What are the 5 Kinds of Business Entity in Malaysia?

In Malaysia, if you want to start operating a business will have to undergo business registration with the Companies Commission of Malaysia abbreviated SSM (Suruhanjaya Syarikat Malaysia). Given there are different types of business entities available in Malaysia, it is crucial to understand their functions to ensure that it suits your business plan and expectations.

If you are interested in starting a business in Malaysia, a good place to start is to first understand the types of business entities in Malaysia.

1. Sole Proprietorship

If you are a Malaysian citizen or permanent resident thinking of starting a small business on your own, a sole proprietorship is one of the simplest business entities to consider in Malaysia.

Characteristics of Sole Proprietorship

• Most traditional form of business structure in Malaysia
• Owned by just one person (only Malaysian citizens or permanent residents can set up a sole proprietorship)

Advantages of Sole Proprietorship

• Simple and fast to set up as it can be ready in 1 hour
• Low costs of yearly maintenance as no statutory audit and company secretary requirements

Disadvantages of Sole Proprietorship

• Unlimited liability to the owner
• Unfavourable tax rate

• For example, due to the unlimited liability nature, the owner may be declared bankrupt in the event of a lawsuit.

• Personal income tax might be expensive in Malaysia if the business earns significant profit (e.g. RM600,000), due to the assessment based on a personal income tax rate scale of up to 30%.

2. Partnership

If you decide to embark on a business venture with business partners, a partnership is one of the easiest business entities to consider in Malaysia.

Characteristics of Partnership

• It is jointly owned by two or more individuals (maximum at 20 partners)
• It is governed by the Partnership Act 1961 or self-created partnership agreements

Advantages of Partnership

• Low set-up cost and low maintenance costs as no statutory audit and company secretary requirements
• Ease of incorporation with the Companies Commission of Malaysia (SSM)
• Shared liability among all partners

Disadvantages of Partnership

• Jointly liable for liability of the partnership as there is unlimited liability
• Unfavourable tax rate
• The business continuity of the partnership will be affected if a partner dies, quits, or leaves the partnership in any other manner.
• Difficulty in receiving important bank loans

• Personal income tax might be expensive in Malaysia if the business earns significant profit (e.g. RM600,000), due to the assessment based on a personal income tax rate scale of up to 30%.

3. Sendirian Berhad (Sdn. Bhd.)

A Sendirian Berhad, also known as Sdn. Bhd., is a private limited company that is limited by shares. Even if you are considering a SME business, you can opt for this business entity. This is one of the few types of business entities in Malaysia which has a separate legal entity feature.  

Characteristics of Sdn. Bhd.

The most distinct feature is that it is separate legal entity, which means:

• It can carry on business
• It can enter into a contract
• It can sue or be sued
• It is body corporate separate from its shareholders which means the shareholders are not liable for its liabilities
• It exists perpetually even when the owner dies, quits, or relinquishes ownership in any other manner
• Owner, who is the shareholder, could be a different person from the one running the company, i.e. director
• It can have 1 to 50 shareholders
• Can be 100% owned by Foreigners or Foreign Companies

• For company beyond 50 shareholders, it will need to be set up as a Berhad company

Advantages of Sdn. Bhd.

• Limited liability to the owner/shareholder
• Easier to obtain bank loan and big contracts as it is considered a more creditworthy business structure as compared to sole proprietorship and conventional partnership
• Easier to have a variety of share structures to cater to each individual shareholder
• Favourable tax rate at 17% and 24% based on different perimeters
• With the new Companies Act 2016, even a single person can set up a Sdn Bhd (previously it requires at least two shareholders and two directors)

• Liability is limited to the share of capital injected

Disadvantages of Sdn. Bhd.

• Higher set up costs (approximately RM2,500-RM3,000 including government fees)
• Higher maintenance costs as it requires annual statutory audit and company secretarial services
• Additional compliance as required by laws to do statutory submission

Check the other types of business in Malaysia at WeCorporate blog.