Type of Business Entities in Malaysia

The basics of setting up a business entity in Malaysia isn’t so difficult to understand: First off, let’s start with Types of Business Entities. There are three (3) different types of business entities to choose from:

1. Sole Proprietorship (also known as Sole Trader)
2. Partnership business entity
3. Limited Company (SDN. BHD. or Sendirian Berhad or BHD. or Berhad)

Understanding different types of business entities available in Malaysia for:

1. Foreign Companies
2. Limited Liability Partnership (LLP) – Coming soon

Sole Proprietor (or Sole Trader)

Like many other countries out there, the Sole Proprietorship business entity in Malaysia is owned solely by one individual, as his/her liability is unlimited. What unlimited liability means is: If a business fails or is declared bankrupt, creditors can sue the sole proprietor’s owner for all debts owed to respective merchants. This means personal assets, personal income and employment income are all liable.

Advantages of a Sole Proprietorship Business Entity

• Less paperwork & additional formalities (registration is easy, fast and fewer documents are needed)
• Price of entity formation is much cheaper and is not required by the Malaysian government to be audited.
• Not required to disclose financial statements to the public.
• Easy to convert into limited company (SDN BHD)

Partnerships

The “Partnership” business entity is a joint-entity holder with two or more persons to carry out a legal business in Malaysia. The Companies Commission of Malaysia requires that partnership entities MUST comprise of at least two (2) members and a maximum twenty (20) members.

Partners in a partnership business entities are also bounded by unlimited liability.

Differences

Generally, the Sole Proprietorship & Partnership business entity is similar to each other in many ways. Some of the differences include:

1. Own partnership agreements are to be made – Or set to default, governed by Malaysia’s Partnership Act 1961.
2. Sole Proprietors are owned by ONE (1) owner whereas Partnerships are owned by TWO (2) or more.

Limited Company (SDN BHD or BHD)

Sendirian Berhad (SDN BHD) is a private limited company, where it prohibits any invitation to the public to subscribe to any of its shares, deposit money with the company for investment or subscription. Minimum members in a private limited company is TWO (2) and maximum is FIFTY (50).

Berhad (BHD) is a public limited company where its shares can be offered to the public for fixed periods and any other forms of subscription. The minimum amount of members’ (shareholders) are TWO (2) and maximum of unlimited amount of members.

There are three (3) types of limited companies in Malaysia:

1. Limited by Shares
2. Limited by Guarantee
3. Unlimited company with/without share capital

Companies Limited by Shares

Liability of members’ contribution to this company is limited to the amount specified on their unpaid shares. Should the company becomes insolvent or goes into liquidation, members are not obligated to pay off the company’s debts if and unless any one of the members gives a personal guarantee.

Also, members’ personal assets, employment and personal income are not liable to any of the company’s debts. This type of business entity is the most common one in Malaysia.

Companies Limited by Guarantee

In a limited company’s Memorandum and Articles of Association, members’ liability is limited to the amount they ‘guarantee’ or undertake during winding up – In which the amount is specified in the Memorandum, agreed and signed by all members.

In many cases, companies limited by guarantee are often registered by non-profit organizations, public societies and clubs.

Unlimited Companies

Unlimited companies are no different from sole proprietorship and partnership business entities. One of the only difference is that they have a special articles of association and are free to return capital to its members’.

Advantages & Disadvantages

• Members’ (also called “Shareholders”) are not liable for the company’s debts beyond the amount of share capital they’ve subscribed to.
• But in this case, the public will have access to financial affairs of the company.
• In event of death or changes among shareholders and/or directors of the company, it need not be winded up (striked-off).
• Every limited company has to appoint: (1) Auditors to verify & report financial affairs, records, accounts and statements; (2) Must have at least a company secretary for AGM, board & shareholders’ meetings.

Foreign Companies

Foreigners (non-Malaysian residents) are allowed to register a private limited company in Malaysia, so long as TWO (2) of the company’s directors are permanent (principal place of residence) residents in Malaysia.

Foreign companies are companies ALREADY incorporated (formed) outside of Malaysia but set up its business premises and operations in Malaysia. There are two ways to go about being a ‘foreign company’ in Malaysia:

1. Register a branch in Malaysia, or;
2. Incorporate a local company (see “Requirements” below)

Requirements

The registration process and documents to be filled in (with payable fees) are as common:

1. A certified copy of the certificate of incorporation OR registration from its country of registration.
2. A certified copy of the company’s memorandum and articles of association, charter, statute defining its constitution.
3. A list of all directors in the company (foreign and local) and list of their powers.
4. A memorandum of appointment or power of attorney under the seal of the foreign company wanting to incorporate in Malaysia to authorize a Malaysian resident to accept on behalf of the company its service of processed and noticed required to be served on the company.
5. A statutory declaration made by the agent of a company (you can get an authorized local Malaysian company secretary here)
6. Registration fees.

Foreign Company’s Local Agent

Companies in Malaysia are governed under Malaysia’s Companies Act of 1965. The agent’s duties and responsibilities include ensuring the company is performing all corrective acts and requirements stated by the Companies Commission of Malaysia (or referred to as CCM and/or SSM).

Limited Liability Partnership (LLP)

The Limited Liability Partnership (LLP) business entity was proposed in 2003, but have yet to be fully implemented by the Companies Commission of Malaysia (“CCM” in English or “SSM” in Malay).

Want to find out more about LLP? Read the official document here.