Starting a Business in Malaysia? Choosing the Right Business Entity

The legal structure you select when starting a business in Malaysia needs to be carefully considered because it affects your liability, taxes, and potential for growth.

A wide type of business entities are available in Malaysia, such as sole proprietorships, partnerships, private limited companies (Sdn. Bhd.), unlimited companies, foreign companies, limited liability partnerships (LLPs), and public limited companies (Berhad).

It’s critical to consider important aspects like your exposure to personal liability, the scope and complexity of your business operations, and your long-term growth goals when choosing a business entity.

Certain organisational forms, such as partnerships and sole proprietorships, provide simplicity but subject owners to unlimited personal liability. Private limited companies and limited liability partnerships (LLPs), offer a safeguard by isolating personal assets from business liabilities.

It’s also important to carefully consider factors like the potential for raising capital, regulatory compliance requirements, management structure, and tax implications.

While they might have more access to funding sources, some entities—like public limited companies—also have stricter governance and reporting requirements.

7 Types of Business Entities in Malaysia

1. Sole Proprietorship

In Malaysia, a sole proprietorship is the most simple and uncomplicated business entity. There is only one person who owns and runs it.

In contrast to other types of businesses in Malaysia, a sole proprietorship shares a legal identity with its owner. Any obligations or liabilities incurred by the company are directly borne by the owner.

Advantages

• Full Ownership and Control

You have total authority over the choices you make for your business as a sole proprietor.

• Financial Benefits

As a sole proprietor, you own all business profits. Additionally, sole proprietors are not subject to a separate corporate tax. Instead, they pay taxes on their personal income, which, depending on earnings, may be beneficial.

• Ease of Setup

A sole proprietorship is easy and quick to register. You can register online via the ezBiz portal or in person at any SSM branch.

Disadvantages

• Unlimited Liability

All of the company’s obligations and debts are directly your responsibility. Your personal assets are at risk if the company experiences financial difficulties.

• Limited Growth Potential

As a sole proprietor, growing the company can be difficult due to the difficulty in obtaining external funding.

• Skills and Expertise Constraints

Many times, you manage many facets of the company on your own. Lack of specialized knowledge or abilities may hinder productivity and company’s growth.

 

2. Partnership

A partnership is a type of business entity owned by two or more individuals. There are two types of partnerships:

1. General Partnership:

Partners in a general partnership have equal rights and obligations. They oversee the company together and bear personal responsibility for all of its liabilities.

2. Limited Liability Partnership

An LLP incorporates aspects of corporations and partnerships. It permits flexibility in management and operations while offering partners limited liability protection. A minimum of two individuals or corporations may form an LLP.

Profit Sharing and Decision Making

• Profit Sharing

  The distribution of profits among partners is outlined in the partnership agreement. Partners may divide profits equally or according to the amount of capital each partner contributed, the amount of work they put in, or other considerations.

• Decision Making

  Partnerships have three options for making decisions: democratic voting, delegation, or consensus. Partners discuss and decide decisions on issues about investments, business operations, and goals.

Advantages

• Combined Resources

Together with your partner(s), you can pool your financial resources, abilities, and knowledge. Through cooperation, the company can obtain additional resources and expertise.

• Ease of Setup

Forming a partnership is a simple and affordable process. No intricate legal requirements or formalities exist.

• Low Annual Compliance Costs

Partnerships have low annual renewal fees (about MYR 60 per trade name). There are no corporate tax payments but each partner has to report income for their personal tax.

• Shared responsibility

You can assign tasks to one another to utilise each other’s advantages.

Disadvantages

• Unlimited Liability

Partners are responsible for the company’s debts. Each partner bears equal responsibility if the other experiences financial difficulties.

• Internal Disputes

Differing opinions between partners can cause strained bonds and poor choices. It’s difficult to kick out a partner without a formal contract.

• Taxation

Although partners report profits on their personal tax returns, partnerships do not pay corporate income tax. Higher personal income tax rates could be the outcome of large profits.

 

3. Private limited company (Sdn. Bhd.)

In Malaysia, a private limited company known as Sendirian Berhad (Sdn Bhd) can be founded by local citizens or foreign nationals. In Malaysia, this kind of business is very common because of its advantages and flexibility.

Minimum Shareholders and Directors

A minimum of one director who resides in Malaysia is required for a Sdn Bhd company. One shareholder is the minimum requirement, and 50 shareholders is the maximum.

The business must become a public company if there are more than 50 shareholders.

Advantages

• Limited Liability

There is protection for the private assets of shareholders. The company’s debt is limited to the amount invested by its shareholders.

• Separate Legal Entity and Perpetual Continuity

A Sdn Bhd company is an independent entity distinct from its shareholders, directors, and founders. In the event that founders or shareholders retire or die, the business still runs.

• Transferability of Ownership

As long as the buyer can afford them, shareholders are free to sell or transfer their shares to anybody. Changes in ownership are possible thanks to this flexibility without interfering with company operations.

• Ease of Fund Raising

Sdn Bhd companies can obtain funding via loans or equity. Since it has an established corporate structure, investors find it appealing. Sdn Bhd companies also frequently have lower interest rates when borrowing from banks compared to other type of business.

• Flexible Profit Distribution

The distribution of profits is the choice of the shareholders. They choose the amounts for dividends, reinvestment, bonuses, director’s fees, and salaries as they deem fit.

Disadvantages

• Public Financial Records

The Companies Act of 1965 is mandatory for Sdn Bhd companies to follow. By virtue of this act, the public can access a Sdn Bhd company’s financial records.

• Strict Compliance

Financial account audits of the company are required every year.

 

4. Unlimited Companies

In limited liability companies, a shareholder’s liability is limited to the amount they invested in the business. Unlike unlimited companies, all members bear full personal liability for the company’s losses.

An unlimited company’s name must finish with “Sendirian” or the acronym “Sdn.” to set it apart from others.

It’s worth noting that the high financial risk involved in unlimited liability makes it uncommon for this type of business to be incorporated in Malaysia.

Advantages

• Ownership and Control

Decisions and operations within the company are directly under the members’ control.

• Simple Structure

Unlimited companies frequently have a simple organisational structure.

• Fewer Compliance Requirements

Unlimited companies usually have lower administrative and compliance costs than larger corporations.

Disadvantages

• No Limit on Liability

The members’ liability is unlimited. They bear full responsibility for the debts and liabilities of the business.

• Limited Access to Capital

The absence of limited liability protection in unlimited companies may make investors cautious about making investments.

 

5. Foreign Company

A foreign company is an organisation that was not incorporated in Malaysia but wants to do business here. A foreign business can operate in Malaysia in one of four ways:

1. Establishing a Local Company
A new legal entity, usually a private limited company called “Sendirian Berhad” or “Sdn Bhd,” is established in Malaysia by the foreign company. This could result in a new legal structure replacing the current one.

2. Registration of a Foreign Company
The foreign entity can register directly with the Malaysian authorities rather than forming a new local company. Through this procedure, the foreign company can adhere to Malaysian regulations while continuing to operate under its current legal structure.

3. Setting Up a Representative Office
A foreign company can set up a representative office to explore business opportunities in Malaysia without engaging in direct commercial activities. This office serves as a liaison and promotes the parent company’s interests. 

4. Establishing a Foreign Branch Office
A foreign branch office allows the parent company to carry out business activities in Malaysia without creating a separate legal entity. This branch operates as an extension of the foreign company and must comply with local regulations and tax requirements.

Each option provides different levels of control, flexibility, and compliance with Malaysian laws, catering to the specific needs and strategies of the foreign business.

Advantages

• Limited Liability for Parent Company

Liability of the parent company is restricted to its investment in the Malaysian subsidiary by registering a different legal entity (like a Sdn Bhd).

• Proactive Government Support

The Malaysian government offers many incentives and actively promotes foreign investment. Key incentives include:

• • Tax Incentives: Benefits such as Pioneer Status and Investment Tax Allowance provide significant tax relief.
  • Grants and Funding: Support for R&D and employee training programs.
  • Import Duty Exemptions: Reduced costs for importing raw materials and equipment.
  • Fast-Track Approvals: Expedited processing for investment applications by MIDA.

Disadvantages

• Cost and Complexity

It can be expensive and time-consuming to register. The total company expense may increase due to legal fees, administrative costs, and compliance requirements.

• Strict Compliance

Foreign companies must follow Malaysian laws, which include securing the required licenses and permits.

• Inability to Convert Entity Type

After registration, a foreign company cannot easily convert to another form of business entity (e.g., from Sdn Bhd to LLP).

• Potential for Double Taxation

If both Malaysia and the foreign company’s home country tax the income, the foreign company could be subject to double taxation. Tax treaties can help with this problem, but careful preparation is important.

 

6. Limited Liability Partnership (LLP)

In Malaysia, an LLP is a business entity that combines elements of a traditional partnership firm and a private company. The Limited Liability Partnerships Act of 2012 governs it.

LLPs are attractive to professionals such as lawyers and accountants because of their flexibility and limited liability.

Profit-Sharing and Management Structure

• Profit-Sharing

  In an LLP, partners decide on profit-sharing ratios based on various factors such as effort, capital contributions, or other considerations.

• Management

  The LLP agreement establishes the internal management structure. Partners may assign specific partners to handle day-to-day operations of the LLP or they can manage it as a group.

Advantages

• No Minimum or Maximum Limit on Partners
• Tax Efficiency

Compared to corporations, LLPs have a less complicated tax structure, and distributions to partners are not taxable in their individual names.

• Reduced Compliance Requirements

Because LLPs have fewer compliance requirements than companies, they are more affordable for professionals and small businesses.

• Flexibility in Operation and Management

Like partnerships, limited liability companies (LLPs) provide flexibility by letting partners choose the internal management structure through an LLP agreement.

• Limited Liability Protection

An LLP offers its partners limited liability, in contrast to a traditional partnership. Business obligations are not a threat to their personal assets.

Disadvantages

• Relatively New Structure

LLPs are still somewhat new, so there may not be much awareness.

• Perception Challenges

It’s possible that some stakeholders don’t fully get the idea behind LLPs.

• Lack of Precedent

LLPs lack established legal precedents because they are a more recent business structure.

 

7. Public Limited Company (Berhad)

Generally speaking, a Public Limited Company, or “Berhad” (BHD), is a business that exists on a stock exchange and offers shares to the general public. The Companies Act of 2016 regulates this kind of business.

There are certain key characteristics of Berhad companies:

• A minimum of two persons who are eighteen years of age or older and typically reside in Malaysia are required for Berhad companies.
• They need at least one shareholder, who may be a local or foreign corporation or an individual.
• Berhad companies that are based in Malaysia are required to have a registered office that is open to the public during regular business hours.
• It is required to appoint a qualified and certified company secretary.

Minimum Share Capital and Listing Requirements

1. Minimum Share Capital

For Berhad companies, there is no set minimum share capital requirement. To raise capital, they must, however, issue shares to the general public; the amount depends on business requirements and market demand.

2. Listing Requirements

A Berhad company needs to apply for listing on the stock exchange (like Bursa Malaysia) in order to become publicly traded. Transparency, financial disclosures, and adherence to stock exchange regulations are all prerequisites for listing.

Advantages

• Access to Large Capital

Berhad companies can raise significant capital for growth, investment, and expansion by issuing shares to the public.

• Increased Visibility

Being publicly listed raises the company’s profile and gains the confidence and trust of partners, customers, and investors.

• Institutional Investment

Berhad businesses find it easier to attract institutional investors, which helps the inflow of capital.

• Employee Shareholding Scheme

A public listing promotes employee morale and helps to retain talent by enabling stock ownership.

• Profitable Exit Strategy

As an exit strategy and possible source of large payouts, owners can sell their shares on the market.

Disadvantages

• High Compliance Burden

Berhad companies must adhere to strict regulations, which include filing for annual general meetings, audited reports, and regulatory filings.

• Complex Regulations

Complying with complex regulations is a requirement for publicly traded companies, which can cause delays in decision-making.

• Market Volatility

Market conditions can cause share prices to fluctuate, which can impact investor sentiment.

• Loss of Privacy

Financial data disclosed by publicly traded companies compromises confidentiality.

• Risk of Hostile Takeovers

Shares listed on public markets are open to takeover attempts.

 

Choosing the Right Business Entity

Here are some of the key factors to keep in mind when choosing the right type of business entity in Malaysia:

• Exposure to personal liability
• The scope and complexity of your business operations
• Long-term growth goals
• Potential for raising capital
• Regulatory compliance requirements
• Management structure
• Tax implications

Conclusion

To sum up, choosing the most appropriate business entity requires taking factors like control, liability, taxation, and simplicity into account.

You must carefully consider your options to ensure legal protection and optimize benefits for your particular business model, as each type has advantages and disadvantages. Keep in mind that making the correct decision can have a big impact on your company’s success!