Starting a business is an exciting venture that comes with many uncertainties. With business registration as the first general license you need, you will face one of the most important decisions early on: choosing the right business entity for your venture.

A business entity is the legal structure and form of organisation for your business. Each type of business entity comes with its own set of pros and cons, and key differences in:

1. Ownership structure

   The main consideration in choosing a business entity revolves around the number of owners, partners, and shareholders involved. Different entities are structured to accommodate the role dynamics of partners, along with how the business is operated.

2. Taxation requirements

   Certain business entities are taxed through the owners’ personal income tax, while others are taxed separately. Understanding the different tax structures among entities, especially in relation to business size and industry, can help in identifying your choice of business entity for maximum profit.

3. Exposure of liability

   In a business entity with unlimited liability, owners or partners bear responsibility for the business debt and the actions of each partner. This implies that personal assets may be at risk in the event of business failure or bankruptcy. Conversely, an entity with limited liability protects you from being personally liable when meeting debt obligations, and the risk is limited to your contributed capital.

The business entity you choose is significant, as it will influence your business for the long run, shaping daily operations, expansion trajectory, and even your exit strategy. This article aims to provide an understanding on each business type in Malaysia, helping you identify which structure fits best with your business objectives.

8 types of business entities in Malaysia

1. Sole Proprietorship

Owned and often operated by a single individual, a sole proprietorship is the simplest and most common form of business entity in Malaysia. This is the only business entity that can be registered using the owner’s name as per one’s MyKad. Since sole proprietorships are easy to establish, they are a commonly used for side gigs and a popular choice for small businesses and freelancers such as contractors and consultants.

Pros of a Sole Proprietorship

• Easy, cheap and quick to set up with simple compliance requirements.

• Owner has complete control over the business.

• All business profits go to the sole owner.

• Suitable for startups and business experimentation.

• Tax levied on owner’s personal income, which has a low tax floor of 0%.

Cons of a Sole Proprietorship

• Only available for citizens or permanent residents of Malaysia.

• Owner has unlimited liability when facing debt obligations and court damages.

• Capital must come from the owner’s own pocket or through loans.

• Personal tax has a higher ceiling of 30% compared to corporate tax.

2. General Partnership

A general partnership can be owned by a minimum of 2 partners and a maximum of 20. This entity is designed for partners aiming to achieve their shared business objectives by pooling their resources together. A partnership agreement is necessary for this structure, outlining ownership portions, profit and loss distribution, and the assignment of responsibilities.

Pros of a Partnership

• Easy and quick to set up with simple compliance requirements.

• Liability is shared among partners.

• Suitable for startups and small businesses.

• Partners can bring different skills and knowledge to the table.

• Tax levied on each partner’s personal income, which has a low tax floor of 0%.

Cons of a Partnership

• Only available for citizens or permanent residents of Malaysia.

• Liability is unlimited when facing debt obligations and court damages.

• Profit is shared among partners.

• Business decisions often require a consensus among partners.

• Personal tax has a higher ceiling of 30% compared to corporate tax.

3. Limited Liability Partnership (PLT)

The features of a PLT lie between a general partnership and a company. A PLT requires a minimum of 2 partners, but has no maximum limit. Despite being a partnership, a PLT is a separate legal entity that allows for property transactions, legal contracts, and legal actions in its own name. Moreover, a PLT benefits from limited liability and is taxed similarly like a company. This entity is common in professional fields like accountancy, law, and consultancy.

Pros of a PLT

• Lower cost and lesser compliance requirements.

• Has limited liability when facing debt obligations.

• Suitable for startups and small businesses.

• Higher flexibility on contribution arrangements.

• PLT tax has a lower ceiling of 24% compared to personal tax.

Cons of a PLT

• Requires a compliance officer that resides in Malaysia.

• Processes may be more complicated as they are governed by a relatively new law — Limited Liability Partnerships Act 2012.

• Lack of interest from third party investors.

4. Private Limited Company (Sdn. Bhd.)

A private limited company is the most popular company structure in Malaysia. This business entity accommodates a minimum of 1 shareholder/partner to a maximum of 50. In contrast to sole proprietorships and partnerships where a business owner and his entity are one and the same, Sdn. Bhd. is a separate legal entity, allowing it to conduct property transactions, enter legal contracts, and participate in legal actions in court.

Pros of a Sdn. Bhd.

• Relatively cheaper to set up and has simpler compliance requirements.

• Can be incorporated with just one shareholder/partner.

• Has limited liability when meeting debt obligations or business failure.

• Corporate tax has a lower ceiling of 24% compared to personal tax.

• Has more tax incentives, and tax exemptions may be available for startups during initial years.

• More scalable, by raising paid-up capital and issuing shares to investors.

• More stakeholder confidence as it needs to meet reporting standards.

• Allows 100% foreign ownership in certain circumstances.

Cons of a Partnership

• Capital is capped at 50 shareholders with no access to public funding.

• Has a higher tax floor of 17% compared to personal tax.

• Cannot facilitate the transfer of shares.

• Requires 50% Malaysian ownership for certain industries like agriculture, banking, education, and oil and gas.

5. Public Limited Company (Bhd.)

A public limited company has similar characteristics to a Sdn. Bhd., but allows for an unlimited number of shareholders. Another major difference is that a Bhd. is typically listed on the stock exchange, and is governed by Bursa Malaysia and the Securities Commission of Malaysia. Additionally, annual general meetings are mandatory for a Bhd. company for transparency and accountability purposes.

Pros of a Bhd.

• Liability is limited to the amount contributed on unpaid shares.

• Able to raise capital through publicly issuing shares and facilitating the transfer of shares.

• Access to public funding increases growth opportunities and diversifies risk with a wider shareholder base.

• strict compliance requirements add standing and prestige to the company.

Cons of a Bhd.

• Higher cost and more complications in incorporation and maintenance.

• Higher difficulty in controlling the company and managing shareholders’ expectations.

• May be in a vulnerable position for hostile takeover.

6. Company Limited by Guarantee (CLG)

A CLG is a public company intended for non-profit purposes. It can be formed for promoting art, science, religion, charity, sports, and other objectives beneficial for the community. Activities that are conducted by a CLG must be aligned to the objects it was incorporated for based on its constitution.

Pros of a CLG

• It is the only company structure for non-profit organisations.

• Does not require initial capital from members.

• Enjoys access to corporate tax exemption.

Cons of a CLG

• Higher cost with strict compliance requirements.

• Members remain liable if the company closes within one year after their departure.

• Requires a license to hold any land or property.

7. Unlimited Company (Sdn.)

This is the only form of a company that has unlimited liability for its shareholders. An unlimited company is often incorporated to hold assets for investment purposes, and has the flexibility for its shareholders to sell shares back to the company. This form of entity is rarely utilised in Malaysia, and can be switched to a limited company (Sdn. Bhd./Bhd.) through the Companies Commission of Malaysia (SSM).

Pros of a Sdn.

• Capable of returning capital to its shareholders.

• Flexibility of being a private or public company.

Cons of a Sdn.

• Higher cost with strict compliance requirements.

• Shareholders are personally liable for business debt.

• Shareholders remain liable if the company closes within one year after their departure.

8. Foreign Company

A foreign business can register as a representative office or a branch office to operate within Malaysia

A representative office is restricted from commercial transactions, but it can engage in activities to evaluate the country’s market opportunities. On the other hand, a branch office can conduct business activities, but they must align with those of their parent company.

For greater flexibility and control in the local market, you can opt to incorporate a local subsidiary in the form of a Sdn. Bhd.

Pros of a Foreign Company

• Suitable for assessing the Malaysian market before expansion.

• Suitable for expansion on a short-term basis.

• Can operate without a local director.

Cons of a Foreign Company

• The parent company is responsible for all liabilities.

• Higher costs with strict compliance.

• Branch offices must have a local resident as authorised agent.

• No access to funding from the Malaysian public.

Not sure which entity is right for your business?

A business entity not only sets the stage for business commencement, but it also comes with tax, legal, and operational implications that may stick with your business for years to come. To select the right entity, consider your business strategy, direction, and potential limitations such as capital funding or the nature of your business. By carefully weighing the pros and cons of each entity as mentioned above, you can identify the one that gives your business the right balance of legal protection and benefits it needs to flourish.

If you are uncertain, feel free to consult with an expert from the OCBC team for additional insights to assist you in making a well-informed decision. If you already have what you want in mind, it’s time to learn how to proceed for business registration by following the steps outlined in our article '4 Steps to Register a Business in Malaysia.'