Ready to head out on your own and start your own company like you’ve talked about for years? There are quite a few things you need to figure out first. Of course you need your product, some capital, a business plan, and plenty of courage. But before those, you also need to know the kinds of business entities that exist in Malaysia. Why? Because you’re going to have to register your business under one of them.
Different business entities might suit different stages of your business or serve different business needs. Knowing them all and how they’re different from one another will help you understand more about how other businesses function and see your own business idea in a different light, while helping you choose which type of business entity you should register as.
Sole Proprietorship / Partnership
A sole proprietorship is defined by the Companies Commission of Malaysia as a business wholly owned by a single individual using a personal name or trade name. It is also the cheapest and simplest to set up. There is no annual filing requirement, and Malaysia’s Business Registration Act does not require sole proprietors to appoint auditors to audit their accounts. Quick and easy.
But, this ease comes at a price. Sole proprietorship has unlimited liability. Which means if you cannot meet your liabilities, your creditors can go after your personal assets. Since you are the sole proprietor, there is no separation between your assets and the proprietorship’s assets. This can also cause problems if the business is on hard times, since a proprietorship cannot obtain public funds to help itself out.
A partnership is much the same as a sole proprietorship, except there is more than one owner. This is usually set up for professional firms like lawyers and auditors. Otherwise it has the same benefits and disadvantages as a sole proprietorship, except the liabilities and profits are now spread over more than one person.
When Should You Go for a Sole Proprietorship or Partnership?
Taking the pros and cons into account, you should go for this type of business entity if you’re comfortable doing your own audits and your business’ potential liabilities can be sheltered with insurance. For example, a food business might get you personally sued if someone gets sick, but a business selling hats has a lot less liability.
Private Limited (Sendirian Berhad)
This form of business entity is the most commonly seen in Malaysia. Unlike a sole proprietorship or partnership, a private limited company is its own separate legal entity. It can acquire its own assets, go into debt, sue or be sued in its own name and has a perpetual succession until the directors and shareholders decide to dissolve the company. This definitely takes the legal load off of the members of the company.
A private limited company is also taxed as its own entity. From here, the company will get specific tax breaks, rates, and reliefs, among other things. However, with this comes with the extra cost of having to provide yearly accounts audits, annual returns, and doing the aforementioned taxes.
When Should You Go for a Private Limited Company?
If your business might require venture capital funding or any outside funds, or your products and services have specific liabilities tied to them, then a private limited company is for you. A private limited company is also seen as more credible, since it’s much harder to dissolve compared to a sole proprietorship or partnership.
This is somewhere between sole proprietorship and private limited. The Companies Commission of Malaysia has only quite recently introduced this option to Malaysian entrepreneurs in 2013 so one immediate disadvantage is how local banks are still new to the idea of limited liability companies and setting up a bank account for it might be a bit troublesome.
Even state-level CCM officials can be unsure about the processes necessary to go through the registration of a limited liability company.
When Should You Go for a Limited Liability Company?
Since there’s less liability than a sole proprietorship or partnership but not as many breaks tax-wise, (it even has a more expensive annual fee than private limited companies) we can’t yet recommend your business to go for this type of entity. Perhaps in future when more companies adopt limited liabilities, we can feel better about recommending this. For now, choosing between a private limited and a sole proprietorship or partnership seems the headache-free way to go.
What About Public Limited Companies?
To oversimplify things a bit, a public limited company is kind of like when a private limited company offers its shares to the public. Which means this business entity is not one a company can become immediately without being a private limited company first. So for first-time businesses, this option is not available.
There you have it. The different types of business entities your company can become. Now that you know these, we hope you can form a better plan and make more informed decisions on how your future company will be like. And if you’re keen on taking out a personal loan to help you out, feel free to check out our comparisons page. Any questions, concerns, or suggestions? Drop them in the comments section down below!