Choosing the right business entity for your new venture in Malaysia can be a daunting task. In our previous article, Understanding the 5 Most Common Types of Business Entities in Malaysia, we explored 5 types of business entities that are available in Malaysia. In this article, we want to dive into the two most popular choices of business entity, which are Sole Proprietorship and Private Limited Company, known as Sendirian Berhad ("Sdn. Bhd.").
This blog aims to compare both structures, detailing their registration process, tax obligations, legal liabilities and more. Read on to discover which one aligns with your vision and sets you up for long-term success.
Overview of Business Structures in Malaysia
Sole Proprietorships
A sole proprietorship is the simplest and most common type of business entity in Malaysia. It is operated and owned by a single individual, known as the sole proprietor. In this structure, the owner has complete control over the business and retains all the profits.
This type of business pays income tax on its profits but counts as personal income for the owner. One good thing about sole proprietorships is that they are easy to start and run since there isn't much paperwork needed unlike other types of businesses.
Private Limited Company ("Sdn. Bhd.")
A Private Limited Company, or Sdn. Bhd., is a common business type in Malaysia. It offers a lot of benefits. One big plus is that it's a separate legal entity from the people who own it. This means the company can have assets and debts all on its own.
Another benefit of an Sdn. Bhd company is limited liability for the owners, also known as shareholders. If the company gets into debt, only the money put into the business by shareholders may be at risk. Hence, their personal assets stay safe.
Business funding might be easier to get with this sort of company too because banks and other lenders often see them as more stable than other types like sole proprietorships or partnerships.
Key Differences Between Sole Proprietorship and Sdn Bhd
This section dwells on the key differences between Sole Proprietorships and Private Limited Company (Sdn Bhd) in terms of number of officeholders, registration process, legal liability, tax reporting, accounting and auditing requirements as well as termination procedures.
Number of Officeholders
A sole proprietorship in Malaysia has just one officeholder. This is different for a private limited company. A private limited company, or Sdn Bhd, can have many officeholders. These include directors, shareholders and company secretaries.
The number of these people hinges on the size and details of the business. Malaysian law sets rules for these roles under its Companies Act 2016. A director runs the business day to day and makes big choices for it.
Shareholders are part owners who can join meetings and vote on key matters within the company.
Business Registration Process
Starting a business in Malaysia needs you to pick your company type. After that, you need to follow the right way to make it official.
- Sole Proprietorship: Go on the SSM website or visit an SSM office near you. Fill up the Business Registration Form (BOR form). Use SSM ezbiz Online Services for quick and paperless work.
- Private Limited Company (Sdn Bhd): A qualified and professional company secretarial firm like Centry can incorporate your company for you. Centry's unique company incorporation platform is 100% online and automated. With us, you can get your company incorporated in as quickly as 24 hours from the comfort of your home. Alternatively, you could register for an MyCoID account and handle the company registration process on your own.
- When incorporating a Sdn Bhd, there are some criteria that you should adhere to relating to company's name, directors, and shareholders. To learn more, simply refer to the list of criteria we have prepared here.
Legal Liability
Legal liability is different for sole proprietors and Sdn Bhd. If you have a sole proprietorship, you face unlimited personal liability. This means if your business gets into debt, you will have to pay it. Your house or car could be taken to cover the cost.
In a Sdn Bhd, the situation is not the same. The company itself must take care of its own debts and legal problems. As a shareholder, your risk ends with the capital that you inject into the business. In this scenario, your private property stays safe even if the firm goes bankrupt or gets sued.
Tax Reporting
In Malaysia, tax reporting is different for sole proprietors and private limited companies. A sole proprietor will add their business's net profit to their own income on tax forms (Form B). They do not need to file a separate tax return for the business. This makes it easier to work out taxes owed each year.
On the other hand, a private limited company must give detailed reports of its earnings every year. It has to prepare special documents called financial statements. The company also needs an auditor to check these papers are correct before they can be sent off as annual returns.
As you pick between setting up as a sole proprietorship or Sdn Bhd, keep this in mind: with more paperwork comes bigger responsibility.
Accounting and Auditing Requirements
Sole proprietors in Malaysia don't need an approved auditor to audit their financial statements. But things are not the same for Sdn Bhd, a private limited company.
Sdn Bhds must get their financial records audited by a licensed auditor. Also, these companies must stick to tight rules about keeping and showing accounts.
Unlike sole proprietors, financial reports of Sdn Bhds in Malaysia are available publicly to be purchased and downloaded.
Termination of Business
The process to terminate a sole proprietorship is different from terminating a Sdn Bhd. For a sole proprietorship, simply log on to SSM ezbiz to inform SSM of the cessation of your business. Failure to do so may attract penalties. To find out more, check out this guide prepared by SSM on termination of business.
On the other hand, terminating a Sdn Bhd company is not as straight forward. When a company ceases business, they will need to either strike-off the company or commence a members' voluntary winding up of the company, both processes will take time and resources to complete.
Income Considerations
In the quest to decide between Sole Proprietorship and Sdn Bhd, entrepreneurs must understand how each structure impacts income; this includes distinguishing business income from personal income and navigating the differences in personal income tax versus corporate tax obligations.
Business income/corporate tax vs. personal income/personal tax
For sole proprietors, their business profit is equivalent to personal income, which will be taxed under personal income tax via Form B.
A private limited company like Sdn Bhd works differently. Here, the company makes its own money separate and pays corporate taxes (via Form C) on its taxable profits. The after-tax profits can then be paid out to shareholders as dividends.
Personal income tax ranges from 0-30%; while corporate tax rates ranges from 16% for SMEs to 24%. Please note that tax rates, special incentives, and deductions can vary from budget cycle to budget cycle as determined by Malaysia's Ministry of Finance.
Conclusion
Summary of the differences between sole proprietorship and Sdn Bhd
Choosing the right business entity is a significant decision that will impact your business's legal status, financial obligations, and growth potential. While a sole proprietorship offers simplicity, personal liability, and minimal setup costs, an Sdn Bhd provides the advantage of limited liability protection, professional image, and potential for expansion. By carefully considering factors like liability, control, taxation, and registration requirements, business owners can make an informed choice.
Considerations for choosing the right business entity in Malaysia
In Malaysia, several factors should be taken into account when choosing a business entity, including personal liability, capital requirements, taxation, reporting obligations, and long-term growth plans. Conducting thorough research, seeking professional advice, and considering future business goals will help entrepreneurs select the most suitable business structure.
Final thoughts on finding success as a business owner
Regardless of the business entity chosen, success as a business owner in Malaysia requires continuous learning, adaptability, and a deep understanding of the local market. Engaging experts, embracing technological advancements, and building strong networks will contribute to sustainable growth and profitability.
FAQs
Q: What is the difference between Sdn Bhd and Sole Proprietorship business in Malaysia?
A: Sdn Bhd and Sole Proprietor are two types of business entities in Malaysia. A Sdn Bhd, or private limited company, is a legal person with its own rights, able to own property and have perpetual succession. A Sole Proprietorship is a business owned by one person who has full control.
A Sdn Bhd, or Sendirian Berhad, is a private limited company that offers limited liability protection to its shareholders. On the other hand, a sole proprietorship is a business owned by a single individual, who is personally liable for all obligations and debts of the business.
Q: How do Sdn Bhd and Sole Proprietorship differ in terms of liability?
A: In a Sdn Bhd, the liability of the shareholders is limited to the amount of their share capital. This means that their personal assets are separate from the assets of the company, and they are not personally responsible for the company's debts. In a Sole Proprietorship, the individual owner is personally liable for all the debts and obligations of the business.
Q: Is one type better than the other for Malaysian citizens or foreigners?
A: Sole Proprietorship may be suited for Malaysians planning a small or home-based business. The Sdn Bhd structure could be more suitable for business expansion or if you're a foreigner aiming to set up a company in Malaysia.
Q: Can a foreigner register a sole proprietorship in Malaysia?
A: No, a foreigner cannot incorporate a sole proprietorship in Malaysia. This business entity is only available to Malaysian citizens or permanent residents. However, foreigners can establish a private limited company (Sdn Bhd) in Malaysia.
Q:What happens when I need to terminate my business?
Sole proprietors can terminate their business registration via the SSM ezbiz portal while a Sdn Bhd needs to follow formal winding up or striking off procedures as per Company Act 2016.
Q: What is the difference between a Sdn Bhd and a sole proprietorship in Malaysia?
A: A Sdn Bhd, or Sendirian Berhad, is a private limited company that offers limited liability protection to its shareholders. On the other hand, a sole proprietorship is a business owned by a single individual, who is personally liable for all obligations and debts of the business.
Q: Should I choose a sole proprietorship or a partnership for my business in Malaysia?
A: The choice between a sole proprietorship and a partnership depends on various factors, such as the nature of your business, the level of control you want, and the sharing of profits and responsibilities. It is recommended to consult with a business advisor or accountant to determine which business entity is the most suitable for your specific needs.
Q: What is the role of the Companies Commission of Malaysia (SSM) in the registration of business entities?
A: The Companies Commission of Malaysia (SSM) is the statutory body responsible for the registration and regulation of business entities in Malaysia. It ensures compliance with the Companies Act 2016 and provides various services, such as business registration, monitoring of company information, and enforcement of company laws and regulations.
Q: What are the tax implications for Sdn Bhd and sole proprietorship or partnership in Malaysia?
A: Sdn Bhd companies are subject to corporate tax rates, which vary based on the company's annual income. Sole proprietorships, on the other hand, are not taxed at the entity level. Instead, the business income is passed through to the owners, who are then taxed at their individual tax rates.
Q: What are the requirements for incorporating a Sdn Bhd?
A: To incorporate a Sdn Bhd in Malaysia, you must have at least one director who is a Malaysia citizen or permanent resident. The company must also have a minimum paid-up capital of RM1 and a minimum of one shareholder. Additionally, a registered office address in Malaysia is required.
Q: What are the requirements for registering a Sole Proprietorship?
A: Registering a Sole Proprietorship in Malaysia is a simpler process compared to incorporating a Sdn Bhd. You would need to be a Malaysia citizen or permanent resident and have a valid personal identification document. You can register your Sole Proprietorship with the Suruhanjaya Syarikat Malaysia (Companies Commission of Malaysia) by visiting their website.
Q: Are audited financial statements required for a Sdn Bhd and a Sole Proprietorship?
A: Yes, audited financial statements are required for a Sdn Bhd. The Companies Commission of Malaysia abbreviated SSM requires Sdn Bhd companies to submit audited financial statements annually. Sole Proprietorships, on the other hand, are not required to submit audited financial statements.
Q: Can a Sole Proprietorship be converted into a Sdn Bhd?
A: Yes, it is possible to convert a Sole Proprietorship into a Sdn Bhd. However, the process involves incorporating a new Sdn Bhd and transferring the business assets and liabilities from the Sole Proprietorship to the new company.
