Choosing the Right Business Structure for Your Business
Starting a business in Malaysia involves making several important decisions, one of which is selecting the appropriate business structure. The type of entity chosen can affect the owner’s personal liability, tax obligations, compliance requirements, funding options and long-term business growth.
In Malaysia, the main business structures commonly considered by entrepreneurs and investors are:
- Company – including a public company (Berhad or Bhd.) and a private company (Sendirian Berhad or Sdn. Bhd.)
- Limited Liability Partnership (LLP)
- General Partnership
- Sole Proprietorship
Each structure has its own legal characteristics, advantages and limitations. Understanding these differences can help business owners make informed decisions based on their business objectives, ownership arrangements and future plans.
1. Company – Berhad and Sdn. Bhd.
A company incorporated under the Companies Act 2016 is a separate legal entity from its shareholders. This means the company can own assets, enter into contracts, incur liabilities and commence or defend legal proceedings in its own name.
Companies in Malaysia are generally classified as private companies (Sdn. Bhd.) or public companies (Bhd.).
Private Company – Sdn. Bhd.
A private company is a common choice for small and medium-sized enterprises (SMEs), family-owned businesses, growing enterprises and businesses seeking a formal corporate structure.
Key characteristics include:
- Separate legal entity: The company has a legal identity distinct from its shareholders.
- Limited liability: Shareholders’ liability is generally limited to the amount unpaid on their shares, subject to applicable law and circumstances.
- Ownership: A private company must have at least one shareholder and cannot have more than 50 shareholders.
- Directors: At least one director must ordinarily reside in Malaysia by having their principal place of residence in Malaysia.
- Transfer of shares: Share transfers are subject to restrictions applicable to private companies.
- Compliance: The company must comply with statutory requirements, including maintaining accounting records, preparing financial statements and making the required filings with the Companies Commission of Malaysia (SSM). Audit requirements depend on the applicable law and exemptions.
Advantages
- Provides limited liability protection in the ordinary course of business.
- Offers a formal structure for ownership, management and succession planning.
- May be more suitable for attracting investors and expanding business operations.
- Can support business continuity despite changes in shareholders or directors.
Public Company – Berhad (Bhd.)
A public company is generally suitable for larger businesses with broader ownership arrangements or businesses intending to raise capital from a wider pool of investors.
Key characteristics include:
- Separate legal entity: The company is legally distinct from its shareholders.
- Limited liability: Shareholders’ liability is generally limited to the amount unpaid on their shares, subject to applicable law and circumstances.
- Ownership: A public company must have at least one shareholder, with no general statutory maximum number of shareholders.
- Directors: At least two directors must ordinarily reside in Malaysia by having their principal place of residence in Malaysia.
- Capital raising: A public company may be able to offer shares or other securities to the public, subject to applicable legal and regulatory requirements.
- Stock exchange listing: A public company is not automatically listed on Bursa Malaysia. A listing requires separate approval and compliance with the relevant listing requirements.
Advantages
- May facilitate access to a wider pool of investors and sources of capital.
- Suitable for businesses pursuing substantial expansion or corporate restructuring.
- Provides a corporate structure capable of supporting larger and more complex operations.
2. Limited Liability Partnership (LLP)
A Limited Liability Partnership (LLP), also known as Perkongsian Liabiliti Terhad (PLT), is a business structure governed by the Limited Liability Partnerships Act 2012.
An LLP combines certain features of a traditional partnership with the benefit of separate legal personality and limited liability. It is often considered by professional practices, consultants, service providers and businesses operated by two or more partners.
Key characteristics include:
- Separate legal entity: An LLP is legally distinct from its partners.
- Limited liability: A partner is generally not personally liable for the obligations of the LLP solely because they are a partner. However, a partner remains responsible for their own wrongful acts or omissions and may have personal exposure under guarantees or other applicable legal provisions.
- Minimum partners: At least two partners are required.
- Management: The partners generally determine the management arrangements through the LLP agreement.
- Compliance officer: An LLP must appoint a compliance officer in accordance with the applicable statutory requirements.
- Compliance: The LLP must maintain proper accounting records and comply with the applicable annual declaration and other statutory requirements.
Advantages
- Provides limited liability protection for partners in the ordinary course of business.
- Offers flexibility in allocating responsibilities, profit-sharing arrangements and management rights.
- Generally has fewer corporate formalities than a company.
- May be suitable for professional firms and businesses where the owners prefer a partnership-based management structure.
3. General Partnership
A general partnership is a business owned and operated by two or more individuals or entities who agree to carry on a business together with a view to profit. In Peninsular Malaysia, the registration of businesses is principally governed by the Registration of Businesses Act 1956 and administered by SSM.
A general partnership is often used by small businesses where the owners wish to share resources, responsibilities, profits and losses.
Key characteristics include:
- Ownership: A partnership generally consists of two or more partners, subject to the applicable legal requirements.
- Legal status: A conventional general partnership is not a separate legal entity distinct from its partners in the same way as a company or LLP.
- Personal liability: Partners may be personally liable for the debts and obligations of the partnership, including liabilities arising from the acts of other partners within the scope of the partnership.
- Management: Partners may participate in the day-to-day management of the business, depending on their agreement.
- Profit sharing: Profits and losses are allocated according to the partnership agreement or applicable legal rules.
- Compliance: Business registration, renewals and other applicable requirements must be observed.
Advantages
- Relatively straightforward to establish and operate.
- Usually involves lower setup and ongoing administrative costs than a company.
- Allows partners to combine capital, skills, experience and business networks.
- Offers flexibility in managing the business and sharing profits.
4. Sole Proprietorship
A sole proprietorship is a business owned and operated by one individual. It is one of the simplest business structures available to eligible individuals in Malaysia and is commonly used by freelancers, small traders, independent consultants and micro-business owners.
In Peninsular Malaysia, sole proprietorships are generally registered with SSM under the Registration of Businesses Act 1956, subject to applicable eligibility and registration requirements.
Key characteristics include:
- Ownership: The business is owned by one individual.
- Legal status: The business is not a separate legal entity from its owner.
- Personal liability: The owner is personally responsible for the business’s debts and obligations.
- Management: The owner has direct control over business operations and decision-making.
- Profits: Business profits belong to the owner, who also bears the business losses.
- Compliance: The owner must maintain appropriate business records and comply with applicable registration, tax and other regulatory requirements.
Advantages
- Simple and relatively inexpensive to establish.
- Offers direct control over business decisions.
- Generally involves fewer administrative formalities than a company.
- Allows the owner to retain the business profits after meeting expenses and obligations.
How to Choose the Right Business Structure?
There is no single business structure that is best for every business. The appropriate choice depends on the owner’s circumstances, business activities and long-term objectives.
Apart from legal structure and liability, business owners should also consider the tax and compliance implications of their chosen entity.
Conclusion
Selecting the right business structure is an important step in establishing a sustainable business in Malaysia.
A sole proprietorship or general partnership may be appropriate for smaller businesses seeking a straightforward structure. An LLP may suit businesses operated by partners who want flexibility and limited liability protection. A Sdn. Bhd. may be more appropriate for businesses seeking a formal corporate structure, future expansion or external investment, while a Bhd. may suit businesses with broader capital-raising objectives.
Business owners should assess their commercial objectives, risk exposure, ownership arrangements, tax position and compliance obligations before making a decision.
For the official comparison prepared by the Companies Commission of Malaysia (SSM), please refer to the following document.
