Advantage of “Sdn Bhd” vs “Sole proprietorship/ Partnership”

It is important to understand your business set up before you kick start a new business. The common business type are Sdn Bhd and Sole Proprietorship/Partnership.

Here are some guidance to enable your decision making:

Limited liability – personal wealth is protected

One of the main advantages of Sdn Bhd is limited liability.

Sole proprietor or Partner assumes all liabilities for their company.As a sole proprietor or partner, your personal assets such as house and car can be seized. As a shareholder, you are not responsible for the debts of the company unless you have given a personal guarantee.

Separate entity – Continuous existence

Sdn Bhd, has the same rights and obligations as a natural person and it can acquire assets, enter into contracts, sue or be sued. Its separate legal allow it continue to exist even if founder, one or more shareholders or directors sell their shares, die or leave the company, until such time that the company is dissolved.

While a partnership or sole proprietorship ceases to exist upon the death of its owner(s), the continuous existence of a company will give greater stability and ability to plan for longer term business goals.

Separate entity – Ownership transferable

You, as a shareholder of a company, can opt to sell or transfer, partially or entirely, your shares to any one (including your wife, family members or somebody who is willing to pay high price). You will be unable to sell or transfer your partnership or sole-proprietorship to anyone except selling the business.

You will not be able to sell goodwill of a good business as the partnership or sole-proprietorship will be discontinued after the sale of business.

Lower company tax rates

Because Sdn Bhd is taxed separately from their owners, and the corporate tax rate is generally lower than the individual tax rate.

Currently, the company tax rate, based on YA2009 to YA2015, for companies (have less than 2.5 million share capital) is as follow:

First RM500,000 chargeable income – 20%

Above RM500,000 chargeable income – 25%

However, maximum tax rate for individual is 26% when chargeable income exceeding RM100k, for YA2013 and YA2014.

Better Tax Planning

With a better records requirement, Sdn Bhd is always easier to enjoy the tax benefit such as tax deduction for business expenses and tax incentive for business assets, and able to withstand scrutiny by tax authority.

Other than that, the Employees Provident Fund (EPF) contribution for director is tax deductible, however it is not for the owner of sole proprietor.

Ability to raise fund

It is often easier for companies to raise money than it is for other forms of business. For example, Sdn Bhd have the option of issuing new share to investors.

Moreover, to obtain a bank loan, the credit rating of Sdn Bhd depend on company cash flow, strategy and business prospects, while Sole Proprietorship is depend on owner’s personal capacity and wealth.

On top of that, Sdn Bhd is also often able to borrow money at lower rates, simply because financial institutions and others tend to see loans to companies as less risky than those given to other forms of enterprise.

This enables better opportunities for Sdn Bhd to expand.

Market Perception

In general, Sdn Bhd is perceived as more stable and transparent than sole proprietorships/ partnership, due to the stringent reporting requirement.

Having Sdn Bhd as part of your company’s name may help you attract more contracts.