What Are The Different Business Types In Malaysia

The single most essential decision you'll make as a business owner is how to organize your company. A variety of elements, many of which will determine your company's future, will be influenced by the shape your business takes. Understanding the benefits and drawbacks of each company organization type is critical for aligning your goals with your business organization type.

Before you register your business with the state, you'll need to decide on a business structure. Most companies will also require a tax ID number as well as the filing of the necessary licenses and permits. Make a wise decision. While you may be able to change your business structure in the future, your location may limit your options. This could lead to tax ramifications as well as an unintentional dissolution, among other issues.

The Different Business Types

Choosing from the several Malaysian business entities is a crucial step in the establishment process. Before you can formally start your business, you must first decide on the type of organization that is best suited to your goals. The decision of what form of business to register is one of the first obstacles that new entrepreneurs encounter. Despite the fact that there are many various sorts of businesses to choose from, it does not have to be tough. To assist you in making your decision, below is a list of a few common business types.

The video below will be explaining the differences, advantages and disadvantages between the types of business.

Sole Proprietorship / Millikan Tunggal

A sole proprietorship is an unincorporated business with only one owner who is personally responsible for the company's profits. The company has to be owned by one Malaysian citizen or a permanent resident. Due to a lack of government oversight, a sole proprietorship is the easiest type of business to start or shut down.

As a result, these types of enterprises are extremely popular among sole proprietors, independent contractors, and consultants. Because a distinct business or trade name isn't required, many single owners operate under their own identities. A single proprietorship does not form a separate legal entity. As a result, a sole proprietorship's business owner is not immune from the entity's liabilities.

Advantage And Disadvantages Of Sole Proprietorship

The simplest business structure is a sole proprietorship. An unincorporated business, has a single owner who bears all of the company's responsibilities, including earnings and debts. Despite its simplicity, this corporate structure has both advantages and disadvantages.

AdvantagesDisadvantages
Forming it is a simple and inexpensive process with minimal or no expenses required, as well as very little paperwork.The business owner is personally liable for all of the entity's debts
Do not have to devote time and money to comply with numerous government regulationsSole proprietorships have fewer possibilities for raising cash.
The owner of a sole proprietorship is only taxed once.Selling a sole proprietorship is more difficult than selling other forms of business types.

To sum up the advantages, forming a sole proprietorship it is simple and has little paperwork. Sole proprietors have only a few regulatory obligations to obey and are not obliged to reveal their financial reporting to the general public. On the earnings made by the entity, the sole proprietor pays solely personal income tax and the entity is exempt from paying income tax.

The disadvantages of a sole proprietorship are if the company fails to satisfy its financial responsibilities, creditors, for example the bank, may seek recovery from the entity's owner, who will be forced to repay existing debts or other financial obligations using his or her personal assets. To raise fresh finances, the owner cannot sell an equity stake. The owner's personal credit history will influences his or her capacity in securing finances.

If a sole proprietor's company makes a lot of money, they will have to pay capital gains tax when they sell it. This is a tax on gains from the date of purchase or the commencement of the firm until the date of sale, and it can be as high as 49% of the entire gains. A sole proprietorship sale also entails the disposal of debts. Newer enterprises may have debt that exceeds profit, especially when they are first starting out. While this is a common occurrence, predicting future earnings for potential owners can be challenging.

General Partnership / Perkongsian Am

The initial sort of partnership is the general partnership. A general partner is regarded as the partnership's owner. General partners are actively involved in the partnership's management and have the authority to make decisions on behalf of the company. A general partnership is owned by two or more individuals with a maximum amount of 20 partners. The partners in a general partnership are not protected from responsibility. If one of the partners is sued, all of the partners are held accountable. In this way, many people relate a general partnership to a single proprietorship. As alternative entity kinds provide more liability protection, this sort of entity has grown less popular.

Advantages and Disadvantages of General Partnership

Because the business is a partnership, the earnings, obligations, and decision-making must all be shared. This is one of the benefits of forming a partnership, especially when the parties have complementary skills and can collaborate effectively. However, it is clear that it can cause some issues. Many partnerships have deteriorated over time. Family and friends start a business together and eventually fall out on a personal or professional level, resulting in a disastrous outcome. This is one of the most significant downsides of partnerships over other company models, but it's critical to be able to weigh the benefits and drawbacks.

AdvantagesDisadvantages
The partners will fund the business with start-up cash according to the nature of the business.General partnerships have unlimited liability, which means that each partner is responsible for the business's liabilities and financial hazards.
Business management responsibilities can be shared among partners enabling them to maximize their abilities.Partners must pay tax in the same manner as sole traders, file a Self Assessment tax return each year and register with HM Revenue & Customs as self-employed.
Less strictly regulated in terms of the laws that govern their formation.People are bound to have differing opinions on how the company should be run, who should do what, and what the company's best interests are. 

Some advantages of a general partnership are that it is often easier to form, manage, and govern a partnership and because the partners have sole control over how the business is run without interference from shareholders, they can be far more flexible in terms of management, as long as all of the partners agree. Rather than sharing the management and taking an equal portion of each company duty, they may divide the work based on their abilities. So, if one partner is skilled with numbers, they might handle the bookkeeping and accounting, while the other has a knack for sales and thus be the company's main salesperson.

Because the partners are funding the business, this means that the more partners there are, the more money they can invest in the company, giving it more flexibility and growth potential. It also means that there will be greater potential profit, which will be split evenly among the partners.

Some of the disadvantages that general partnerships have are that there will be different opinions that can lead to conflicts and arguments, which can hurt not only the business but also the relationships of people involved. This is why, during the formation phase, it is usually a good idea to prepare a deed of partnership to ensure that everyone understands what procedures will be in place in the event of a disagreement and what would happen if the partnership is dissolved.

According to existing legislation, if a partnership earns more than a particular amount of money, they are subject to higher personal taxation than they would be in a limited corporation. As a result, in most circumstances, forming a limited company would be more advantageous due to more favourable tax rules. For some people, having unlimited liability can be off-putting. This can be mitigated by forming a limited liability partnership, which benefits from the limited liability advantages offered to limited businesses while maintaining the flexibility of the partnership model.

Limited Liability Partnership / Perkongsian Liabiliti Terhad

For professionals such as attorneys, accountants, doctors, dentists, and other firms in the professional sector, limited liability partnerships are the most typical option. The limited liability partnership prevents the partners' personal assets from being used to pay business debts and liabilities. Individual partners in a limited liability partnership may be held personally accountable for improper or negligent behaviour, but the other partners are not. A Limited Liability Partnership is able to have an unlimited number of partners.

Advantages and Disadvantages of Limited Liability Partnership

A partnership is a contract between two or more companies or individuals to own and operate a business together. Partners share managerial responsibilities as well as the company's profits and losses. A limited liability partnership (LLP) is a type of corporate structure that protects individual partners from the negligence of other members of the organization.

AdvantagesDisadvantages
Each partner is personally liable for the company's activities and this includes debts, liabilities, and other partners' wrongdoings.It will be more difficult for a limited liability partnership to obtain funds.
Managerial responsibilities might be split evenly or separately based on each partner's experience.As the company grows more partners may be involved in the decision-making process
Individual partners are usually responsible for their own personal income taxes, self-employment taxes, and anticipated taxes.Individual partners are not required to discuss with other participants their other business agreements.

Advantages of Limited Liability Partnership are that they are individual partners are protected from personal liability of other partner's irresponsible behavior.  Individual partners are also not personally liable for the debts or other obligations of the partnership. Partners with a financial stake in the company can choose to have no influence over business decisions but yet retain ownership rights based on their percentage ownership.

Taxes are not the responsibility of the partnership. The company's credits and deductions are passed on to partners to claim on their individual tax filings. The percentage of individual interest each partner has in the company is used to allocate credits and deductions. This can be advantageous for partners who have a minor stake in the company or who have specific tax requirements due to their other business interests.

Some disadvantages are that despite the fact that the Company is permitted to open a corporate bank account in its own name, most bankers are still wary of such businesses, therefore lending packages are limited. It may be simple to form a Limited Liability Partnership at first, but as the company grows, more partners may be involved in decision-making. This could cause issues when it comes to making a choice, especially if there is a disagreement among the partners. A partnership agreement that spells out exactly what each partner may and cannot do when making business choices should be drafted out for the sake of the company's overall integrity. Limited Liability Partnership's financial accounts must also be made public, which may be a problem for some partners.

Private Limited Company / Sendirian Berhad (Sdn. Bhd.)

A Private Limited Company also known as Sendirian Berhad (Sdn. Bhd.), like an LLP, is a separate legal entity from its owners, which implies that shareholders have limited liability and are only liable for corporate obligations up to the amount invested and the funds in the firm. A Sendirian Berhad might have as few as one stakeholder and as many as fifty. You must first obtain approval for a Company Name before forming a Sendirian Berhad in Malaysia.

To register a Sendirian Berhad, a number of requirements must be satisfied, including:

  • A RM1 minimum paid-up capital is required.
  • At least one director must be at least 18 years old and a Malaysian resident.
  • All directors should not be bankrupt and should not have been convicted in Malaysia in the previous five years.
  • At least one company secretary must be a member of a professional organisation recognised by the SSM.
  • An office with a physical location.
  • Reporting on the audit return and reports to be submitted each year.

Advantages and Disadvantages of Private Limited Company

A company that is registered as a Private Limited Company depending on the nature of the company can be 100% held by foreigners. As a result, it is the most popular among international investors. Private Limited Companies can have anywhere from two to fifty shareholders. It does sell stock to the general public. This type of company does not invite the general public to invest in their business. The majority of small and medium businesses are run as private limited companies. Private Limited Companies are a legal entity in their own right.

AdvantagesDisadvantages
Current shares can be transferred and new shares issued to new investors easily. Maintaining a Sendirian Berhad is substantially more expensive than a Berhad
A Sendirian Berhad provides liability "protection" to its shareholders, limiting their exposure to the amount of share capital they purchased.Because the accounts will be inspected by a certified auditor, they must be well-maintained and compliant with Malaysian accounting standards.
Sendirian Berhad is only taxed on its profits. This means that these companies are exempt from paying any additional taxes.A Sendirian Berhad's founders do not have complete control over the company's activities.

To sum up the advantages of a Sendirian Berhad, the shareholders are not liable for any obligations that exceed their shareholdings, as long as there is no fraud or other malpractice. Existing members can sell their shares to transfer their shareholdings entirely or substantially (subject to the consent of the board of directors). In contrast to sole proprietorships and partnerships, there is no need to wind up a corporation if one of its shareholders or directors dies. Sendirian Berhad can deduct expenses like entertainment, travel, and charitable contributions.

To sum up, the disadvantages of Sendirian Berhad. A company secretary and an authorized auditor to manage the registration books and audit the company's finances, respectively, must be hired under the company. The organization may have to pay between RM2,000 and RM5,000 per year to hire these professionals.

A Sendirian Berhad must keep and engage a well-trained bookkeeper. When the company's founders decide to privately issue shares to outsiders, they are inviting more investors to join the company. With less power, founders are less likely to be able to make and implement crucial choices without contacting other shareholders.

Public Limited Company / Berhad (Bhd.)

A Public Limited Company (Berhad) is a legal entity in which the company's shares are sold to the general public. A Public Limited Company has the option of being listed on the country's stock exchange market or not. The most common reason for converting a Sendirian Berhad to a Berhad is to raise public cash. A Public Limited Company's share capital can be raised from the public through an initial public offering (IPO), and the maximum number of shareholders is unlimited. The company's ability to raise financing is limited by a few factors:

  • Public Limited Companies are expected to meet with a higher level of financial and compliance reporting standards, which necessitates stricter regulations.
  • A criteria that must be met Financial and Annual Reports are required to be made public.
  • The corporation is required to hold an Annual General Meeting for all of its shareholders.

Advantages and Disadvantages of Public Limited Company

A Public Limited Company is a company that is managed by directors and owned by shareholders. A Public Limited Company can sell its stock to the general public. A Public Limited Company, like a private corporation, is listed on the stock exchange and must be more transparent and public about its details than a private company. Here are some advantages and disadvantages to being a Public Limited Company.

AdvantagesDisadvantages
A Public Limited Company , especially one that is listed on a recognized exchange, has the opportunity to raise share capital.The needed level of transparency for a Public Limited Company is substantially higher than that of a Private Limited Company.
Offering public shares allows a corporation to distribute the risk of ownership across a wide number of stockholders.When a Public Limited Company is listed, the market might exert additional pressure.
A Public Limited Company's shares are more easily transferable, giving stockholders additional liquidity.A Public Limited Company makes it much more difficult to control who is a shareholder and to whom the directors are ultimately accountable.

Advantages of Public Limited Companies are that their capital may be raised and it is often significantly larger than that of a Private Limited Business because it can sell its shares to the public and anyone can invest their money. Hedge funds, mutual funds, and other institutional traders may be interested in investing in a stock that is listed on an exchange. Obtaining funding from a diverse group of investors offers some advantages over relying just on one or two "angel investors," as many private companies would do to help them develop. While an angel investor can give a significant amount of finance and knowledge, the founders may not be happy with the level of control the angel expects over the company's path.

Shareholders and potential shareholders will find it easier to transfer shares in a company if the stock is listed on a stock exchange, albeit the market still relies on willing buyers and sellers being accessible. Shareholders are less obligated to stay with the company and may even help the company by encouraging individuals to invest. It's also easier to deal with events like a shareholder's death because there are no restrictions on the transferability of shares, which are common in private firms. Shares can be transferred in accordance with the terms of any will.

Disadvantages of Public Limited Companies are in addition to having their accounts audited, they are often unable to file shortened accounts, but smaller private companies can often do so. A Public Limited Company must reveal more specific information about its business and its performance under the complete form of accounts, which is then open to anybody.

Analysts study Public Limited Company accounts more closely, and media coverage is more frequent. the original owners or directors may lose control of the company's direction, suffer conflicts, or just spend a lot more time managing shareholder expectations. The company's share price reflects the market's perception of the company's worth, and (prospective) investors should expect a healthy return. There will be a desire for the share price to rise in addition to dividends paid from profits. The directors may become almost entirely focused on short-term performance as a result of this level of stress on the share price, which is normally not as immediate in a private company. As a result, they may overlook strategic opportunities or challenges, failing to achieve the greatest long-term results for the company.

Which Business Type Should You Choose?

It's not always straightforward to pick which structure to use for new enterprises that fall into two or more of these categories. You should think about your startup's financial demands, risk, and growth potential. It can be tough to change your legal structure after you've registered your company, so think about it carefully when you're first starting out.

Here are some crucial things to think about while deciding on a legal structure for your company.

  • Liability in the legal sense. To what extent does the owner's legal liability need to be limited? If you have a significant investment in equipment and the contracts you work on are significant, as well as if your business needs to borrow money with potential liability and you don't want to take on personal liability for potential losses associated with the business, a sole proprietorship or partnership might not be the best option.
  • Tax implications. What are the options for minimizing taxation based on the unique situation and aspirations of the business owner? Private Limited Companies (corporations) have more tax alternatives than sole proprietorships and partnerships.
  • The cost of starting a business and maintaining it. However, tax benefits may not be sufficient to balance the other costs of doing business as a corporation. In comparison to a sole proprietorship, partnership, or limited liability partnership, there will be a high expense of hiring company secretaries for record-keeping and paperwork, as well as a high cost of incorporation and accounting audit.
  • Flexibility. Your goal is to make the ownership structure as flexible as possible by taking into account the business's unique needs as well as the personal needs of the owner or owners. Individual requirements must be taken into account.

Conclusion

Starting a business is an exciting and scary moment. Before you make this crucial decision, make sure you carefully research the business types and choose carefully. Don't base your decision on what others have done. The answer to the issue of "What structure makes the most sense?" is unique to each business owner's situation.

Every circumstance is unique. You can't simply assume that one shape is superior to another. Do look into how you would like the future of your company to be while making this decision.

Reference

Definition of Business Type

Advantages and Disadvantages of Sole Proprietorship

Advantages and Disadvantages of General Partnership

Advantages and Disadvantages of Limited Liability Partnership

Advantages of Private Limited Company

Disadvantages of Private Limited Company

Advantages and Disadvantages of Public Limited Company

Which Type Should You Start With

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Written by Cherylle Phua

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