Types of Business Entity in Malaysia: Advantages and Disadvantages

Conducting  any type of business in Malaysia requires a registered legal entity. Registration must be completed within 30 days of starting operations, as conducting business without a legal entity is punishable by law.

The Companies Commission of Malaysia (SSM) oversees all business registrations. The first and most important step before registering your business is to select the appropriate legal structure or type of entity.

This blog will provide a comprehensive overview of the various types of business entities that can be registered in Malaysia. We will explore the advantages and disadvantages of each type, along with other essential details to help you make an informed decision.

Quick Comparison: Sole Proprietorship vs Partnership vs Company vs LLP

Here is a quick comparison of the most popular business entity from (detailed description is added after this )

Types of Business Entity in Malaysia

There are 4 major business types of legal entity structures in Malaysia, and they are allowed to conduct business in Malaysia.

1. Sole Proprietorship
2. Partnership
3. Company
   1. Private Limited Company 
   2. Public Limited Company
   3. Foreign Company
4. Limited Liability Partnership

Besides these, there are additional forms of entity like Companies limited by guarantee and unlimited companies, which are not very popular, and co-operative societies, which are used for conducting for-profit business. 

Sole Proprietorship in Malaysia

Sole Proprietorship, also known as Perniagaan Tunggal in Malaysia, is one of the simplest and most common forms of business entity. This structure is favoured by individuals looking to start small-scale businesses independently. 

Characteristics of Sole Proprietorship:

• Ownership: A Sole Proprietorship is owned and operated solely by one individual. The proprietor assumes full control and responsibility for all aspects of the business.
• Personal Liability: In the event of business failure or bankruptcy, the proprietor's personal assets and income are at risk, as they are directly liable for all debts incurred by the business.
• Registration: Registering a Sole Proprietorship in Malaysia involves choosing either a personal name or a trade name. The registration process is relatively straightforward and can be done online through ezbiz Portal online or in person at the Companies Commission of Malaysia (SSM).

Advantages and Disadvantages of Sole Proprietorship

Partnership in Malaysia

A partnership is a business entity formed by two or more individuals who come together to carry out a legal business. Partnerships can be established with a simple partnership agreement outlining the rights, responsibilities, and profit-sharing arrangements among the partners.

It is a flexible and accessible business structure in Malaysia, suitable for ventures involving multiple stakeholders. 

Characteristics of Partnership Firm

1. Ownership: Partnerships are jointly owned by two or more individuals, with a maximum limit of 20 partners according to Malaysian law. 
2. Liability: Each partner is personally liable for the partnership's debts and obligations. If the partnership cannot meet its financial obligations, creditors can pursue the partners' personal assets to settle the debts.
3. Registration: Partnership registration can be done online through ezbiz Portal by submitting the necessary documents and paying the required fees. Partnerships are registered only under a trade name, and the registration certificate serves as legal proof of the partnership's existence.

Advantages and Disadvantages

Companies (Private Limited, Public and Foreign Companies)

In Malaysia, companies are classified into different types based on their structure, liability, and ownership. The three main types of companies are Private Limited Companies (Sendirian Berhad or Sdn Bhd), Public Companies (Berhad or Bhd), and Foreign Companies. 

Private Limited Companies (Sdn Bhd)

A Private Limited Company, known as Sendirian Berhad (Sdn Bhd), is the most common type of business entity in Malaysia. This form of entity is favored by most entrepreneurs and small to medium-sized enterprises (SMEs) due to its flexibility and limited liability benefits.

Private limited company can raise funds by selling shares.

Characteristics:

• Ownership and Shares: A Sdn Bhd can have between 1 to 50 shareholders. The company can be owned entirely by a single individual or a group of shareholders.
• Limited Liability: Shareholders' liability is limited to the amount they have invested in the company. Their personal assets are protected from the company’s debts and liabilities. A Sdn Bhd is a separate legal entity from its owners. It can own property, incur debt, sue, and be sued in its own name.
• Compliance: The company must submit audited financial statements and an annual return to the Companies Commission of Malaysia (SSM), and a qualified company secretary must be appointed to handle compliance matters.
• Number of Shareholders: A private limited company can have between 1 and 50 shareholders.
• Registration: Companies can register with the SSM through the MyCoId portal by paying applicable fees and submitting required documents. A private limited company must have at least one shareholder/director who is a resident of Malaysia.

Public Companies (Bhd)

A Public Company, known as Berhad (Bhd), is a type of company that offers its shares to the public and can be listed on the stock exchange. This entity is suitable for large businesses aiming to raise capital from the public.

Foreign Companies

Foreign Companies refer to businesses that are incorporated outside of Malaysia but seek to establish a presence within the country. They can operate as a branch of the foreign parent company or incorporate a local subsidiary.

Advantages and Disadvantages

Limited Liability Partnership

A Limited Liability Partnership (LLP) is a relatively new form of business entity in Malaysia, introduced under the Limited Liability Partnership Act 2012. It combines elements of a traditional partnership with the benefits of limited liability typically found in corporations. LLPs provide a flexible and efficient structure for professionals and small businesses to operate in Malaysia.

Characteristics:

1. Separate Legal Entity: LLP is considered a separate legal entity distinct from its partners. This means that the LLP can enter contracts, own property, and sue or be sued in its own name.
2. Limited Liability: Partners are not personally liable for the LLP's debts and obligations beyond their agreed-upon contribution, except in cases of fraud or misconduct.
3. Ownership: LLPs are jointly owned by two or more partners, with no maximum limit on the number of partners. There is no maximum limit on the number of partners, unlike general partnerships.
4. Registration: LLPs are required to register with the Companies Commission of Malaysia (SSM) in compliance with the LLP Act 2012. Registration can be done online through the MyLLP portal.
5. Regulatory Compliance: LLPs are required to appoint a company secretary and file an annual declaration every year.

Advantages and Disadvantages of LLP

Things to Consider While Choosing the Entity

Before registering your business, it's crucial to carefully consider the form of business entity you want to establish. Whether you opt for a company, LLP, partnership, sole proprietorship, or another structure, each entity has its own set of advantages, compliance requirements, fees, rebates, structures, and taxation implications. 

Here are some key factors to consider when selecting the appropriate legal entity:

Ownership:

Decide whether you will be the sole owner, seek partners, or wish to add shareholders. Then, determine the entity's structure for documentation purposes.

Funding Requirements:

Consider how you plan to finance your business—whether through self-funding, partnerships, debt, grants, investments, etc. Larger businesses and startups often have complex funding needs, making company registration preferable.

Liability Protection:

Choose whether you want to assume personal liability for the company's obligations. Entities like partnerships and sole proprietorships entail lower compliance burdens but expose you to personal liability. In contrast, limited liability entities such as LLPs and companies impose higher compliance requirements but shield you from personal liability.

Industry and Business Model:

Certain industries require specific licenses, and some entities may not be eligible. Ensure compatibility between your chosen entity and your industry's regulatory framework.

Continuity and Transferability:

Determine whether you are establishing a venture for perpetual, long-term, or short-term purposes, and whether you anticipate transferring ownership in the future. Companies offer perpetual continuity and allow for the transfer of ownership, while sole proprietorships terminate with the proprietor.

Conclusion

Selecting the appropriate form of business entity is a critical decision for entrepreneurs in Malaysia. Each type of entity offers its own set of advantages and disadvantages, impacting factors such as liability protection, taxation, management flexibility, and regulatory compliance.

Once the right business entity form has been identified, entrepreneurs can proceed with the registration process with the Companies Commission of Malaysia (SSM).