Which Malaysian business type should you choose for your company?6 months ago
This article was written by Dinesh Sadhwani, a practicing advocate & solicitor of the High Court of Malaya.
For those of you who want to start your own business, one of the questions that might be on your mind is this – What type of business you should register?. Some of the common options in Malaysia to consider are:
- A private company limited by shares incorporated under the Companies Act 2016, which can be identified by its suffix Sdn Bhd (Sendirian Berhad).
- An unincorporated business (sole proprietorship).
- An unincorporated partnership (conventional partnership).
- A limited liability partnership (LLP) registered under the Limited Liability Partnerships Act 2012, which can be recognised by its suffix PLT (“Perkongsian Liabiliti Terhad”).
So many options to choose from, but how do we know which one to go with? We’ll discuss the pros and cons of each type below.
Company limited by shares (a.k.a. the “Sdn Bhd”)
Suffix: Sdn Bhd
Good for: Mid sized to large businesses
1. The company is “alive”: One of the benefits of operating a Sdn Bhd is that the company is a separate legal entity. This means that the company is treated as a separate “person” in law. The company has almost all the powers which you and I (individuals or, as the law calls it, – “natural persons”) have – the power to purchase, own, and sell assets; the power to enter into contracts; the power to open bank accounts and receive money; the power to sue (as well as risk being sued!), and so forth.
The shareholders, directors and employees can come and go, but the company will remain in existence until it is dissolved (e.g. wound up or struck off from the register of companies). This makes a Sdn Bhd great for succession plans.
2. Limited liability for owners: Probably one of the more important benefits of using a Sdn Bhd is that the liability of the company’s shareholders is limited to the amount they have paid or agreed to contribute. For example, if you invest RM200,000 in a company in exchange for 20% shareholding and the company later becomes insolvent, your worst case downside is that you are unlikely to recover your investment. As a shareholder or even a director, you are not legally liable for the company’s liabilities.
This is also why a private company carries the suffix Sdn Bhd (Sendirian Berhad) – the “Berhad” denotes the limited liability of shareholders. Shareholders do not have to worry about company’s creditors going after them personally for the company’s liabilities. There are some exceptions to the limited liability (e.g. fraud or sham) but that is a topic for another day.
3. You can run a 1 man company: Under the new Companies Act 2016, it is now possible for a company to have a sole director and individual shareholder (who can be the same person). Under the old Companies Act 1965, you needed at least 2 directors and individual shareholders. Therefore, sole proprietors can now explore running their business under a company, without the need to bring a fellow director/shareholder on board.
1. High Costs: Incorporating and operating a company comes with initial start-up costs (e.g. incorporation costs) and recurring costs (e.g. the costs of engaging a company secretary and auditor every year). On this note, the Companies Commission of Malaysia (CCM) has issued a practice directive whereby certain companies are exempted from the requirement to appoint an auditor.
2. Taxation: A company is subject to tax at the applicable corporate tax rate. If your personal income tax rate is lower than the applicable corporate tax rate, you may want to consider another form of business.
3. The company’s money is not your money: The separate legal entity brings with it a significant issue: It can be difficult for laypeople to understand. This is especially when the company is family owned, or both owned and managed by the same people. The company’s assets (including cash balances) belong to the company and not the shareholders. A Sdn Bhd cannot distribute its assets to its shareholders except via a dividend or capital repayment – which must be done in accordance with the Companies Act.
If you are employed by the company or serve as a director, the company can pay you a salary or director’s fees. So it’s important to carefully consider in advance how you intend to draw income from the company, whether you can do so, and whether there are any consequences (e.g. tax) or restrictions (e.g. Companies Act) that you need to account for.
Sole proprietor (a.k.a. the “One-Man Show”)
Suffix: No suffix necessary
Good for: Small businesses
1. Easy to use: The sole proprietorship is very easy to set-up. Unlike a private company where you have to deal with various legal concepts and rules (e.g. directors, shareholders, share capital, registered office, constitution, board and shareholders' meetings, company secretaries, auditors, audited accounts, returns/filings, and MORE), the sole proprietorship is relatively straightforward. If you want a simple set-up (at least for a start), this might be the option for you.
2. Low Costs: The set-up and compliance costs for a sole proprietorship are relatively low compared to a private company. As discussed above, a private company must engage a company secretary and auditor - but there are no such requirements for the sole proprietor (although you may need the assistance of a professional in preparing and filing your tax returns).
1. You are the company!: Although you can use a trading or business name (e.g. Awesome Trading & Co), strictly speaking, the sole proprietorship is not a separate entity. In other words, you are personally responsible for all contracts and transactions entered into by the sole proprietorship. Also, the sole proprietorship is not a separate entity, and will be dissolved upon your own passing, so it’s not great for running a family business.
2. Your personal assets are at risk: One of the most significant disadvantages of operating a sole proprietorship is that, the business’s liabilities are also your personal liabilities. It’s prudent to only take risks that you can stomach when carrying out your business as a sole proprietor – you may otherwise end up taking a hit on both your invested capital and your personal assets.
3. One-man show: You are the sole owner of the business and have to manage it alone. If you ever decide to bring in a business partner, you will have to transfer the business (including its assets and contracts) to a different business type that will be owned by you and your business partner.
4. Taxation: The net income earned from the business is deemed to be your personal income. Hence, unlike the private company which is subject to tax at the applicable corporate tax rate, the net income from the business will be subject to your personal income tax rate. Likewise, if your personal income tax rate is higher than the applicable corporate tax rate, you may want to consider a Sdn Bhd or Limited Liability Partnership (we’ll get to this one soon).
Conventional partnership (a.k.a. Staple for Professionals)
Suffix: No suffix necessary
Good for: Professional services (lawyers, auditors, etc)
1. Easier to use than a Sdn Bhd: Although not as simple as a sole proprietorship, a partnership is nonetheless relatively easier to set-up and operate for the same reason that we discussed above for sole proprietorships.
2. Low Costs: Again, the set-up and compliance costs for a conventional partnership are relatively lower compared to a private company.
1. No separate legal entity: The conventional partnership is not recognised as a separate legal entity in law. We will see the implication of this below.
2. You are both responsible for each other’s decisions: Under section 7 of the Partnership Act 1961, the decisions of each partner in carrying out the usual operations of business will bind his partners as well. Further, section 11 of the Partnership Act says that every partner is jointly liable with all other partners for the debts and obligations of the partnership.
What does this mean in simple English? If you enter into a partnership and your partner incurs debt on behalf of the partnership, you will be equally responsible for that debt. As the partnership is not a separate legal entity, your personal assets are at risk, just like your partners. So before entering into a partnership, select your business partners carefully...
Limited liability partnership (LLP) (a.k.a “The Newbie”)
Good for: Those who want a close alternative to Sdn Bhd while not risking their personal assets
1. Best of both worlds: The LLP is a hybrid between a company and partnership, i.e. you’re effectively operating a conventional partnership while enjoying the benefits of running a Sdn Bhd – the separate legal entity and limited liability. If you want a close alternative to the “Sdn Bhd” without compromising on limited liability protection, the LLP is a good option to consider.
2. Still easier to use than a Sdn Bhd: The LLP has more compliance requirements than a conventional partnership, but is yet again relatively less complex compared to the Sdn Bhd.
3. Lower Costs: Again, the set-up and compliance costs for a LLP are relatively lower compared to a Sdn Bhd.
1. Less popular, and therefore less recognised: The LLP was only introduced in Malaysia about 5 years ago. Because of this, you might find it a challenge to, firstly, introduce or explain your business entity and, secondly, convince others to do business with you (be it banks, suppliers, customers, or even regulators).
Unless there are compelling reasons to use the LLP, it’s may be better to stick to the other better recognised types of businesses. According to statistics, there were approximately 1.2 million companies, 6.4 million businesses, and 12,000 LLPs registered as of 31 August 2017. So as you can see, even if we give some allowance for the fact that the LLP is new, the other forms of business are vastly more popular than the LLP. So just bear in mind that you might be in lonely company (pun intended) if you decide to use this option!
Fit your type of business to your needs
In summary, there is no “one-size-fits-all” solution when it comes to selecting a type of business. Each person’s circumstances may be unique and need to be taken into account. Having said this, some of the broad considerations or questions that you should ask when selecting a type of business are:
- Regulatory restrictions or requirements: Are there any legal requirements or restrictions as to the form of business that you must or cannot use for your type of business?
- Legal advantages/disadvantages: Does your business really only need your involvement? Or do you need a few partners to cover areas you don’t understand? Consider your individual standing and match your needs to the type of business.
- Taxation: Although taxation is one of the pros (or cons), it is listed as a separate consideration here as it can be a significant issue by itself. Do you pay more taxes under one type of business than another?
- Acceptance/recognition: Who are the parties you anticipate dealing with? Will they recognise or understand, and more importantly, want to transact with your business?
The CCM’s (Companies Commission of Malaysia) and IRB’s (Inland Revenue Board) websites are good places to look-up more information on registration and taxation. In any case, you should reach out to the appropriate professional advisers (lawyer, company secretary, auditor, tax consultant, etc.) before making major decisions to avoid unexpected problems or pitfalls.