Opening a business can be confusing, especially when there are different types of business entities. There are two main business entities, Enterprise and Private Limited company (Sdn Bhd).
Enterprises can be broken down into 2 different business entities, namely sole proprietorship and partnership. Private Limited Company (Sdn Bhd), or formally known as a company limited by shares, is the most common incorporated business entity in Malaysia.
But how do these two main business entities differ from each other?
Malaysian citizens and permanent residents can opt for either Enterprise or Private Limited company. However, non-citizens and non-permanent residents have only one choice, which is a Private Limited Company (Sdn Bhd).
Ease and Cost of Setup
Setting up a Private Limited Company (Sdn Bhd) is more expensive than an enterprise. It would cost a minimum of RM 1,000 to register a Private Limited Company (Sdn Bhd) with Suruhanjaya Syarikat Malaysia (SSM) compared to about RM 30.00 for an enterprise.
It is mandatory for a Private Limited Company (Sdn Bhd) to have a certified company secretary, auditors, and tax agents. These services will generally cost at least RM5,000 a year, depending on transactions and the size of the business. Thus, contributing to a higher operating cost.
For lower startup capital, you (and your shareholders) could set up an enterprise first then convert it into a Private Limited Company (Sdn Bhd) later.
The owners of enterprises generally split all the profits and losses equally amongst each other. If you are the sole owner of the enterprise, you will receive all the profit generated.
For a Private Limited Company (Sdn Bhd), shareholders do not share all the profits equally. Instead, shareholders are paid in dividends, which could be a certain percentage of the total gross income or profit.
Owners and partners of enterprises are subjected to individual income tax. The tax rate is between 0% to 30%, depending on your chargeable income tier (Year Assessment 2020).
Compared to enterprises, there are more tax incentives for Private Limited Companies (Sdn Bhd). For example, companies with MSC Malaysia status are exempted for 5 years with a possible extension of another 5 years (subjected to criteria and qualifications).
Private Limited Companies (Sdn Bhd) are subjected to corporate tax. The standard corporate tax rate is 17% (for the first RM 500,000 of the chargeable income) and 24% (for any amount thereafter)(Year Assessment 2019).
A point to note: For chargeable income higher than RM 150,000, a Private Limited Company (Sdn Bhd) pays fewer taxes than an Enterprise. Adding in the individual income tax, the company and shareholder may pay more taxes in total. This is especially true when he or she pays him or herself a very handsome dividend or salary.
It is not entirely true that one can save more on paying taxes by either opting for a Private Limited Company (Sdn Bhd). Improving one’s knowledge and understanding of taxation will definitely help in the long run.
Liability and Risk
Enterprises have unlimited liability. The owners and the business are seen as one single entity. On that note, business owners are responsible for the debts incurred. Owners risked getting sued and have their personal assets taken away by creditors.
Shareholders in Private Limited Company (Sdn Bhd) are only liable for any unpaid amount of shares held. Creditors cannot sue and claim the shareholders' personal assets to pay back the business’ debts.
Considering the risks and financial losses one can stomach, he or she may want to protect his/her personal finances and assets. This is done by opting to set up a Private Limited Company (Sdn Bhd).
Private Limited Companies (Sdn Bhd) are known for their perpetual succession. It will remain in existence though its founder has departed from the company. Enterprises have to close, especially upon the departure of the sole proprietor.
Private Limited Company (Sdn Bhd) is preferable for a long-term business plan and especially with the intention of handing down the business to the next of kin. Its owner(s) may come and go without directly affecting the company.
Private Limited Companies (Sdn Bhd) must comply with the strict rules laid out by SSM and the Companies Act 2016. It is compulsory to appoint and hire a certified company secretary upon the incorporation of the company.
For example, the company’s documentation must be kept in the office at all times, mandatory lodging of annual returns and financial statements to SSM. Sdn Bhd company must report to SSM for any company changes. Non-compliance may lead to heavy penalties and even imprisonment.
Enterprises are much easier. There is no need to acquire a certified company secretary and lodging of returns and statements. The Rules of Businesses Act 1956 (ROBA 1956) is the law that governs all enterprises in West Malaysia. Meanwhile, Enterprises and Private Limited Company (Sdn Bhd) operating in Sabah and Sarawak have to adhere to the local ordinances.
In conclusion, proper planning and considerations of all factors will ease your decision to either set up an Enterprise or Private Limited Company (Sdn Bhd).
Photos via Canva
Looking to set up an Enterprise in Kuching, Sarawak? Here.