Business Type in Malaysia

Q: What are the main vehicles used in Malaysia to establish a business?

There are 3 types of business entities one can choose from to start up a business in Malaysia, namely:

  • Sole proprietorship
  • Partnership
  • Companies – Under the Companies Act 2016, a company can be incorporated as:
    • a company limited by shares – the most common type of limited companies. A company having a share capital may be incorporated as a private company (company name ended with the word “Sdn. Bhd.”) or public company (company name ended with the word “Berhad” or “Bhd”)
    • a company limited by guarantees – usually the type of entity used by non-profit organisations such as charitable bodies, foundations etc; or
    • an unlimited company – where no limit placed on the liability of its members and its members may be made personally liable for its debts without limit on their liability.

Q: What is sole-proprietorship?

Sole proprietorship is a form of business entity which is set up and owned solely by 1 individual only.

  • High annual operation costs for appointment of:
    • an auditor to perform annual audits on the company accounts and to prepare financial statements to be lodged with the SSM; and
    • a company secretary to manage its statutory submissions and returns as well as attending and preparing minutes for its board of the directors and shareholders’ meetings.
    • Easy to start up with low startup costs.
    • There is no audit and annual filing requirement.
    • Low annual operating costs for conventional partnership.
    • Higher annual operating cost in the case of LLP for:
    • lodgement of annual declaration stating whether the LLP is able to pay its debts; and
    • Easy to start up with low startup costs.
    • There is no audit and annual filing requirement.
    • Low annual operating costs – only required to pay an annual fee to SSM to keep its business renewed from year to year.

Q: What are the advantages and disadvantages of sole-proprietorship?

Advantages

  • Easy to start up with low startup costs.
  • There is no audit and annual filing requirement.
  • Low annual operating costs – only required to pay an annual fee to SSM to keep its business renewed from year to year.

Disadvantages

  • There is no separate legal entity between the sole proprietor and the business. This means the sole proprietor and the business are in law, the same entity. If the business fails, the sole proprietor is personally liable for all debts due and owing by the business to the creditors i.e. the creditors can sue the sole proprietor personally to recover all debts incurred by the business from or against the sole proprietor’s personal assets (including cash savings, lands and properties, cars and other “cash-able” items) and other personal income, employment income etc.
  • The liability of the sole proprietor is unlimited. This means that there is no limit to the liability of the sole proprietor.
  • Death of the sole proprietor will result in the cessation of business and termination of the sole proprietorship. Sole proprietorship can be closed down by merely filing a form with the SSM notifying the cessation of business.

Q: What is partnership?

A partnership is a form of entity where 2 or more individuals come together to carry out a business. There are 2 types of partnership in Malaysia i.e. the conventional partnership governed by the Partnership Act 1961 and the limited liability partnership (LLP) governed by the Limited Liability Partnership Act 2012. An LLP can be formed by 2 or more individuals or corporations.

An LLP, unlike a conventional partnership, is a body corporate and is capable of suing and being sued, owning and holding property. It is an alternative form of business entity in Malaysia, offering a hybrid of characteristics between a conventional partnership and a private limited company (“Sdn Bhd”).

Q: What are the advantages and disadvantages of partnership?

Advantages

  • Easy to start up with low startup costs.
  • There is no audit and annual filing requirement.
  • Low annual operating costs for conventional partnership.
  • Higher annual operating cost in the case of LLP for:
  • lodgement of annual declaration stating whether the LLP is able to pay its debts; and
  • appointment of a compliance officer to lodge documents on behalf of the LLP.
  • Unlike conventional partnership, an LLP is a separate legal entity from its partners. This means the creditors cannot sue the partners personally and go after their personal assets and income for the debts incurred by the LLP, which is a separate legal entity from its partners and the creditors can only sue the LLP to recover the debts due and owing from the LLP, except if an LLP partner commits a wrongful act or omission in running the LLP business, such partner remains liable in tort for such act or omission but will not be liable for the wrongful act or omission of the other partners. An LLP is liable to the same extent as the partner who commits a wrongful act or omission in running the LLP business then the liabilities of the LLP are to be borne out of the property of the LLP.

Disadvantages

  • There is no legal separate entity between the partners in conventional partnerships and the business. This means the partners are jointly and severally liable for debts and liabilities incurred by other partners, with or without their knowledge, and the partners can be sued personally by the creditors against their personal assets and income.
  • The liabilities of the partners in conventional partnerships are unlimited.
  • Notwithstanding that not all partners contribute equally to the capital and liabilities of the partnership, all the partners are entitled to share equally in the capital and profits of the partnership under the law, unless the capital contribution, ownership percentage and profit and loss distribution of each partner are agreed upon in a written agreement.
  • No majority of the partners can expel any partner unless a power to do so has been conferred by written agreement between the partners.
  • By default, a conventional partnership will terminate upon the death or bankruptcy of a partner whereas a partner to an LLP will cease to be partner upon death or dissolution of the partner and the partnership is obliged by the law to continue to pay the share of profits of such departing partner to its estates unless an option was given to the surviving partners in a partnership agreement to buy out the departing partner and exercised accordingly.

Q: What is the difference between sole-proprietorship/partnership and Private Limited Liability Company (sdn bhd)?

Description Sole Proprietorship Conventional Partnership LLP Private Limited Company
Governing law Governed by Registration of Businesses Act 1956 (“ROBA”). Governed by ROBA and Partnership Act 1961. Governed by Limited Liability Partnership Act 2012 (“LLPA”) – hybrid between a company and a conventional partnership. Governed by Companies Act 1965 (“CA”) therefore subject to stricter regulations.
Number of owners 1 individual only Minimum 2 individual partners, maximum 20 Minimum 2 partners (either individuals or corporations) and no maximum Minimum 2 members, maximum 50 (but allows another company to wholly own 100% of the private company).
Startup costs Low – registration starts from RM100. Low – registration starts from RM100. Moderate – registration costs RM500. Higher – incorporation fee costs about RM2,500.
Annual operating costs Low – business renewal, tax and accounting fees. Low – business renewal, tax and accounting fees. Lower than a private company – accounting fee, tax fee and lodgement fee of annual declaration (RM200). No audit and annual filing fee needs to be incurred. However a compliance officer is required to be appointed to lodge documents on behalf of the LLP. Higher – accounting, audit, tax and secretarial services fees as well as annual filing fees.
Audit and annual filing requirement None None (except audit of accounts is required in a partnership agreement). None (except audit of accounts is required in a partnership agreement). Mandatory i.e. companies are required to appoint auditor to audit the company accounts annually and company secretary to file annual statutory forms and reports.
Legal status No separate legal entity. No separate legal entity. Separate legal entity. Separate legal entity.
Owner’s liability Unlimited liability which can extend to personal assets of the sole proprietor. Unlimited liability (jointly and severally liable with the partnership) which can extend to personal assets of the partners. No personal liability of partner, except for own wrongful act or omission or without authority.
Liabilities borne by the partners are jointly and severally to the extent of contribution only.
Limited liability – shareholders are not personally liable for the company debts.
Liabilities borne by the shareholders are to the extent of unpaid shares only.
Life of business Death of the sole proprietor will result in the cessation of the business. Death or bankruptcy of a partner will result in dissolution of the partnership (except otherwise provided in a partnership agreement). A partner will cease to be partner of the LLP upon his death or dissolution (except otherwise provided in a partnership agreement) but such cessation to be the partner to the LLP will not affect the continuity of the business. Death or bankruptcy of a shareholder will not affect the continuity of the business.

Q: What are the advantages and disadvantages of private limited company?What are the advantages and disadvantages of private limited company?

Advantages

  • A company or corporation is a separate legal entity from its members or owners.
  • Liability of the members are limited to the amount they have each contributed as capital to the company or the amount specified on their unpaid shares. In the event the company becomes insolvent or goes into liquidation, its members will not be personally liable for debts incurred by the company unless any one of the shareholders provides a personal guarantee.
  • Death or bankruptcy of a shareholder will not affect the continuity of the business.

Disadvantages

  • High annual operation costs for appointment of:
  • an auditor to perform annual audits on the company accounts and to prepare financial statements to be lodged with the SSM; and
  • a company secretary to manage its statutory submissions and returns as well as attending and preparing minutes for its board of the directors and shareholders’ meetings.
  • Mandatory annual audit of accounts and filing of statutory forms and reports. Late or non-lodgment will attract penalties such as fines and striking off of company under the Companies Act 2016.
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