision to transfer the shares to a new investor is beneficial to the Company or not.