Are you planning on starting a business in Malaysia but unsure of the different types of business entities available? Look no further, as we have put together a comprehensive guide to help you understand and choose the right type of business entity for your venture. From sole proprietorship to private limited companies (Sdn Bhd), we will explain each entity's key features, benefits, and suitable industries or sizes.
By the end of this article, you'll have a clear understanding of what type of business entity is most appropriate for your needs. So let's get started!
Types Of Business Entities In Malaysia
There are several types of business entities in Malaysia, including sole proprietorship, partnership, limited liability partnership ("LLP"), private limited company ("Sdn Bhd"), and public limited company ("Bhd").
Each type of business entity in Malaysia presents distinct advantages and disadvantages, from the simplicity and flexibility of sole proprietorship to the legal protection and capital-raising capabilities of a Sdn Bhd, making it important for entrepreneurs to evaluate their objectives when deciding which structure best suits their needs.
Understanding these different forms of ownership structures can help you choose which one fits your specific goals and objectives.
1. Sole Proprietorship
A Sole Proprietorship, also known as an Enterprise, is the simplest business entity to get started for entrepreneurs who want to start a small business or venture.
Characteristics
- Governed by Companies Commission of Malaysia ("CCM"; or Suruhanjaya Syarikat Malaysia - "SSM") and Registration of Businesses Act 1956.
- Wholly owned business by a single individual using his personal name or a trade name.
- Can only be registered by Malaysia citizen or Permanent Resident (PR).
- All profits and losses go directly to the business owner.
- Requires license renewal upon expiry
Advantages
- Easy and quick to set up. The business owner simply need to register for his/her sole proprietorship license with SSM.
- Requires minimal setup cost.
- No requirement for annual statutory audit
- No requirement for annual filings with SSM.
Disadvantages
- The owner has unlimited liability, meaning personal income or assets of the owner will not be protected if the company is declared bankrupt or in debt.
- The owner of sole proprietorship is taxed at the individual level on the business' taxable income which may become unfavourable if the business generates significant income.
- Lacks access to capital raising capabilities as compared to Companies.
2. Partnership
Characteristics
- Governed by SSM and Partnership Act 1961.
- Can be set up by a minimum of 2 partners, up to a maximum of 20.
- Only Malaysian citizens or permanent residents (PRs) can be part of a Partnership.
- Requires license renewal upon expiry
Advantages
- Easy and quick to set up. Partners simply need to register the Partnership with SSM.
- Requires minimal setup cost.
- No requirement for annual statutory audit
- No requirement for annual filings with SSM.
Disadvantages
- Partnerships are not a separate legal entity. All partners are jointly liable for the unlimited liability of a partnership.
- Any business profits from the Partnership are taxed at the individual tax rate of each partner.
- Lacks access to capital raising capabilities as compared to other types of business entities.
3. Private Limited Company ("Sdn Bhd")
Characteristics
- Governed by SSM and Company Act 2016.
- Can have a minimum of 1 director who is an ordinary resident in Malaysia.
- Can have 1 to 50 shareholders.
- Can have paid up capital starting from RM1.
- Separate legal entity from its owners, the liability of shareholders is limited up to the amount the have contributed to the company.
Advantages
- Easier access to funding and contracts as it is considered a more creditworthy business.
- Foreign investors are allowed to own up to 100% equity in a Sdn. Bhd.
- Shareholders' liabilities are limited and shielded.
Disadvantages
- Higher set up cost compared to Sole Proprietorship and Partnership
- Higher maintenance cost as it requires submission of Annual Return to SSM, statutory audit, and submission of audited financial statements every year
4. Limited Liability Partnership ("LLP")
Characteristics
- Governed by SSM and Limited Liability Partnerships Act 2012.
- Allows for unlimited number of partners
- Only Malaysian citizens or permanent residents (PRs) can set up an LLP.
Advantages
- Limited liability to the partners.
- Cheaper set up and maintenance costs.
- Fewer compliance requirements – not required to audit its accounts annually.
- LLPs are taxed similar to Companies.
Disadvantages
- LLPs are governed by a relatively new act. Professional support for this entity could be limited in the market.
- LLPs may face challenges in getting bank loans due to its relatively new form of corporate structure.
5. Public Limited Company ("Bhd")
Characteristics
- Governed by SSM and Securities Commission of Malaysia ("SC").
- Allows for unlimited number of shareholders.
Advantages
- Able to raise funds by offering and issuing shares to the public through an Initial Public Offering ("IPO").
- Shareholders' liabilities are limited and shielded.
Disadvantages
- Higher cost of setting up
- Require adherence to more rigorous regulatory compliance requirements
Choosing The Right Business Entity In Malaysia
To ensure the success of your business venture in Malaysia, it is crucial to choose the right type of business entity. Among the steps to consider are:
- Assess your business objectives
- Evaluate level of risks involved
- Assess funding requirements of your business
- Consider Taxation And Regulatory Requirements
- Determine ownership structure and control
- Seek professional advise
Assess Your Business Objectives
Before choosing the right business entity in Malaysia, it is essential to assess your business objectives. One of the first steps you should take is to determine the level of risks involved in your industry or business. If you are unsure about this, consider seeking professional advice from a lawyer or accountant.
Evaluate Level Of Risks Involved
When choosing a business entity in Malaysia, it is crucial to evaluate the level of risk involved. Sole proprietorships have unlimited personal liability, while limited liability companies and corporations offer greater protection to owners' personal assets.
Assess Funding Requirements of Your Business
Furthermore, understanding the capital raising capabilities of each type of business entity can play a significant role in evaluating your options. Owners and partners of Sole Proprietorships, Partnerships, and LLPs may have to front all the required business capital as it is difficult for them to access funding facilities. Other other hand, Sdn Bhd's structure and business entity type allows for easier access to raise funds; while Bhds can have the option to raise funds from the public.
Consider Taxation And Regulatory Requirements
It is important to consider taxation and regulatory requirements when choosing a business entity in Malaysia. Sole proprietorships and partnerships are considered pass-through entities, where profits and losses flow through to the individual owners’ personal income tax returns.
LLPs and Sdn Bhds offer advantages such as providing liability protection for partners and more attractive tax rates compared to sole proprietors and partnerships.
When it comes to regulatory compliance, all businesses must comply with Malaysian laws on company registration, accounting standards, taxes, licenses, permits and employment regulations regardless of their chosen business entity type. It is crucial that entrepreneurs familiarise themselves with these regulations when starting a business in Malaysia. Seeking professional advice from lawyers or accountants can help ensure compliance with both taxation and regulatory requirements.
Determine Ownership Structure And Control
When choosing a legal structure for your business in Malaysia, it's crucial to consider ownership structure and control. Sole proprietorships give complete ownership and control to the single owner, while partnerships allow for shared control among multiple owners. Limited liability partnerships (LLPs) offer equal partnership rights with limited liability protection, while private limited companies (Sdn Bhd) provide flexibility in shareholding structures with restricted transferability of shares. Public limited companies (Bhd), on the other hand, allow free transferability of shares but are subject to stricter regulations.
Additionally, ownership structures can impact decision-making processes within the company. In sole proprietorships and partnerships, decisions are made solely by the owner(s). In LLPs and Sdn Bhd companies, members have an equal say in decision-making (assuming that shareholders of Sdn Bhd are also the directors which are commonly the case) unless otherwise stated. Public limited companies involve shareholders who elect board members to make decisions on their behalf. Careful consideration of ownership structures is paramount as they can significantly affect how your business operates and grows over time.
Seek Professional Advice
When it comes to choosing the right business entity in Malaysia, seeking professional advice is crucial. Consulting with a legal or accounting professional can help entrepreneurs navigate the complex legal and regulatory requirements of each business structure. It's important to select a reputable advisor who has experience working in Malaysia.
Professional advisors can also help entrepreneurs assess their objectives and evaluate the level of risk involved in their chosen industry. They can provide valuable guidance on tax implications, compliance requirements, and ownership structure and control. By seeking expert advice, entrepreneurs can make informed decisions that will set their businesses up for long-term success.
Conclusion
In summary, understanding the different types of business entities in Malaysia is crucial for setting up a successful business. Each entity has its unique features and benefits, and it's important to assess your business objectives, level of risk involved, taxation requirements, and ownership structure before choosing the right one.
If you're unsure, always consider seeking professional advice to make an informed decision that best suits your needs. With careful consideration and planning, entrepreneurs can register their preferred type of business entity in Malaysia with ease. Start your entrepreneurial journey confidently by choosing the best type of business entity today!
