Which business types to register in Malaysia? | Partnership or LLP tax lesser?

4 Type of Business Incorporations in Malaysia

Are you thinking of starting a business in Malaysia? Did you know there are more than 1 type of business incorporation in Malaysia? In Malaysia there are 8 different types of businesses. They are Sole Proprietor, Partnership, Limited Liability Partnership, and Private Limited Company, Unlimited Company, Public Limited Company, Company Limited by Guarantee (CLG)and Foreign Company. In this article, we will be discussing the top four popular type of businesses in the list, tax rate, and more.

Sole Proprietorship

What is sole proprietorship in Malaysia? Sole proprietorship is the simplest form of businesses formation with a single owner. In Malaysia, only Malaysian citizens are allowed to be sole owners. Sole proprietors are required to pay a n annual fee to SSM (Suruhanjaya Syarikat Malaysia) to renew the company’s business. Sole proprietorship is suitable for those who have enough fundings to start a business by themselves with minimal complexities. What are the benefits of a sole proprietorship over a partnership business? Unlike partnership, sole proprietorship owner has complete control over the business. The owner does not have the share the profits generated by the business and has complete freedom in making any decisions relating to the business.

sole-proprietorship
Pros Cons
Does not need to submit audits or annual filling. Unlimited liability. Any losses from the business will impact your personnal assets. Sole proprietors are liable for all risks undertaken by the business.
Simplest form of business. Easiest setup. Difficult to secure funding to sustain business life.
No corporate business tax. Unable to take one business debt.

Partnership

A partnership consists of two to twenty people joining together to start and manage a business. All partners combine their resources to execute a business. A partnership agreement is signed in the beginning detailing the responsibilities of each partner. Details like how decisions are made, how profits and losses are divided, as well the extent of each partners’ involvement in decision making is written in a partnership agreement.  In Malaysia, only Malaysian citizens and permanent residents are allowed to register for a partnership business. The partnership incorporation is not taxed but the partners are taxes as individuals and must report their individual losses and profits. Is partnership better than sole proprietorship? Both businesses have their own set of benefits and disadvantages. Depending on the nature of your business, and funding, you can choose a business that is suitable.

partnership
Pros Cons
Minimal paperwork, no additional business entity taxes. Just like sole proprietorship, it has unlimited liability. Any losses from the business will impact the partners personal assets.
Losses of the business are shared amongst partners based on the partnership agreement. Profits made in the business have to be spilt between the partners according to the partnership agreement.
An extra set of hands to help run the business. Disagreement and conflict might occur among partners.

Tax For Sole Proprietorship and Partnership:

  • A resident individual who carries on a business are liable to tax, you need to use Form B when filling your taxes to LHDN , whereas for individuals without business income, you will be report under form BE.
  • Tax period for sole and partnership is January to December every year.
  • Due date of tax submission is 6 months after December of that year
  • Failure to pay tax within the stipulated time will result in a 10% late payment penalty.
  • Tax rate can vary from 0% to 28%

Limited Liability Partnership

A Limited Liability Partnership (LLP)  has the combination of the characteristics of a partnership and a company. A LLP consist of two or more parties / individuals. It is a separate entity from its partners. LLP’s are common for business like law firms, accounting firms, and wealth managing firms.
Pros Cons
Limited liability. Patners assets are protected. More paperwork. More filing formalities than the general partnership.
Less complaince requirements in comparisons to other incorporations. Suitable for start-ups and small companies. Limited partners can lose their limited liability if they take on management roles.
Ability to easily bring new partners in and retire existing partners. Only available for specific occupations.
LLP

What is the difference between Partnership and LLP?

A partnership is an agreement between 2 or more parties to carry on a business and share the profits and losses. Partners have to bear unlimited liability. LLP on the other hand is a business operation that combines the features of a partnership and a body corporate. One of the advantages of LLP is that it is a separate entity and the liability borne by each partner is limited tot the capital contribution. Which is better, Partnership or LLP? LLP is different from partnership in terms of liability and legalities.  In LLP, a partner is only liable for their own actions and cannot be held responsible for the actions of other partners. Where else no such protection is given to partners in a partnership business.

Private Limited Company (Sdn Bhd)

What is a Private Limited Company (PLC)?  Private Limited Company is a separate legal entity from its owners. A Sdn Bhd can buy and sell property, engage in legal contracts. A minimum of one person to a maximum of 50 people can be involve in establishing a Private Limited Company. PLCs are the most common type of entity for foreign investors. This is because foreigners are allowed to own 100% of the company. However in Malaysia, some industries require a 50% Malaysian ownership. A few industries that require a 50% Malaysian ownership are banking, education, oil, gas, and agriculture.
LLC
Pros Cons
Limited liability. Owners are only responsible for the amount they contributed. Personal assets and wealth are not affected if something happens to the company. Monthly Company Secretary Retainer Fee (Ranges from RM50 to any amount depending on company size and Company secretary rate)
Has better compliance responsibility. Non-compliance can lead to a penalty and/or imprisonment.
Favoured by banks and is the only incorporation eligible to apply for any government tax incentives. Mandatory Annual General Meeting and Audited Accounts.

Tax liability for LLP and PLC :

  • In Malaysia upfront tax is collected. The tax can be paid in 12 months instalments.
  • Tax estimate is submitted using a form called CP204.
  • CP204 needs to be submitted before 30 days of the company’s basis period.
  • Tax Revision :
    • Company can begin to revise their taxes on the 6th or 9th month of their basis period.
    • Companies are advised to follow the period of tax revision because if the actual tax payable is more than 30% of the estimated tax, the difference will be subjected to a penalty.
    • For both LLP and PLC, submission of tax return is by the 7th month of the company’s accounting period.
    • LLP will submit a form called TP
    • PLC will submit a formed called Form C
  • SMEs:
    • If a Private Limited Company is considered a SME (Small Medium Enterprise), two years of tax exemption will be given
    • If it is a registered SME, First RM500,000 chargeable income will be taxed at 17% and the remaining is taxed at 24%
    • If not an SME, the tax rate will be flat at 24%

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