Type of business entities
There are 3 types of business entity in Malaysia such as Sole proprietorship, Partnership and Limited Company.
Sole Proprietorship or Sole Trader is solely owned by one individual and in Malaysia only Malaysia citizens or permanent residents can register as owner of this type of business. Personal names or trade names can be used as business name. Sole Proprietorship is type of business liability is unlimited. Unlimited liabilities mean is if a business fails or is declared bankrupt, creditors can sue the sole proprietor’s owner for all debts owed to respective merchants. The personal assets, personal income and employment income are all liable. There is no protection to the owner’s personal assets. There is no separation between the owner and its personal assets. Besides that, a sole proprietorship is only required to pay an annual fee to the Companies Commission of Malaysia to keep its business renewed from year to year. There is no audit and annual filing requirement.
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 contain of at least two members and a maximum twenty members. Same as sole Trader that I mention above, only Malaysia citizens or permanent residents can register to form this type of business entity. However, a partnership agreement is usually drawn up by legal counsel, which outlines the responsibilities and liabilities of each partner, conditions of termination and means of resolving intra-partner disputes. All business partners share the profits and liabilities in the business undertaking in which all have invested. The partnership itself does not pay taxes, but each partner are taxed as individual and has to report their share of business profits or losses.
Sendirian Berhad (SDN BHD) is a private limited company, where it prohibits any invite 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 2 and maximum is 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 2 and maximum of unlimited amount of members. There are 3 types of Limited Company in Malaysia such as Limited by share, Limited by Guarantee and Unlimited company with or without share capital. Limited by share means that 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. Besides that, Limited by Guarantee refers to a company limited by guarantee is one which the liability of the members are limited to the amount which the members have undertaken or guaranteed to contribute. A company limited by guarantee is usually the type of entity that are used by non-profit organizations such as charitable bodies, foundations and others. Furthermore, for unlimited companies, there 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.
Strength and Weaknesses of setting up each type of business entity
Strength of Sole Proprietorship
Simplicity of formation. There are little of paperwork is required if you choose to set up your business name. There are required a small fee to completing the paperwork. You are then received a certificate with the name of your business. You can use the certificate to register a bank accounts and apply a credit card for your business use. It is unlike the other business structure, individuals owning sole trader are not required to make any annual reports or legal documents required by some of the business structures.
Full ownership and management control. Owners are not required to attend formal meetings required by owners and members of other business structures. As a sole proprietorship, the owner can decide to sale or transfer the company to another individual and make important business decisions at his discretion.
Taxation rules. Sole proprietors are not required to file separate tax returns for their business.
Those income made from the business is counted as personal income and the owners pay taxes are according to their individual tax rates. Sole proprietors must pay Social Security and Medicare taxes only. The tax rules regarding sole proprietorships allow owners to avoid the double taxation of corporations.
Change your business structure easily. If your business grows to a certain place, you can change your business structure to a more complex model. So, the only thing the required to do is filling out the paperwork for your new business structure. You are not required to fill out paperwork with a regulatory body because sole proprietorships are not governed by regulatory bodies.
Get all the profits. Sole Proprietors are the only owner of the business so the profits do not split with other owners. There are 100% profit retention allow the sole proprietors to use the money at their discretion. You can choose it to reinvest the money in your business or start other business or use it for any personal reasons.
Weaknesses of Sole Proprietorship
Unlimited personal liability. In sole proprietorship, there are no legal distinction between business and owner, any assets owned by either are financially at risk. All debts, losses or lawsuits that have paid yourself and can’t be paid by the business even if that means using personal assets, include home for your own.
Limited life expectancy. The success of most sole proprietorships is so closely tied to the owner that the business may be unable to survive the loss of the owner through illness or death. While sole proprietorships can be sold or transferred to heirs, they often struggle to survive because the new owners may lack the knowledge to keep them going or the customers’ loyalties were to the original owner and not the business.
Limited expertise and growth potential. Sole proprietors are in charge in every aspect of the business, including product and service development, marketing, accounting and customer service and other any aspect. Most sole proprietors are knowledgeable about their business product or service, but may have limited knowledge or experience in the other areas. This lack of expertise can slow the business.
Difficulty raising money. Sole proprietors may face problem in raising money if needed to start or sustain a business. Banks often lending money to sole proprietors because repayment becomes questionable if the business fails or the owner dies. Potential investors also may shy away from an unproven business model.
Heavy burden. Although making all the decisions can be a benefit of sole proprietorship, it also may become a burden. As the business owner, you are responsible for its success and failure. You also can have difficulty relinquishing control and delegating to others if your operations continue to grow.
Strength of Partnership