There are three (3) main types of companies that can be incorporated under the Companies Act 2016 (the “Companies Act”), namely:
- Company limited by shares (private and public companies);
- Company limited by guarantee; and
- Unlimited company
A. Company limited by shares
A company is limited by shares if its shareholders/members (a.k.a. its owners) are legally responsible for the debts of the company to the extent of any unpaid amount of their shares in the company – i.e. limited liability. A company limited by shares can either be a private company or a public company.
i) Private limited company (“Sdn Bhd”)
In Bahasa Malaysia, a private limited company is called a ‘Sendirian Berhad’, hence the abbreviation ‘Sdn Bhd’ suffixed to its name. If you are a foreigner, this is the only type of company you can incorporate in Malaysia. Foreigners are not allowed to incorporate public companies limited by shares or companies limited by guarantee, which are also public companies by nature.
As the name suggests, the shares of such companies are privately issued to individuals and/or corporate bodies, and the minimum number of shareholders required in a private limited company is 1, and the maximum number allowed is 50. The minimum number of directors required is 1 director, who is ordinarily residing in Malaysia with a principal place of residence in Malaysia. There is no need to publicly report the financials of the company, nor is there a need to hold an annual general meeting.
Some advanced ways of using private limited companies include incorporating such companies for the purpose of joint ventures and to facilitate holding and subsidiary company arrangements/relationships.
Exempt private companies (as defined under the Companies Act) which are owned by less than 20 individuals are not required to lodge its financial statements with the CCM if it obtains a certificate declaring its status as an exempt private company. It is, however, still under the obligation to produce annual financial statements for its own record and internal circulation.
A private company may convert to a public company, and vice versa, by passing a special resolution and lodging a notice of conversion with the Companies Commission of Malaysia.
ii) Public limited company (“Bhd”)
In Bahasa Malaysia, a public limited company is called a ‘Berhad’, hence the abbreviation ‘Bhd’ suffixed to its name. Public limited companies may or may not be listed on the stock exchange but are usually listed to obtain the full benefits of being a public company, for e.g. to accept equity investment in its shares from the public.
There is no cap to the maximum number of shareholders in a public limited company, and it is obligatory of public limited companies to hold annual general meetings and make annual reports on their financials. Due to its public nature, public limited companies are subject to higher reporting standards and listing rules by the Companies Commission of Malaysia and the Securities Commission of Malaysia. The minimum number of directors required is 2 directors ordinarily residing in Malaysia with a principal place of residence in Malaysia. Examples of public limited companies include major banks, telco companies, construction companies, property development companies etc. and these companies are mostly listed on the stock exchange.
B. Company limited by guarantee (“CLBG”)
As mentioned above, a CLBG is a public company, and by default has the term ‘Berhad’ or abbreviation ‘Bhd’ suffixed to its name. CLBGs can, however, apply for the suffix to be omitted from its name.
CLBGs are widely used for not-for-profit companies such as charities, community projects, clubs, societies and other similar bodies. No profits or dividends are distributed to the members of the company.
CLBGs are prohibited from having a share capital under the Companies Act, and unlike other types of companies, CLBGs are required to adopt a company constitution at the time the company is incorporated, which shall state, inter alia, that the company is a company limited by guarantee, the objects of the company, the capacity, rights, powers and privileges of the company, and the number of members with which the company proposed to be incorporated.
In case you are unaware, any charity organisation you form which involves more than 20 people are required to be registered with the Companies Commission of Malaysia too, as unincorporated associations are prohibited under the Companies Act.
Examples of CLBGs include organisations carrying names with the terms Foundation (Yayasan), Institute (Institut), Academy (Akademi), Corporation (Badan), Alliance (Gabungan), Fund (Tabung), Centre (Pusat) etc.
C. Unlimited Company
An unlimited company, as the name suggests, means that limited liability does not apply to its members/shareholders. As such, its members/shareholders will be personally responsible for the full extent of any losses it incurs. Unlimited companies are rarely incorporated in Malaysia. All other start up and operation costs and procedures remain the same. An unlimited company may convert to a limited company by passing a special resolution and by lodging a notice for conversion with the Companies Commission of Malaysia.
D. Foreign Companies
Foreign companies, as the name suggests, are companies (or other corporate bodies) incorporated outside of Malaysia, and can be incorporated or registered in Malaysia in one of two ways:
- incorporating as a local company (i.e. Sdn Bhd) (with foreign shareholder ownership); or
- registering the foreign company with the Companies Commission of Malaysia as a foreign branch (i.e. branch office).
Unlike a local company, a foreign company registered as a foreign branch office will not be a separate legal entity under the Companies Act, as they are merely an extension of the parent company, and are as such not incorporated as a new entity. It can also be costly to set up a foreign branch as the SSM registration fees are high, ranging from a minimum of RM 5,000 up to RM70,000 depending on the share capital of the foreign company. Branch offices are mostly used by foreign companies wishing to adopt short term operations in Malaysia. Otherwise, it would almost always be better to incorporate a local subsidiary company instead.
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.