Before starting a business, you have to know which business structure/model that will help your purpose. You can either go with sole proprietorship or private limited company (also known as Sdn. Bhd.) in Malaysia.
Sole Proprietorship is a business set up by one individual which is suitable for small businesses.
Easy to use: The Sole Proprietorship is very east and fast to set up. Less paperwork and formalities.
Low cost: The registration and compliance costs for a Sole Proprietorship are relatively low compared to a Private Limited Company.
No separate legal entity: The entrepreneur is personally responsible for all the business dealings and there will be no succession for the business.
Your personal assets are at risk: The entrepreneur personally bears all the risk. For example, you would have to take a bank loan in your name and pay off the debts yourself. The business’s liability is your liability. If you business is not doing good and you might end up paying debts with your personal assets.
One-man show: The entrepreneur usually has to manage all the business alone. If you ever decide to bring in a partner, then you will have to transfer your business to another business type that will be owned by you and your partner.
Taxation: The net income earned from the business is deemed to be your personal income and it will be subject to your personal income tax rate. Unlike private company which is subject to tax at the applicable corporate tax rate. Therefore, if your personal income tax rate is higher than the applicable corporate tax rate, you might want to consider a Private Limited Company.
A Private Limited Company (Sdn. Bhd.) is a type of privately held business entity, in which owner’s liability is limited to their shares. It is the most common choice for startups or entrepreneurs in Malaysia. It must have at least 1 resident director and at least 1 shareholder (maximum 50 shareholders). It provides a legal entity that is separated from its shareholders. This means that the debts, risks, and the responsibilities are made in the company’s name, not personal.
Limited liability: One of the biggest advantages of using a Private Limited Company is that the liability of the company’s shareholders is limited to the amount they have paid or agreed to contribute. For example, if a shareholder invests RM100,000 in a company in exchange for 10% shareholding and the company later becomes insolvent, the worst case scenario would be that the shareholder is unlikely to recover his/her investment. As a shareholder or even a director, you are not legally liable for the company’s liabilities unless you have given a personal guarantee.
Separate entity: The Company has its own legal identity. It is ‘immortal’ and can be inherited and passed on to another owner or sold.
Lower tax rate: The standard corporate tax rate is 24%. For small and medium enterprise (SME) with paid up capital not more then RM2.5 million, the first RM500,000 Chargeable Income will be taxed at 17% and subsequently will be taxted at 24%. Source: LHDN official website
Ability to raise funds: Funding is usually easier for Private Limited Company both with bank loans or attracting investors.
Here is the summary of the features of both Sole Proprietorship and Private Limited Company:
|Feature||Private Limited Company||Sole Proprietorship|
|Owned by||At least 1 Director
|Taxes||Corporate tax for SME (17% for the first RM500,000 and subsequently at 24%)
Eligible for exemptions
|Personal tax (max 28%)|
|Compliance requirements||Company Secretary
Annual filings to CCM
|Inform CCM annually|