Business

Choosing the Right Business Structure in Malaysia

Malaysia, with an average annual growth of 2.52% in GDP, has started to emerge as a springboard for the regional business expansions observed in the Association of Southeast Asian Nations. According to the World Competitiveness Yearbook of IMD published in 2022, Malaysia holds the 2^nd position to have the most developed and competitive business environment among the Association of Southeast Asian Nations. Determining the right business structure in Malaysia is as essential as following the right procedure to register a legal entity in Malaysia.

Business structure in Malaysia refers to the type of corporate legal entity to be registered in Malaysia. The most crucial and principal requirement for setting up a legal entity in Malaysia is to choose the right business structure depending upon certain well-established factors. The importance of choosing the right business structure in Malaysia directly accounts for the registration of the legal entity in Malaysia, influences the legal and financial operations of the company, and ensures compliance with the regulations of Malaysia governing the formation of the corporate legal entity in Malaysia.

Factors responsible for critically determining the Business Structure in Malaysia

There might be situations when determining the right business structure is critically difficult, such as when one corporate legal entity is better than another legal entity. There are various established factors to be minutely observed for determining the best-suited business structure in Malaysia. The factors responsible for critically determining the business structure in Malaysia are:

1. Consider the object and goal of the business structure in Malaysia.
2. Consider the ease of establishing the business structure in Malaysia.
3. Analyze the risk of personal liability of the entrepreneurs;
4. Access the advantages of setting up the business structure in Malaysia.
5. Access the disadvantages of establishing a corporate legal entity in Malaysia.
6. Consider the cost and other charges to maintain the business structure in Malaysia.
7. Whether the chosen corporate legal entity is scalable or not;
8. Determine the legal implications and responsibilities before determining the business structure in Malaysia.
9. Determine the implications of the taxes and income earned during the business operations.
10. Analyze the investment opportunities in the business structure in Malaysia;
11. Establish a full-proof exit strategy before choosing the business structure in Malaysia.

Business Structure in Malaysia: A Comprehensive Study

Every business structure in Malaysia needs to be registered with the Companies Commission of Malaysia. Namely, Suruhanjaya Syarikat Malaysia (SSM) was established and is working under the aegis of the Ministry of Domestic Trade and Consumer Affairs. They’re not only the factors to be reviewed before choosing the right business structure in Malaysia, but also there exists a penalty of MYR 50,000, or imprisonment of at least 2 years if the chosen business structure is not registered within 30 days of its commencement.

Determining the type of business structure in Malaysia is also regulated by the advantages and disadvantages of business incorporation in the nation. The comprehensive business structure in Malaysia free to legally register and operate their business are as provided below:

Sole-Proprietorship

A sole proprietorship, commonly known as a sole trader or the most traditional form of business, is a corporate legal entity in Malaysia that is required to be registered under the aegis of Registrar of the Business appointed under the Companies Commission of Malaysia, namely, the Suruhanjaya Syarikat Malaysia. A sole proprietorship is a form of business structure in Malaysia solely owned and controlled by an individual called the sole proprietor of the business, having no separate legal entity and the sole rights of the sole proprietor to make decisions, carry the taxation, liable for all the debts and other legal obligations of the business firm. The annual cost required for the registration of the business of sole proprietor is approx. MYR 95 is divided as MYR 60 for reserving the trade name, MYR 30 for reserving the name of the company, and MYR 5 for every subsequent branch. The sole proprietor requesting to register the business structure in Malaysia must be a Malaysian citizen or a permanent resident of Malaysia. There is no legal obligation to file the annual returns or draft the annual audit of the business. This business structure in Malaysia requires the annual renewal of the relevant licenses upon their expiry. If any provision specifying the termination of the legal business structure exists, it must be notified (through Form C) to the Registrar of the Business 30 days prior to such termination.

Advantages of Choosing a Sole Proprietorship

The advantages of attracting the business of sole proprietorship to stand in the capacity of the simplest business structure are:

1. Easy and simplified procedure to set up the business firm.
2. A cheaper option to establish and maintain the sole-proprietorship business as there is no requirement to conduct the annual audit of the firm;
3. The sole proprietor is the sole owner having full control over the business structure;
4. The pass-through taxation laws for the business structure;
5. The privacy of the firm is maintained as there is no mandatory provision for filing the annual reports;
6. The compliance cost is lower, etc.

Disadvantages of Choosing a Sole Proprietorship

The disadvantages of choosing a sole proprietorship business structure in Malaysia are:

1. The sole proprietor firm has no separate legal entity from the owner;
2. The owner of the firm is personally liable for any debts and liabilities of the sole proprietorship (unlimited liability of the sole proprietor);
3. Low chances to raise investment in the business structure;
4. Difficult to sell all the rights for carrying and conducting the business of sole proprietorship;
5. The business structure will collapse after the death of the owner of the business;
6. The sole proprietor is individually taxed under his name;
7. A major challenge is renewing the license of the business annually, etc.

Partnership

The partnership is a form of business structure in Malaysia registered with the Registrar of the business, governed under the provisions of the Partnership Act of 1961. In a partnership business, 2 or more partners, not more than 20, have a share in ownership and management of the business with the main object of generating profit in the business. The partners comprising the partnership firm must be Malaysian citizens or permanent residents of Malaysia holding unlimited personal liability (joined and severally liable) for paying all the debts and liabilities of the business structure. A partnership agreement is signed between the partners at the time of the formation of the business structure in Malaysia. The agreement describes the responsibilities and liabilities of each partner, the provision governing the termination of the firm, and the provision for dispute resolution among the partners. The partnership business is not a separate legal entity and, hence, is most suited to professional business setups like lawyers, accountants, doctors, Company Secretaries, and architects. There are 2 forms of partnership business carried out in Malaysia, namely:

1. General Partnership, also known as Conventional Partnership, is governed and registered by the Registration of Business Act of 1956 and the Partnership Act of 1961;
2. Limited Liability Partnership, which is an alternative form of business structure in Malaysia, is governed by the Limited Liability Partnership Act of 2012.

A partnership business in Malaysia must annually register the trade name for MYR 60 along with annually renewing the business license 30 days before the date of expiry and other relevant permits to carry the corporate legal entity Malaysia. At least 30 days prior to the termination of the partnership agreement, the Registrar of the Business must be notified through Form C. In a situation where a partner in the business is deceased, the remaining partners are offered two options: whether to file for the termination within 30 days or to submit an amended ownership document specifying the removal of the deceased partner and carrying the established business by the other partners.

Advantages of Choosing a Partnership

Certain advantages of collaborating to form a partnership business in Malaysia are:

1. It is easy to register a partnership business(voluntary registration);
2. No requirement to conduct an annual audit or file corporate tax;
3. The responsibility is shared among the partners(burden is distributed among the partners);
4. The profit and loss are shared among the partners(partners are jointly and severally liable for any debts and liabilities arising in the course of the business);
5. Low cost of establishment and maintenance of the partnership firm, like compliance cost;
6. The life of business continues even after the death of any partner, etc.

Disadvantages of Choosing a Partnership

Some of the disadvantages of forming a partnership business are:

1. There might be a conflict of opinion among the partners;
2. Unlimited personal liability of the partners(reason- not a separate legal entity);
3. The partners of the firm are individually taxed for the profits of the firm;
4. Difficult to raise investment in the business;
5. Mandatory to annually renew the firm

Limited Liability Partnership

An LLP, which stands for Limited Liability Partnership, is a hybrid business structure having a separate legal entity from its members with at least 2 partners (can be an individual or body corporate). The partners in an LLP must be Malaysian citizens or permanent residents of Malaysia and have limited liability up to the extent of their contribution to the firm. An LLP business structure in Malaysia holds the attributes of both a Company and a partnership firm. It is a body corporate regulated and registered under the Limited Liability Partnership Act of 2012 for MYR 500. It has perpetual succession similar to a company where any change in the model of the partnership will not affect the existence of the firm. It is an affordable corporate legal entity in Malaysia suggested for small and medium-scale companies, business startups in Malaysia, and professionals like attorneys, accountants, doctors, dentists, etc. The dissolution of an LLP is possible through 2 methods, namely voluntary or compulsory winding up of the LLP either by the partners or the Court respectively, and Striking off, which can be done either by an application of the partner on the MyLLP portal(currently inactive) or through the initiative of the Registrar.

Advantages of Choosing a Limited Liability Partnership

The advantages of choosing an LLP business structure in Malaysia are:

1. No requirement to annually audit the finances of the LLP(unless expressly mentioned in the partnership agreement);
2. No maximum limit for partners;
3. Simplified process of registration;
4. The partner enjoys the benefit of both a partnership firm and a company;
5. A separate legal entity;
6. Low annual compliance cost;
7. Limited personal liability of the partners;
8. Continues even after the death of any partner, etc.

Disadvantages of Choosing a Limited Liability Partnership

The disadvantages that do not attract an entrepreneur to choose an LLP in Malaysia are:

1. An issue in attracting funds;
2. No limit on the number of partners may cause chaos in decision-making;
3. Issues during the raising of loans from the bank, being it a new corporate legal entity in Malaysia, etc.

Company

A company in Malaysia is the most common form of business structure regulated under the Companies Act of 2016 and the Companies Regulation of 2017. A company registered in Malaysia holds a separate legal entity from its shareholders. The shareholders of the company are not personally liable for any loss or liability arising in the course of the business. The basic cost to register a company in Malaysia is MYR 1000. The process of dissolving a company is similar to that of an LLP in Malaysia. Companies in Malaysia are registered as:

Company Limited by Shares

A company limited by shares is a form of business structure in Malaysia holding limited liability of its members up to the extent of their contribution to the company. A company limited by shares is further categorized under:

• Private Limited Company

A private limited company commonly termed Sendirian Berhad (Sdn Bhd) is a legal business structure in Malaysia that prohibits the subscription of the shares and debentures of the company in public. It is the most preferred option for foreign investors as it offers 100% ownership status. At least 1 and the maximum cap is 50 members are required to register a private limited company with the Companies Commission of Malaysia (SSM). An Sdn Bhd must appoint a secretary of the company (CS) within 30 days of issuing the certificate of incorporation. The tax rate of the companies having less than MYR 2.5 million share capital is 17% of the chargeable income and 24% of the subsequent income. The legal requirements to register a private limited company in Malaysia include the following:

1. At least 1 shareholder (any nationality);
2. At least 1 director (above 18 years of age, not a bankrupt, and a resident of Malaysia);
3. At least 1 company secretary registered with the Companies Commission of Malaysia-SSM (who is a Malaysian citizen);
4. A corporate office registered in Malaysia;
5. At least paid-up capital of MYR 1

The advantages of registering a private limited company in Malaysia are:

1. The company is free to hold its property, enter into contracts, buy and sell property, sue and be sued in its name;
2. Offers 100% foreign ownership;
3. It is taxed on the profits earned in the company (allows no additional taxes);
4. Limited liability of the shareholders;
5. Easy to attract small investors;
6. Claim any tax deductions.

The disadvantages of a private limited company specify the negative results of forming a private limited company, which states that raising and transfer of funds from the public is restricted and expensive to maintain as it is mandatory to submit annual reports and audits of the company.

• Public Limited Company

A public limited company, commonly known as Berhad, is a form of business structure registered in Malaysia offering shares to the general public. This corporate legal entity in Malaysia is usually listed on the Stock Exchange and is governed by the Securities Commission of Malaysia. There must be at least 2 directors and 2 members with a maximum cap of an unlimited number of shareholders required to register a public limited company in Malaysia.

The advantages of forming a public limited company in Malaysia include easy access to attract investors, the option to claim tax deductions for employees, easy transfer of shares, etc. The disadvantages of a public limited company specify the higher cost required for its registration and maintenance, higher level of transparency, and mandatory requirement to annually audit the company’s accounts.

Company Limited by Guarantee

A company limited by guarantee is a corporate legal entity in Malaysia wherein the profit of the company is not distributed among the members enrolled in the company. This form of business structure in Malaysia is a public company registered with the Companies Commission of Malaysia (SSM) if the total number of members exceeds the cap of 20 people. There is no concept of attracting the shareholders as the members of the company are the only ones who pay the company’s debts per the amount guaranteed by them. The main purpose of forming the business structure in Malaysia is to establish non-profit organizations and other charitable business foundations.

The advantages of forming a company limited by guarantee are as provided below:

1. Exemption from corporate taxes;
2. Not required to invite shareholders;
3. Promotes art, science, religion, charity, etc.

The disadvantages of forming a company limited by guarantee include the higher cost of its formation, strict regulations for maintaining the company, the partners having no share in the profits of the company, and the members being liable for the debts of the company.

Unlimited Liability Company

In an unlimited liability company, also known as Sendirian (Sdn), the liability of the members and shareholders is unlimited, having the personal liability for any loss or debt of the company. It is the advanced and flexible version of a partnership business structure in Malaysia, having no limit on its membership, and can be easily converted into a limited liability company through an application and the special resolution of the Companies Commission of Malaysia (SSM). The disadvantages of registering an unlimited company in Malaysia are attracted by the higher cost of registration, the unlimited liability of the shareholders and members of the company, etc.

Foreign Company

Any foreign alien who is not a resident or citizen of Malaysia is free to incorporate and run a foreign company in Malaysia. The foreign companies in Malaysia are incorporated by foreigners already having established business structures in some other countries and are further categorized under two heads, namely:

• Branch Office of Foreign Company:

It is an extension having no separate legal entity from a parent foreign company registered and carrying business outside Malaysia. The parent company owns 100% of shareholdings along with the debts and liabilities of the branch office established in Malaysia with the object of expanding its business structure in Malaysia for the short term. A branch office in Malaysia shall have at least 1 authorized agent who is a resident of Malaysia responsible for performing all relevant requirements for the formation of the branch office with the Companies Commission of Malaysia (SSM).

• Representative Office of a Foreign Company:

A representative office of a foreign company registers its business structure in Malaysia when it is seeking to understand and study the business environment, research and plan business structure, and expand its market reach by incorporating a corporate legal entity in Malaysia. The representative office is wholly controlled by the parent company and hence cannot engage in any business activity or transaction for profit-making, sign any contract under its seal, participate in any trade, etc.

The disadvantages of incorporating a foreign company in Malaysia include the higher cost of registration, not having a separate legal entity from the parent company, the inability to raise funds, etc.

Conclusion

Deciding on the form of business structure in Malaysia is the most crucial step required for setting up a perfect corporate legal entity. Certain factors like the risk involved, taxation requirements, ownership structure, object, benefits, and drawbacks of the legal entity must be considered when choosing the best business structure in Malaysia.

In depicting what form of business structure an entrepreneur must choose is unique and varies according to the requirements for every business formation. The diverse economy of Malaysia offers a wide opportunity for entrepreneurs to register their business structure and establish a prosperous path for the growth and development of their established legal entity.

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