guide on how to convert enterprise to sdn bhd

How To Convert An Enterprise To A Sdn Bhd In Malaysia

New levels of growth with a Sdn Bhd

This post covers essential steps for owners of sole proprietorships or conventional partnerships to convert their enterprise into a private limited company known as a Sdn Bhd.

If you’re not sure, check out our post on five signs it’s time to upgrade from Enterprise to Sdn Bhd here.

caterprillars turning into butterflies to show enterprise upgrading into sdn bhd company in malaysia

Before looking at the process, time to clarify the frequent misconception regarding ‘upgrading’ or ‘converting’ an Enterprise to a Sdn Bhd – it doesn’t work that way!

You can’t ‘upgrade’ a business entity

The shift from enterprise to private limited company requires incorporating a new company, renegotiating contracts, transferring assets to the new entity, and closing down your existing enterprise.

For a full guide on the various requirements to incorporate a company, check out our guide to incorporating a Sdn Bhd in Malaysia.

Meanwhile, here is an overview of the steps to ‘upgrade’ your Enterprise into a Sdn Bhd:

8 steps to go from Enterprise to Sdn Bhd

Step 1: Adopt a constitution (Optional)

A constitution is an agreement made by the corporation, its directors, and its shareholders that directs the organisation’s operations and future development.

Since the Companies Act 2016 already outlines the overall clauses, your new Sdn Bhd does not need to adopt a constitution if you want to start quickly. This is more important if your company will already involve multiple shareholders and directors.

Step 2: Open a corporate bank account

Your new Sdn Bhd will need it’s own corporate account to handle all company transactions. This new banking setup helps keep your business finances separate from your personal ones and is a key part of presenting a trustworthy image.

Step 3: Transfer assets & liabilities to new Sdn Bhd

This involves buying the assets and transferring liabilities from your Enterprise. Be sure to properly record all your assets in a balance sheet so the ‘sale’ between the Enterprise Sdn Bhd ‘buying’ them, is carried out at the assets’ correct book value.

A lawyer may be required to persuade the creditor to change their debtors to the new Sdn Bhd.

And no, don’t even think of running away from the debt!

Step 4: Re-sign contracts with stakeholders

To maintain continuity, reestablish contracts with your stakeholders — including suppliers, clients, and customers. This means they’ll now be doing business with your new Sdn Bhd, not you as an individual. 

Step 5: Register with Lembaga Hasil Dalam Negeri

Your new Sdn Bhd must meet its tax obligations and filing returns under its own entity. You can register for an account via MyTax, LHDN’s online portal.

Within three months of operating, your new Sdn Bhd will have to begin submitting tax estimates. For a full list of Sdn Bhd tax obligations, check out LHDN’s Tax File Registration page.

Step 6: Register with EPF, SOCSO, EIS, & HRDF

If your enterprise already employed staff, this should come as no surprise. employees. Your Sdn Bhd must register as an employer with the EPF within 7 days and SOCSO within 30 days of hiring the first employee.

Additionally, if you employ more than ten staff, you must also register with the HRDF. 

Step 7: Apply for necessary business licenses

Depending on the nature of your business, you may need to obtain specific licenses or permits to operate. This is especially important if your expansion plans involve new business activities that will require new business licenses.

Step 8: Close down the Enterprise

After moving all assets and liabilities, fulfilling all contracts and licenses, and registering with all necessary government bodies, it’s time to shut down the old business.

This can be done online via SSM’s EzBiz portal and costs RM200. 

SSM will email you about your Enterprise’s successful termination, and you will have completed the ‘upgrade’!

Bear in mind that running a Sdn Bhd comes with its own challenges.

Let’s quickly verify that the benefits of a private limited company align with your entrepreneurial goals.

Benefits of a Sdn Bhd vs an Enterprise

The table below shows key benefits of a Sdn Bhd over an Enterprise. We’ve bolded the most frequently cited advantages for your convenience.

BenefitsSole Proprietorship (Enterprise)Private Limited Company (Sdn Bhd)
LiabilityUnlimited personal liabilityLimited liability
Perpetual ExistenceDepends on owner’s lifespanContinued existence regardless of members
Ownership TransferabilityHarder to transfer ownershipEasier to transfer ownership
Capital RaisingHarder to attract investorsEasier to raise capital and attract investors
TaxesPersonal income tax of ownerTaxed separately at corporate tax rate
Public PerceptionSeen as less credibleSeen as more trustworthy

We’ve identified milestones in a business owner’s journey that indicate it’s time for a Sdn Bhd:

  1. Your annual profits from the business exceed RM70,000
  2. Your total personal income tax bracket exceeds 17%
  3. You have or plan to have more than 5 employees
  4. You foresee having over 20 business partners

If that describes you, then you have a strong case for making the conversion. If you are still undecided, download our free checklist below for a more complete self-assessment!

MISHU enterprise to sdn bhd checklist

    However, there is no free lunch; it’s only right that we also lay out the drawbacks of a Sdn Bhd compared to an Enterprise.

    Drawbacks of a Sdn Bhd vs an Enterprise

    The table below, shows key drawbacks of running a Sdn Bhd compared to an Enterprise.

    DrawbacksSdn BhdEnterprise
    Setup & Maintenance CostsHigher due to compliance requirements and annual audit feesLower – just annual license renewal
    PaperworkMore paperwork and administrative tasks(a lot) Less paperwork
    TransparencyMore transparent, which may invite greater scrutiny from the public and investorsLess transparent, which provides more privacy
    Decision makingCan be less flexible with more stakeholdersMore freedom with just one decision-maker

    As you can see, there is a price to pay for a higher potential for growth and expansion.

    You submit to tighter regulation and sacrifice the total autonomy that comes with owning an enterprise.

    Put it this way: Shared decision-making in a large corporation or complete control of a smaller one – which sounds better to you?

    multiple stakeholders and decision makers in a sdn bhd

    If you’re still here, you’re certain a Sdn Bhd is the ideal business structure even with the tradeoffs.

    In that case, time to clarify the frequent misconception regarding ‘upgrading’ or ‘converting’ an Enterprise to a Sdn Bhd – it doesn’t work that way!

    Additional to-dos for your new Sdn Bhd

    As you’re set on transitioning from a sole proprietorship to a Sdn Bhd, there are three additional points to keep in mind.

    1. Appoint a Company Secretary 

    Under the Companies Act 2016, you have a maximum of 30 days upon incorporation to appoint a Company Secretary. This is a company officer who ensures a company’s compliance with regulatory requirements.

    2. Engage an independent auditor

    This auditor conducts detailed examinations of your company’s financial statements. Again under the Companies Act 2016, every Sdn Bhd must submit to annual audits from a professionally certified and independent auditor. 

    3. Consider a Shareholders’ Agreement 

    A shareholders’ agreement is a contract between the shareholders of a company detailing their rights, responsibilities, and obligations. This agreement sets out rules about how the company should be run and provides a clear framework for decision-making and conflict resolution processes.

    Ok, there are actually way more than just these three things to consider, but you know what, take it one step at a time – and take those steps with MISHU!

    Let MISHU help transition your Enterprise

    HOBD Adrian

    MISHU’s team is can assist you with incorporating your new Sdn Bhd, as well as various other needs such as appointment of a Company Secretary, opening a corporate bank account, and more. We would love to sit down over a virtual cup of coffee and understand your needs – so let us know if you’d like help!

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