Before you set up a company in Malaysia, you must first decide on the type of business entity. Choosing a suitable corporate structure from the various types of business entities in Malaysia is a crucial step that cannot be overlooked. Laying down a solid foundation is the key to long-term success. In this article, we highlight 5 different types of business entities that you can choose from in Malaysia that meet your business goals.
Related Read: Find out what is SME in Malaysia »
Table of Contents
1. Sole Proprietorship
If you are a Malaysian citizen or permanent resident thinking of starting a small business on your own, a sole proprietorship is one of the simplest business entities to consider in Malaysia.
Characteristics of Sole Proprietorship
- Most traditional form of business structure in Malaysia
- Owned by just one person (only Malaysian citizens or permanent residents can set up a sole proprietorship)
Advantages of Sole Proprietorship
- Simple and fast to set up as it can be ready in 1 hour
- Low costs of yearly maintenance as no statutory audit and company secretary requirements
Disadvantages of Sole Proprietorship
- Unlimited liability to the owner
- For example, due to the unlimited liability nature, the owner may be declared bankrupt in the event of a lawsuit.
- Unfavourable tax rate
- Personal income tax might be expensive in Malaysia if the business earns significant profit (e.g. RM600,000), due to the assessment based on a personal income tax rate scale of up to 30%.
2. Partnership
If you decide to embark on a business venture with business partners, a partnership is one of the easiest business entities to consider in Malaysia.
Characteristics of Partnership
- It is jointly owned by two or more individuals (maximum at 20 partners)
- It is governed by the Partnership Act 1961 or self-created partnership agreements
Advantages of Partnership
- Low set-up cost and low maintenance costs as no statutory audit and company secretary requirements
- Ease of incorporation with the Companies Commission of Malaysia (SSM)
- Shared liability among all partners
Disadvantages of Partnership
- Jointly liable for liability of the partnership as there is unlimited liability
- Unfavourable tax rate
- Personal income tax might be expensive in Malaysia if the business earns significant profit (e.g. RM600,000), due to the assessment based on a personal income tax rate scale of up to 30%.
- The business continuity of the partnership will be affected if a partner dies, quits, or leaves the partnership in any other manner.
- Difficulty in receiving important bank loans
3. Sendirian Berhad (Sdn. Bhd.)
A Sendirian Berhad, also known as Sdn. Bhd., is a private limited company that is limited by shares. Even if you are considering a SME business, you can opt for this business entity. This is one of the few types of business entities in Malaysia which has a separate legal entity feature.
Related Read: 4 Reasons Entrepreneurs Set up a Company in Malaysia as Sdn Bhd »
Characteristics of Sdn. Bhd.
The most distinct feature is that it is separate legal entity, which means:
- It can carry on business
- It can enter into a contract
- It can sue or be sued
- It is body corporate separate from its shareholders which means the shareholders are not liable for its liabilities
- It exists perpetually even when the owner dies, quits, or relinquishes ownership in any other manner
- Owner, who is the shareholder, could be a different person from the one running the company, i.e. director
- It can have 1 to 50 shareholders
- For company beyond 50 shareholders, it will need to be set up as a Berhad company
- Can be 100% owned by Foreigners or Foreign Companies
Advantages of Sdn. Bhd.
- Limited liability to the owner/shareholder
- Liability is limited to the share of capital injected
- Easier to obtain bank loan and big contracts as it is considered a more creditworthy business structure as compared to sole proprietorship and conventional partnership
- Easier to have a variety of share structures to cater to each individual shareholder
- Favourable tax rate at 17% and 24% based on different perimeters
- With the new Companies Act 2016, even a single person can set up a Sdn Bhd (previously it requires at least two shareholders and two directors)
Disadvantages of Sdn. Bhd.
- Higher set up costs (approximately RM2,500-RM3,000 including government fees)
- Higher maintenance costs as it requires annual statutory audit and company secretarial services
- Additional compliance as required by laws to do statutory submission
4. Berhad (Bhd.)
A Berhad, also known as Bhd., is a public limited company that is limited by shares. A Bhd. is one of the business entities in Malaysia that is suitable for companies with large business operations.
Characteristics of Bhd.
- More than 50 shareholders
- Unlimited number of shareholders
- Public listed and governed by Securities Commission of Malaysia
Advantages of Bhd.
- Limited liability restricted to ownership of shares
- Easier to raise and obtain funding due to it being publicly listed
- Able to raise capital through issuance of shares to public
- Ownership of shares is flexible and easily transferable
- Growth and expansion opportunities
Disadvantages of Bhd.
- Higher set up costs
- Has very strict compliance and regulatory requirements
- Difficult to maintain due to complexity involved
5. Limited Liability Partnership (LLP)
A Limited Liability Partnership is unlike other business entities in Malaysia. It is a relatively new corporate structure governed under Limited Liability Partnership Act 2012 and is a hybrid of conventional partnership and Sdn. Bhd.
Characteristics of Limited Liability Partnership
- Limited liability for each of the partners
- Governed by a tailor-made partnership agreement
- Unlimited number of partners
- Need to appoint a compliance officer whose responsibilities is to ensure that the LLP submits statutory returns to SSM
Advantages of Limited Liability Partnership
- Low set up costs
- Low maintenance fee as there is no need to perform annual statutory audit
- Financial records are not public
- It is governed by LLP agreement which can be tailor made to suit the individual partners’ need
- It exists perpetually even when the owner dies, quits, or relinquishes ownership in any other manner
- Favourable tax rate at 17% and 24% based on different perimeters
Disadvantages of Limited Liability Partnership
- A relatively new form of corporate structure hence not easy to get bank loan
In essence, understanding these 5 business entities in Malaysia will allow you to plan ahead better when you set up a company in Malaysia. For those intending to start or expand businesses in Malaysia, it might be quite daunting and challenging to start on your own. At WeCorporate, we provide company incorporation services and packages tailored to your corporate needs. Even more, our comprehensive range of services and professional guidance will assure that you will be covered in this journey.
FAQs
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There are 5 different types of business entities to choose from when setting up a company in Malaysia. They are:
- Sole Proprietorship
- Partnership
- Sendirian Berhad (Sdn. Bhd.)
- Berhad (Bhd.)
- Limited Liability Partnership (LLP)
- Both foreigners and foreign companies can have 100% foreign ownership when they set up a Sdn. Bhd. company in Malaysia.
- You can have an unlimited number of shareholders, but you will minimally require at least 50 shareholders in order to set up a Bhd. company in Malaysia.
- When you set up a LLP company in Malaysia, the disadvantage is that it is not easy to get bank loans. This is because a LLP is still a relatively new form of business entity.
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