Business

A Guide to Underline Common Mistakes while Starting a Malaysian Company

Malaysia, a diverse nation, offers a large number of opportunities for residents and non-residents to establish successful businesses of their choice. The process of company formation undergoes various challenges and common mistakes that degrade the status of the entrepreneurs forming a Malaysian Company. The pitfalls of company formation in Malaysia are evident for several reasons that complicate the business setup in Malaysia. As widely observed, certain prime mistakes while starting a Malaysian company are absenteeism from preparing the fundamentals for smoothly establishing and carrying out the operations of the Malaysian Company. Running a Malaysian company requires compliance with certain legal as well as statutory business standards as outlined in the Companies Act of 2016.

Why Avoid Common Mistakes While Starting a Malaysian Company

Entrepreneurs must mandatorily avoid certain common mistakes while starting a Malaysian company to eliminate the following reasons:

1. To avoid the debts of the shareholders;
2. To avoid any financial crisis during Malaysian company formation,
3. To secure the goodwill of the Malaysian company;
4. To get easy approval from the Companies Commission of Malaysia, i.e., SSM;
5. To avoid any legal risks,
6. Ensures efficient processing of the company formation;
7. To ensure smooth opportunities for foreign investment, etc.

Common mistakes to avoid while starting a Malaysian Company

It is difficult to set up a company in Malaysia because of the entrepreneur’s common legal mistakes while starting a Malaysian Company. According to an article of 2020 published in the ASEAN Entrepreneurship Journal, several barriers or common mistakes while starting a Malaysian Company have led to the failure of approx. 60% of the Small-medium enterprises are registered in Malaysia. The pitfalls of company formation in Malaysia are observed for several reasons, as provided below:

1. Lack of corporate experience;
2. Lack of labour expertise;
3. Lack of proper market research;
4. Lack of financial support;
5.  Lack of technological development;
6. High turnovers;
7. Difficulty in expanding the market size;
8. Lack of human resource management;
9. Lack of creativity and innovation;
10. Poor marketing strategy, etc.

The blog stresses avoiding the following common mistakes while starting a Malaysian Company, as discussed below.

Avoid confusion while deciding the structure of the Malaysian Company.

Initially, the entrepreneurs must avoid any confusion when deciding on the basic structure, i.e., the blueprint of the Malaysian Company. It is considered to be the most common mistake when starting a Malaysian company, and it attracts the decision regarding creativity and talent when choosing the correct form of business. The structure and form of the company have to be evaluated and decided based on fixed parameters like the nature and environment of the Malaysian company, wherein certain factors like what kind of product the company is focusing on and what services the Malaysian Company is offering. Generally, avoiding pitfalls of company formation in Malaysia is targeted through deciding the correct structure or form of the Malaysian company into different types of business entities like a Company Limited by shares, a Company Limited by guarantee, an Unlimited Liability Company, a Sole-Proprietorship, a Limited Liability Partnership, and a Foreign Company.

Avoid skipping research on the business climate of Malaysia.

The next important consideration that must not be avoided to eliminate any mistakes while starting a Malaysian company is that the entrepreneurs must conduct proper research on the market and business climate of Malaysia. Planning the conduct of proper market research also aids in planning the goals and objectives (according to the market condition) during the formation of a Malaysian Company. The business climate and other market standards, including the local markets, targeted audience, market conditions, new trends, and the business ideas of other relevant competitors of Malaysian markets, must be properly analyzed and studied. Hence, proper market research is considered to be a gem for avoiding the pitfalls of company formation in Malaysia. The dominance of different industries like the manufacturing, service, trade, and agriculture sectors in Malaysia must also be analyzed in consonance with the Malaysian Investment Development Authority (MIDA) to identify the wide investment opportunities for the foreign entrepreneurs willing to invest in the respective sectors.

Avoid ignoring the company’s regulatory authority.

Ignoring the standards set by the Companies Commission of Malaysia, i.e., Suruhanjaya Syarikat Malaysia, a regulatory authority, is one of the most common mistakes while starting a Malaysian Company. It is equally important to adhere to the legal requirements rather than regulatory compliances for company formation in Malaysia. As observed, most entrepreneurs forget to comply with the compliance of regulatory authorities, which act as gatekeepers in setting the guidelines and standards for avoiding any professional dilemma, delays, and other pitfalls of company formation in Malaysia.

Avoid choosing restricted names for your Malaysian Company

Choosing restricted, prohibited, or unavailable names is one of the most common mistakes while starting a Malaysian company. Certain relevant factors that must be considered for the approval of the company name by the Companies Commission of Malaysia during the formation of a Malaysian Company are provided below:

1. Must not be similar or identical to the name of the other registered business;
2. The words must be clear to understand;
3. The name of the company must not be such that it can be misrepresented;
4. The name of the company must consider the factor of novelty;
5. The name of the company must not contain the name of any government agency;
6. The name of the company must be SEO-friendly to ensure the online presence of the company;
7. The name of the company can be in any foreign language, including English and Bahasa;
8. The name of the company must not contain any insulting or obscene words;
9. The name of the company must not contain any gazetted words like Malaysian Royalty, Royal King, Imperial, Federal, National, State, and other international bodies like ASEAN, UNESCO, NATO, Royal Family, etc.;
10. The name of the company must not contain words like Lottery, Liquor, Astro, DIGI, Telecom, Bank, Insurance, Tax, Exchange;
11. The name of the company must not contain words that establish a connection with government slogans like Vision 2020, Malaysia Boleh, 1Malaysia, etc.

Avoid negligence while preparing and keeping the documents.

Preparing relevant papers of a legal nature for the company is yet another alarming challenge faced by every entrepreneur, and it acts as the blueprint for how a company formation must be regulated in Malaysia. No negligence of any nature will be born while preparing the relevant documents like the Memorandum of Association, the Articles of Association, the Prospectus of the company, and a certificate for trading granted under the Companies Act of 2016, etc. The company’s documents must not only be carefully prepared but should also be kept safe and maintained by the company’s registrar under Section 47 of the Companies Act of 2016. Any failure to comply with the maintenance of the corporate legal documents is considered a common mistake while starting a Malaysian company and fined RM 10,000.

Avoid skipping the notification of the relevant changes in the Company

Skipping the notification of changes in the particulars of the company is yet one of the common mistakes when starting a Malaysian company. Hence, every entrepreneur must mandatorily inform and notify the Registrar of the company within 30 days of the relevant changes in the business particulars as provided below:

1. Change in the name of the Malaysian company;
2. Change in the address of the Malaysian company;
3. Change in the type or structure of the Malaysian company;
4. Change in the particulars or branches of the Malaysian company;
5. Change in the information of the owners, shareholders, directors, partners, and other associated members of the Malaysian company.

Failure to notify the company of the changes in the particulars through Form B, along with the supportive documents and fees, attracts a fine of RM 20,000.

Avoid failure in filing the annual return for the Company

Failure to file the annual return in a timely manner is one of the most observed mistakes when starting a Malaysian company. The entrepreneurs must mandatorily file the annual reports within 30 days from the anniversary of the company to the Companies Commission of Malaysia (SSM), including the following information:

1. Information regarding the business activities;
2. Information regarding the directorship of the Malaysian company;
3. Information regarding the company secretary and shareholder;
4. Information regarding the capital status of the Malaysian company;
5. Complete information regarding the assets of the company;
6. Basic details regarding the registered office address, branch address, and the business address of the company;

Failure to file the annual returns for the Malaysian Company is observed as a serious pitfalls of company formation in Malaysia which attracts a fine of RM 50,000 and even the striking off the company (if not filed for 3 consecutive years).

Avoid non-compliance with the duties and responsibilities of the directors

The next crucial requirement for avoiding common mistakes while starting a Malaysian company is compliance with the duties and responsibilities of the directors. The list of responsibilities that a director of the company holds includes the following:

1. The fiduciary duties of the director include avoidance of any conflict of interest between personal and company matters, any conflict of interest for the company, etc.;
2. The statutory duties of the director include acting in good faith, properly using the designated powers, disclosing the interest in any conflict, getting the meetings of the company approved, giving disclosure notice for the shareholders of the Malaysian company, etc.;
3. Due diligence and reasonable care must be exercised by the director of the company {as provided under section 213(2) of the Companies of 2016}.

Failure to comply with the duties and responsibilities of the directors is an offence punishable by at least 5 years of imprisonment or with a fine of at least RM 3 million or both.

Avoid giving incomplete information about the company

One of the most common mistakes when starting a Malaysian company is giving inappropriate and incomplete information about the company. The details required at the time of company formation in Malaysia include the following:

1. Complete information of the shareholders;
2. Complete information of the directors of the company;
3. Complete identification details;
4. Complete details of the employees of the company, including, name, salary, Identification number, etc.;

Avoid ignoring Negative feedback.

The negative feedback from the customers must not be avoided to eliminate the pitfalls of company formation in Malaysia. Entrepreneurs must not only focus on positive feedback or comments but also align the business strategy according to the demands of the haters, i.e., those who criticize or pass negative comments on the business setup. There are diverse modes like online methods, surveys, rating systems, etc., which are used to record the feedback and comments of the customers to improve the business opportunities for the Malaysian company.

Avoid skipping financial planning.

It is important for the new business entities being registered in Malaysia to manage the finances of the company through proper budget planning to ensure the main fundamentals of the company’s finances. Most startups registered in Malaysia fail due to a lack of proper financial planning. Money regulation, i.e., expenses or budget management in a business, is a mandatory factor that is required from the beginning of a business setup to ensure a smooth journey and avoid any pitfalls of company formation in Malaysia.

Avoid confusion while registration of business licenses & permits

It is important to remember that every entrepreneur must avoid any sort of confusion and also forget the registration of business licenses and permits required for lawfully carrying out the operations of the business. Certain relevant business licenses that must not be ignored are:

1. Issuance of the health and medical permits;
2. Issuance of the entry permits, including Export and import entry permits under section 10 of the Immigration Act and Regulation 4 of the Immigration Regulations of Malaysia;
3. Issuance of the professional entry permits with outstanding skills and recommendation from a Malaysian agency;
4. Issuance of the Industrial, services, and manufacturing permits from the Ministry of International Trade and Industries and MIDA;
5. Issuance of Agricultural license from the Ministry of Agriculture and Agro-Based Industry;
6. Issuance of general licenses like company registration certificate and social security registration for the organization;
7. Issuance of licenses for the manufacturing sector;
8. Issuance of licenses for carrying out construction-related business operations;
9. Issuance of Certificate of fitness for certified machinery;
10. Issuance for sales tax license;
11. Issuance of approval for fire brigade permits;
12. Issuance of license for maritime, air, and land transportation from the Ministry of Transport, etc.

Any foreigner entering Malaysia without relevant permits under section 6(3) of the Immigration Act of 1959 is held accountable for making common mistakes while starting a Malaysian company with a fine of at least RM 10,000 or with imprisonment of at least 5 years or both.

Avoid ignoring the competitors of the Malaysian Company.

Underestimating and ignoring the competitors in the market is one of the most common reasons for the pitfalls of company formation in Malaysia, wherein the entrepreneurs deeply indulge in managerial, financial, and other operations of the business and forget to consider the competitors of the Malaysian company willing to register their business. It stands as a serious issue faced by most entrepreneurs while registering their Malaysian company, which requires hiring a team of professionals with eminent knowledge and experience in deeply handling the other core functions of business setup, especially in analyzing the market strategy of the competitors.

Avoid doing everything by yourself.

Entrepreneurs start extending their limits by doing everything by themselves which is a big issue or mistake that may ruin the longevity of the corporation. It is totally considered a dumb idea that stresses out the physical and mental well-being of the entrepreneurs. The easiest way to avoid this issue is the appointment of designated employees, a group of experts and specialists knowing the field associated therewith.

Other Considerations while starting a Malaysian company

Certain ignored grey areas need to be urgently targeted or considered to avoid any mistakes while starting a Malaysian company, including the following:

1. Consider the targeted audience to ensure smooth regulation of the company;
2. Consider the cultural and language differences (if any);
3. Consider the cultural differences before starting an offshore Malaysian company;
4. Consider Professional assistance (if required);
5. Consider issues related to the management of human resources while starting a Malaysian company;
6. Diligently considering the cash flow in the business is considered to be the apex reason for avoiding mistakes while starting a Malaysian company;
7. Consider patience and Due Diligence following the procedure of company formation;
8. Consider setting creative and innovative goals for the Malaysian Company formation;
9. Consider the budget flow for the registration of the Malaysian company;
10. Considering the need for a registered address during company formation in Malaysia,
11. Consider adopting a strong marketing strategy for the initial years of the business setup;
12. Consider tax compliance obligations for the Malaysian company formation;
13. Consider the employment of relevant authorities like a company secretary, the directors, and other employees to ignore the pitfalls of company formation in Malaysia.

Conclusion

Avoiding common mistakes allows a business to run with full compassion, enthusiasm, commitment, energy, highlights, motivation, and the object of holding a positive rate for profitability and longevity. Even the pandemic i.e., COVID-19 has set an additional challenge for almost all the new startups to eliminate the pitfalls during establishing a Malaysian company.

So, the present study targets the barriers or pitfalls of company formation in Malaysia wherein certain issues like human resource mismanagement, mishandling digital business, ignoring competitors in the market, and not strategizing the business strategies according to the analyzed market standards. The issues underlined in this blog are considered to be the mistakes that are commonly made when starting a Malaysian company.

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