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.
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.
1. Sole Proprietorship / Milikan Tunggal
A Sole Proprietorship is the most simple business entity. It is very attractive to many business owners due to the simplicity from the ease of setting up to the low compliance regulations as compared to other business entities. A Sole Proprietorship is solely owned by one individual. However, a major disadvantage of the Sole Proprietorship is that the business has unlimited liability. This means that if the business is sued or declared bankrupt, creditors are able to go after the owner of the business, including his or her personal income and assets.
2. Partnership / Perkongsian
This business entity is very similar to a Sole Proprietorship. A Partnership is held between a minimum of 2 and up to 20 members, and is suitable for professional firms. Any business profits from the Partnership are taxed at the individual tax rate of each partner, and not at the whole of the business. Much like Sole Proprietorships, this type of business is bound by unlimited liability, and only Malaysian citizens or PRs are eligible to register for businesses as Partnerships.
3. Limited Liability Partnership (LLP)/ Perkongsian Liabiliti Terhad
The Limited Liability Partnership or LLP is a hybrid between a partnership and private limited company. It is similar to the conventional partnership but with the advantages of a private limited company. Below are some of the features of LLP:
It is a body corporate and a separate legal entity from its partners.
LLP has perpetual successions
The LLP is capable of suing and being sued, acquiring, owning, holding and developing or disposing of property.
LLP has fewer compliance requirements and is a much more affordable business vehicle. For instance, LLP is not required to audit its accounts annually.
4. Private Limited Company/ Sendirian Berhad (Sdn Bhd)
A private limited company by shareholding is known as Sendirian Berhad (Sdn Bhd) Company. This type of company is a separate legal entity from its owners, which means this company is considered as a legal ‘person’ that can buy or sell property, present into legal contracts, sue or get sued in courts of law.
Choosing this type of entity allows an entrepreneur to keep their finances and assets separately from the business. This means that the people who have invested in the business, namely the shareholders, are only responsible for any company debts up to the amount that they have invested and no more. Hence, this type of entity is a good way for a company to get investment without risk to personal wealth.
5. Public Limited Company/ Berhad (Bhd)
A Public Limited Company (Berhad) is an entity whereby shares of the company are offered to the members of the public. A Berhad has the choice to be listed on the stock exchange market of the country or not. In most cases, a Sendirian Berhad is converted to a Berhad to raise public funds. The share capital of a Berhad can be raised from the public through an initial public offering (IPO) and there is no limit to the maximum number of shareholders. The ease to raise capital for the company comes with a few restraints:
Stricter regulations to adhere to - as Berhads are required to comply with a higher level of financial and compliance reporting standards.
Mandatory requirement to disclose Financial Reports and Annual Reports to the public.
Obligated to host hold an Annual General Meeting for all of the company’s Shareholders.
6. Company Limited by Guarantee (CLBG)
A CLBG is a public company, but unlike a Berhad, it is not bound by shares. A CLBG is typically used for not-for-profit companies e.g. charities, clubs, societies, community projects, etc. Any organisation which involves more than 20 people is required to be registered with SSM as unincorporated associations are prohibited under the Companies Act.
A CLBG is also not allowed to have share capital and no profits are to be distributed amongst the members of the company. A good way to find out which are CLBGs in Malaysia would be to look for these words in the name: Fund (Tabung), Corporation (Badan), Foundation (Yayasan), Alliance (Gabungan) etc.