Before you continue reading, we advise you to have a read about the different types of business entities you can operate in Malaysia here if you haven’t. But, if you already understand what differentiates a business from a company and a limited liability partnership (an ‘LLP’), then read on to learn about the benefits of a company or LLP!
As you may or may not know, operating a company is more complicated than running a simple business due to the extensive compliance obligations involved, and the complexity of operating an LLP ranks somewhere in between the two.
There are higher administrative and operational costs (such as registration fees, filing fees and taxes) involved in the operation of a company, and a range of legal and regulatory requirements (such as company secretarial and auditing requirements for a company), which needs to be complied with. Nonetheless, choosing to incorporate a company or an LLP to run your business comes with its benefits, and could well turn out to be a great investment for the future. Let us explain why.
If you’ve noticed, we used the term ‘incorporate’ above rather than ‘register’ when describing setting up a company or an LLP, and it is for a reason. To ‘incorporate’ means to constitute something as a legal corporation, and to ‘register’ means to enter into or record on an official list or directory. As you can tell, what this means is that the process of incorporation creates a new legal entity, while the process of registration does not.
As such, in order to fully appreciate the benefits of incorporating a company or an LLP for your business rather than merely registering your business as a sole proprietorship or a partnership with another, you will need to understand the concept known as ‘separate legal personality’ and the concept of limited liability.
What is ‘separate legal personality’?
All companies and LLPs incorporated under the Companies Act 2016 (the “Companies Act”) and the Limited Liability Partnerships Act 2012 (the “LLP Act”) respectively are accorded ‘separate legal entity’ or ‘separate legal personality and capacity’ status under s. 20 of the Companies Act and s. 3 of the LLP Act respectively, which gives companies and LLPs a separate legal personality from its members/shareholders and its partners (a.k.a. its owners) under the law.
This means that companies and LLPs, which have been properly incorporated, is a legal person (though not a human person, but a person nonetheless as far as the law is concerned) in its own right separate from its owners. Businesses registered as sole proprietorships or partnerships are not accorded this separate legal personality.
As such, even if you were the only individual behind the running of a company, you and the company are two separate ‘people’ under the law! Interesting right? Well, that’s what companies are. Likewise, an LLP is separate legal person from its partners.
As a result, companies and LLPs can sue and be sued in their own right on matters related to them, and its owners or officers will not be personally involved in any such action as long as they do not act ultra vires (i.e. act beyond their legal power or authority).
What is limited liability?
LLPs and Companies incorporated as private or public companies limited by shares (i.e. Sdn Bhd or Bhd), as their names suggest, mean that its partners or shareholders/members are legally responsible for the debts of the LLP or company only to the extent of the nominal value of their portion or shares – and not a single cent more! Owners of businesses registered as sole proprietorships or partnerships on the other hand do not enjoy such limitation of liability, and will be liable to the full extent of any such debts and losses.
Why does this matter?
Having a separate legal personality and limited liability means that the owners of companies and LLPs can run their businesses through these business entities without fear of extensive personal liability through their involvement with the company or LLP. And this is why companies – especially private limited companies, are popular business vehicles used by business owners to operate their business ventures.
Both companies and LLPs have perpetual succession, which means that their existence can survive the death, exit, or removal of its founding shareholders/members or partners, until and unless dissolved in accordance with the law. Ownership in a company is represented by its shares and can easily be transferable and managed. Furthermore, the legal and regulatory requirements, and compliance obligations involved in the operation of companies and LLPs increases their reliability, accountability, and overall reputation in the eyes of potential customers and clients entering into business transactions and dealings.
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.