In Malaysia, you can choose a few business structures available to set up a business. They are a Private Limited Company (Sdn. Bhd.), sole proprietorship and partnership. Each of them has their advantages. Therefore, it is important to understand the differences to choose the best business structure. The following is the difference between a sole proprietorship and a private limited company: 

Sole Proprietorship

A sole proprietorship business is owned by one individual using their name or a trade name. It is the easiest type of business to establish.

The advantage of sole proprietorship is as per below:
– Simple and cheap: The registration is cheaper and simpler compared to Sdn. Bhd. The sole proprietor is not required to do annual filings with the Suruhanjaya Syarikat Malaysia (SSM).
– Decision-making: It is easy as no general meeting is required.
– Taxation: The tax rate is lower than Sdn. Bhd. only if the business income is lower than the scale rate of 17%.

However, the sole proprietor has unlimited liabilities where he/she can be sued by any party regarding his/her business activities. The sole proprietor is also personally liable to the authorities such as the Lembaga Hasil Dalam Negeri, SSM in their capacity.

The disadvantage of sole proprietorship is as per below:

– Liabilities: The owner is personally liable for all the business liabilities.
– Business financing: Owner is difficult to obtain loans from banks and financial institution as their account is unaudited.
– Funds: Business owners are unable to obtain funds from third-party investors as the business structure has no shareholding options.
– Eligibility: Only Malaysian or permanent residents could register sole proprietorships. 

Private Limited Company (Sdn. Bhd.)

Private Limited Company, also known as Sdn. Bhd. in Malaysia. It is the recommended business structure in Malaysia.

The advantage of a private limited company (Sdn. Bhd.) as per below:
– Separate legal entity: A private company (Sdn. Bhd.) is a separate legal entity from the owners. It can purchase or sell any property, sue or be sued as well as perform any transactions in its private limited company name.
– Liabilities: The liability of shareholders is only limited to the unpaid amount on their shares. Nonetheless, shareholders will be personally liable if they provide a personal guarantee about a loan given to the company.
– Succession planning: The company could have perpetual succession as long as the company has a minimum of 1 shareholder.
– Business loan: The company makes it easier to obtain loans from banks and financial institutions.
– Funds: The company makes it easier to obtain funds from third-party investors by issuance of shares and rewarding shareholders via dividends.
– Taxation: The company will only be taxed on the first MYR 600,000 at 17% and a further 24% on the subsequent balance. It is also able to enjoy tax incentives such as pioneer status, investment tax allowance, and others. 

The disadvantage of a Private Limited Company (Sdn. Bhd.) is as per below:
– Annual filing: Private Limited companies (Sdn. Bhd.) have to submit annual returns and audited reports as required Companies Act 2016.
– Cost to setup: The cost to set up is higher as it requires paying for company secretarial services and statutory audit services.