6 differences between sole proprietorship and Sdn Bhd in Malaysia

While a private limited company (Sendirian Berhad) is the most common choice for entrepreneurs in Malaysia, some may prefer sole proprietorship which requires lesser paperwork and has a less complex system of paying taxes. Prior to Malaysia company registration, it is essential to understand the main differences between sole proprietorship and Sdn Bhd in Malaysia. 

Main differences between sole proprietorship and Sdn Bhd in Malaysia

To ensure your Malaysia business entity is optimally structured to meet your long-term business goals, it is necessary to fully know the differences between a sole proprietorship and Sendirian Berhad company. Tetra Consultants has listed 6 main differences between these two business entities in terms of registration requirements as well as legal, accounting, tax and audit obligations.

#1 Number of Officeholders

The main difference between a sole proprietor and a private limited (Sdn Bhd) company is the number of officeholders. A sole proprietor is a business owned by only one individual. There are no other officeholders in a sole proprietorship.

Conversely, to register for a private limited (Sdn Bhd) company, you will need to have at least one Malaysia resident director, one company secretary and one shareholder. There can be a maximum of 50 shareholders in a private limited (Sdn Bhd) company.

#2 Registration Process

Registering a sole proprietorship for your business is a relatively straightforward process. The owner simply has to fill up the Business Registration Form (Form A) through the Ezbiz Online services found on the SSM website. The business will only be registered for 1-5 years but can be renewed before the expiration date. The total fees incurred typically do not exceed RM 85.

In contrast, registering for a private limited (Sdn Bhd) company is a less straightforward process that requires the submission of more documents, including documents detailing the percentage of shareholding for each shareholder and the minimum paid-up capital. Prior to deciding, it is important to be clear on how to incorporate a Malaysia company. A registration fee of RM 1,000 is also required for Malaysia company formation. While there is no limit to the lifespan of the company, the company is required by the law to file tax returns and prepare audited financial statements every year.

#3 Legal Liability

Another key difference is the amount of legal liability the owners can be held accountable for. A sole proprietor has unlimited liability because the business is not a separate legal entity from its owners. Sole proprietor simply refers to the owner of the business. Hence the owner is expected to be personally responsible for any liability incurred by the business. In the case of insolvency, the personal assets of the owner can be seized by creditors.

A private limited (Sdn Bhd) company, on the other hand, is considered a separate legal entity from the company’s owners or shareholders. This means that the liabilities incurred by the company are separated from the shareholders. In the case of insolvency, only assets belonging to the company will be liquidated and seized by creditors. Shareholders will only be held liable for the number of shares they hold in the company.

#4 Tax Reporting

Since a sole proprietor is not considered a separate legal entity from his or her business, any income earned from the business will be counted under the owner’s personal income. This means that they will be paying income taxes instead of corporate taxes for any net profit earned by their business.

Meanwhile, a private limited (Sdn Bhd) company will pay corporate taxes on the net profit earned by the company. The company will be required to file annual tax returns and prepare financial statements in accordance with the Companies Commission of Malaysia (SSM).

Tax filing is a much simpler process for a sole proprietor because it can be filed together with the owner’s annual personal tax return. However, the amount of tax paid may be much higher for owners of a sole proprietorship when the profit earned from their business rises. Hence, when setting up business in Malaysia, it is important to consider the scale of your business before you decide whether to register for a sole proprietorship or a private limited (Sdn Bhd) company. This is to ensure that you are able to minimise the tax expenses incurred by your business.

#5 Accounting and Auditing Requirements

Under the Companies Act 1965, a private limited (Sdn Bhd) company is required to appoint an approved auditor to audit the financial statements prepared by their accountants. The auditor must be a member of the Malaysian Institute of Accountants (MIA) and have received approval from the Ministry of Finance in Malaysia. Accountants employed by private companies must also adhere strictly to the Malaysian Private Entities Reporting Standard (MPERS) when preparing the financial statements for the company.

In contrast, sole proprietors are not required to appoint auditors to audit their accounts. Since the business is not a separate legal entity, owners of a sole proprietorship do not have to disclose their financial statements to the public. They are also not required to keep a separate set of accounting records. However, it is good practice to have records and journal entries to keep track of the cash flow and transactions taking place in the business. If unclear, Tetra Consultants recommends outsourcing your Malaysia accounting and tax obligations to our team of Chartered Accounts. 

#6 Termination of Business

Since the business is not separated from the owner for a sole proprietorship, the business will cease to exist once the owner passes away or chooses to terminate the business. A sole proprietorship can be easily terminated by filling up a form that is downloadable on the SSM website.

In comparison, a private limited (Sdn Bhd) company will continue to exist even after the owner of the company passes away. Termination of a company is a more complex process that involves an application to the court and the consultation of a liquidator to facilitate the closure of the company. The cost to wind up a company starts from RM 10,000, and will usually be much higher, depending on the size and scale of the company.

Conclusion

The time and cost of setting up a company in Malaysia will vary depending on whether your business structure is a sole proprietorship or a private limited (Sdn Bhd) company. It is important to consider each of the points of difference before you decide on the most suitable business structure for your company. While it may be less cumbersome to register for a sole proprietorship, it could be better to opt for a private limited (Sdn Bhd) company if you wish to expand your business to a larger scale.

Tetra Consultants’ team of experts will recommend the optimal business entity for you once we fully understand your intended business activities and corporate structure. Our service package includes Malaysia company set up, corporate bank account opening, as well as nominee director and shareholder services.

Contact us now for a free non-obligatory consultation to find out more about Malaysia company formation services.

Prepared by: Lim Yi Xuan and Jessica Zhou