Do you need to incorporate a Sdn Bhd for your business?
In today’s issue of Head’s Up, guest author Dylan Damsma, the Founder of Foundingbird is sharing some of his tips and quips for companies and budding founders if you ever need to incorporate a Sdn Bhd for their business.
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By Dylan Damsma,
You've finally decided that you want to pursue that business idea you've had for years, but now looms your question: "Do I incorporate a company or just register as a sole proprietor?". This is a question I regularly get and, while the answer may not always be clear cut, I hope that these couple of pointers could make your decision a lot easier.
If you have just started and want to try out the market - Sole Prop / Partnership
Starting and running a Sdn Bhd is a commitment that takes up time and resources. Besides the company incorporation fee of RM1,010 paid to the Companies Commission of Malaysia (SSM), you have to pay your company secretary a monthly fee and additional charges that come with some company secretarial services. And while the new Companies Act of 2016 has definitely simplified the compliance for Sdn Bhd, a Sdn Bhd still has to lodge their annual returns and (audited) financial statements every year.
Register a sole proprietorship or partnership
For a small business that is starting with a limited budget, you can register a sole proprietorship if you are a solopreneur or a partnership if you have business partners. It only takes RM60 annually which is paid to the SSM to keep your business up and running. However, a sole proprietorship or partnership is not a separated legal entity. This means that any debts made by your business are your personal responsibility.
If you are in one of the regulated industries - Depends
Besides the registration with the SSM, your business might require a specific licence from respective governmental authority to operate. The application for business licences for specific industries often requires your company to be registered as a Sdn Bhd with a minimum paid-up capital. Examples of regulated industries are - manufacturing sector, construction sector, medical sector, oil & gas sector, finance sector, and telecommunication sector.
Find out the necessary licences required for your business
You can check out the MalaysiaBiz portal for suggestions on business licences you need based on the industries and locations of your business. It is recommended to consult a corporate lawyer if you have concerns because you might require a business licence if your business model involves any of the regulated industries without actually being in the industry.
If your estimated annual profit is over RM150k - Sdn Bhd
There is no differentiation between personal income tax and taxes for business if you are running your business as a sole proprietorship or a partnership. All business income is considered as your personal income; hence, you will have to pay taxes based on the personal income tax rate instead of the company tax rate. For an estimated annual profit of RM150,000, the personal income tax rate is 24% while the company tax rate is only 17% for companies with less than RM2.5 million paid-up capital.
Understand taxes for personal income and company revenue
The personal income tax rate and company tax rate are different as stated on the LHDN website. With a Sdn Bhd, your business is considered as a taxable individual who should pay company taxes according to the amount of profit the business earns each year. You, as the business owner, will pay your personal income tax according to only the amount of income you receive from your business.
If you want to raise funds from investors - Sdn Bhd
Raising funds is an important step to scale your business to the next level. While a sole proprietorship or partnership might get a business loan from banks or P2P lending platforms, a Sdn Bhd allows you to raise funds through investments through equity crowdfunding platforms (ECF) or by selling shares in your company to individual and corporate investors. You can differentiate the shares held by you and your business partners with the shares held by investors through adopting a constitution for your Sdn Bhd.
Establish the credibility of your business
Since a Sdn Bhd is subjected to a stricter scrutiny from the SSM compared to a sole proprietorship or a partnership, a Sdn Bhd is considered as more credible in the entrepreneur landscape of Malaysia. Structural wise, it is managed by a board of directors and is backed by shareholders who have contributed to the paid-up capital of the business; hence, this gives investors confidence in investing in your business.
If you are ready to fully commit to growing the business - Sdn Bhd
As a Sdn Bhd is considered as a separated legal entity who can earn an income, acquire properties, sign a contract, and get involved with legal actions, it gives you the capacity to mitigate the risk in growing your business. It allows your business to:
Venture into regulated industries
Raise funds through investors
Explore the possibility of tendering for governmental projects
Manage taxes better with lowered tax rate
Separate your personal liability from the business' liability
To register a sole proprietorship or a partnership, you can refer to the Registration of Business (ROB) guidelines of the SSM; to incorporate a Sdn Bhd, you can go through a company secretary or do it yourself through the MyCoID portal and appoint a company secretary which is mandatory for running a Sdn Bhd.
And that's it! If you're just getting started as a with your business, it's usually the wise decision to start off without incurring too many costs by simply registering as a sole proprietor or partnership. However, if you do fit any of the pointers above, such as foreseen profits of more than RM150k, requiring to raise investments or needing specific licenses to operate, a Sdn Bhd is often the only right way to go.
Dylan Damsma is the founder and CEO of Foundingbird, a digital company secretarial firm to simplify the processes of starting, running, and governing a company so that entrepreneurs can focus on the big picture of their businesses. 👉 Incorporate your Sdn Bhd online now through Foundingbird.