One of the first decisions most aspiring Malaysian business-owners and entrepreneurs have to make before embarking on a new business venture is whether to set up their business as a sole-proprietorship/partnership or a private limited company (sdn bhd).
Here, we hope to highlight the main differences between these business entities and shed some light on the suitability of these entities for different businesses.
#1 Legal Liability
One of the biggest difference between sole-proprietorships, partnerships and private limited companies lies in their ability to protect business owners from legal liability should anything go wrong.
If you set up your business as a company (sdn bhd), you and your shareholders would be protected by the corporate veil. In other words, if your company gets sued, you and your partners as directors and shareholders of the company would not be personally liable.
That is how some people can go through a business bankruptcy but still hold on to their luxury houses and cars.
On the other hand, if you set up your business as a conventional sole-proprietorship or partnership, you and your partners will be personally liable for any legal proceedings brought against your business. This would mean that you and your partners would have to sell your house and car to pay off the debts of your sole-proprietorship or partnership.
However, it is also important to note that it is now possible to register a business entity as a Limited Liability Partnership or an LLP which combines the simplicity of a traditional partnership with the protection of the corporate veil with the introduction of the Limited Liability Partnership Act 2012.
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#2 Accounting And Auditing Standards
Besides legal liability, private limited companies (sdn bhd) also differ from sole-proprietorships and partnerships when it comes to the accounting and auditing standards they would need to meet.
It is mandatory for private limited companies to be audited by an accounting firm annually whereas there isn’t such a requirement for sole-proprietorships and partnerships. The cost of a yearly audit will also amount to an additional cost to maintaining the business entity.
#3 Raising Capital
If your business has plans to raise capital or bring in shareholders in the future, it is best to register the business entity as a private limited company (sdn bhd) because that is the right vehicle to do so.
For example, technology start-ups are required to be registered as private limited companies so they have the right corporate structure to raise venture capital funding in the future.
#4 Cost Of Maintaining Entity
If you were to register your business entity as a private limited company (sdn bhd), you will also incur a higher cost of maintaining your business entity due to the need to carry out an annual audit and having a company secretary.
Company secretary fees usually start at a couple of hundred ringgit per month and gets more expensive with the complexity of the company and the amount of company secretarial work performed.
Maintaining a company would cost significantly more than maintaining a sole-proprietorship or a partnership.
Which Should You Choose?
The type of business entity your venture should take would depend on the scale and nature of your business.
If your business is just a small stall, a personal online blogshop or a small-scale service provider, it might make more sense to register your business as a sole-proprietorship or a partnership. This is because it won’t make sense for you to incur additional costs that would come with setting up and maintaining a private limited company.
With the recent introduction of the Limited Liability Partnership Act 2012 in Malaysia, you could consider registering your business as a limited liability partnership to take advantage of the best of both worlds as well.
However, if your business is a technology start-up that plans to raise money in the future, a restaurant or a factory of a sufficient scale where you have a substantial number of employees on your payroll and suppliers who regularly extend you a line of credit, it would make sense to protect yourself from legal liability by registering your business entity as a private limited company.
This is so that you won’t go bankrupt if anything goes wrong with your business. In such cases, the extra costs and higher accounting and auditing standards would be worth every penny and extra effort spent.
DollarsAndSense is a website that aims to help people make better financial decisions, one interesting bite-sized article at a time. Like us on Facebook to stay in touch with our latest article.
DollarsAndSense Malaysia is a website that aims to help people make better financial decisions, one interesting, bite-sized article at a time. Like us on Facebook to stay in touch with our latest articles.