As a business owner, you would undoubtedly want to set your business up in a way which will guarantee success in the long run. With that in mind, it is essential that you think about how you would fundamentally structure your operations to provide a good foundation for your business, and one of the first things to consider is – which type of business entity should you operate? How many types of business entities are there? Do you know the difference between a business and a company? Wait, there is a difference?
Fret not, let us briefly explain it to you. Here we give you a simple breakdown of the basic types of business entities you can form in Malaysia.
|Types of Business Entities
|Sole Proprietorship / Sole Trader
|i. Limited by Shares
ii. Private Company
iii. Public Company
iv. Unlimited Company
|Hybrid of the two above
|Limited Liability Partnership
There is a common misconception that a ‘company’ is the same as a ‘business’, but in actual fact, not all businesses are operated as companies. How do you differentiate a business from a company? Legally a business name does not have the suffix ‘Sdn Bhd’ to their names.
This is a business entity in which the business is owned by one person i.e. the sole proprietor. He is solely responsible for the capital of the business, running of the business, liabilities of the business as well as repayment of the debts incurred by the business. A sole proprietor must register his business with the Registrar of Businesses under the Registration of Businesses Act 1956 within 30 days of its commencement. Failing to register will result in fine up to RM50,000 and/or imprisonment up to 2 years.
What happens if two sole proprietors (note: they must be individuals) decide to team up? They can consider forming a partnership. Partnership is governed by the Partnership Act 1961 where it states that the maximum number of partner in a partnership is capped at 20. Such business must also be registered with the Registar of Businesses under the Registration of Businesses Act 1956. However, if the partnership is governed by other specific written laws, such maximum limit does not apply. For example, lawyers, accountants, architects.
Partnership concept is commonly used by professionals such as lawyers, accountants, architects, company secretaries. We are also seeing an increasing trend where these professionals are upgrading themselves to limited liability partnership (discussed below).
This is probably the most common type of business entity. A company enjoys various benefits and perks, but it comes with higher operational and compliance costs.
The main foundation of company law is that a company is recognised by law to have a separate legal entity from its shareholders and directors. It also has unlimited capacity in the sense that it can sue and be sued; acquire, own, hold, develop or dispose of any property and do any act which it may do or to enter into transactions. Unlike partnership, the death of a business partner will not affect its legal personality – it continues to run until such entity is removed from the register through liquidation or deregistration by SSM.
If a company breaches its contractual obligation, it can be sued. The company is also liable for its debts and so long as the shareholders have paid up the amount on his shares, the shareholders will not be liable for the debts.
C. Hybrid Model: Limited Liability Partnership (LLP)
Over the years, the business scene has developed a new form of entity by merging the features and concepts found in traditional partnership vis-à-vis company to form this new concept called LLP.
An LLP must have at least 2 partners (who may be individuals or body corporates) but there is no cap on the maximum number of partners. The biggest advantage of forming an LLP is that an LLP is a body corporate and has a separate legal personality from its partners (hence limited liability!). It also has perpetual succession whereby any change in its partners will not affect its existence. Even though the partners will not be personally liable for the debts and liabilities of the LLP, they will still be personally liable if they commit a tortious wrong. Another distinctive feature of an LLP is that it only needs to keep a true and fair financial statement, where such statement does not need to be audited or lodged with SSM.
Fascinating isn’t it? Now that you have learned this, it’s your turn stop being confused and educate your friends and family by sharing this article! If you still have questions about business entities or which type is suitable for you, feel free to contact us for free consultation. MISHU provides both company incorporation and partnership registration with SSM.
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.