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Sole Proprietorship vs. Sdn Bhd: Full Guide of Malaysian Business Types

Last updated: May 03, 2024

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When talking about setting up a business in Malaysia, you may come across terms such as Pte Ltd (Sdn Bhd) and sole proprietorships. These terms each refer to a type of business entity in Malaysia, but what do they mean, and how do they differ?

Understanding the differences between these two common business structures is essential for anyone starting a business in the region.

This guide will explore the main differences, legal implications, and unique features of Sole Proprietorship vs. Private Limited Company (Sdn Bhd) with a clear understanding of which structure is best suited for your business goals and objectives.

Let’s discuss these business setups to see how they compare and contrast, so you can make an informed decision before starting a business in Malaysia.

Figure 1
Figure 1: Illustration of a businesswoman discussing a business with her coworkers.

What Is a Private Limited Company (Pte Ltd)?

A Private Limited Company (Pte Ltd) also referred to as a Limited Liability Company (LLC) is one of the business types in Malaysia that is commonly known as Sdn Bhd (Sendirian Berhad).

Private Limited Company (Pte Ltd), also known as Sdn Bhd in Malaysia, is a distinct business entity that operates as a separate legal entity. This structure allows the company to enter into contracts, own property, sue or be sued, and continue its existence despite changes in ownership through continuous succession.

As a regulated entity, a private limited company must comply with the requirements of the Companies Act 2016 (CA 2016), including the obligation to submit annual filings such as annual returns and audited financial statements.

One of the significant benefits of a private limited company is limited liability. This means that shareholders are generally not personally liable for the debts of the company, and their risk is limited to the unpaid portion of their shares.

However, there are exceptions where shareholders can be personally liable, such as when they provide personal guarantees for company loans.

In addition, Sdn Bhd (private limited company) is the most common business structure in Malaysia, offering a balance between legal protection and corporate formality.

Although it requires more administrative effort compared to a sole proprietorship, the advantages of limited liability and perpetual succession make it the preferred choice for many businesses.

What Are Sole Proprietorships?

Sole proprietorships are the simplest and most popular type of business to set up due to their minimal formalities and requirements.

Unlike private limited companies, sole proprietorships do not need to submit annual filings to Suruhanjaya Syarikat Malaysia (SSM), with owners only needing to renew their business licence with SSM.

Despite its simplicity, a significant drawback of a sole proprietorship is the unlimited liability of the owner. This means that sole proprietors can be held personally liable for any debts or lawsuits arising from their business activities.

They are also personally liable to authorities such as the Lembaga Hasil Dalam Negeri (LHDN) and SSM.

The difference between a sole proprietor and an LLC is that the sole proprietor's assets are at risk if their business incurs liabilities or legal issues.

Overall, while sole proprietorships are attractive due to their ease of setup and flexibility, they involve considerable personal risk due to the unlimited liability of the owners.

Proper risk management and financial planning are essential for sole proprietors to overcome these potential challenges.

The Differences between Sole Proprietorship vs Sdn Bhd Malaysia

Below is a summary table of the key differences between a sole proprietor and an LLC:

Aspect	Sdn Bhd (Private Limited Company)	Sole Proprietorship
Ownership	Can have one or more owners. Must be Malaysian residents or have a principal place of residence in Malaysia.	Owned by one person, who must be a Malaysian citizen or permanent resident.
Entity Name Format	Company name must end with "Sdn Bhd." The name requires approval from the Suruhanjaya Syarikat Malaysia (SSM).	No specific format for the name, but trade names require approval from the Registration of Business (ROB).
Capital Funding	Shareholders provide the capital.	Self-funded by the owner.
Legal Status	The company is a separate legal entity.	The business is not a separate legal entity.
Debt Liability	The company is responsible for its debts.	The owner is personally liable for business debts.
Legal Liability	Limited liability, with protection for personal assets and wealth.	Unlimited liability, where personal assets and wealth are at risk depending on business operations.
Business Management	Managed by a board of directors.	Managed by the sole proprietor.
Personal Liability	No personal liability unless an agreement is entered into personally.	The sole proprietor has unlimited liability, potentially affecting their personal assets.
Shareholders	Minimum of 1 and a maximum of 50 shareholders.	None.
Company Secretary	A licensed or qualified company secretary is required under the Companies Act 2016.	Not required.
Audit Requirement	Financial accounts must be audited and submitted to the SSM annually.	Not required.
Annual Compliance with SSM	Required to circulate audited financial statements to all shareholders and submit annual returns and audited statements to the SSM within a set timeframe.	Not required.
Licence Renewal	Not necessary.	Must renew the business license annually.
Income Tax	Taxed as a company.	Taxed as an individual sole proprietor.
Income Tax Rates (2020)	- For companies with paid-up capital of RM2.5 million or less: 17% on the first RM600,000; 24% on the remaining balance. - For companies with paid-up capital over RM2.5 million: 24%.	Ranges from 0% to 30%.
Governing Law	Regulated by the Companies Act 2016 and the Companies Regulations 2017.	Regulated by the Registration of Businesses Act 1956 and the Registration of Businesses Rules 1957.

Conclusion

That's the full explanation of the differences between Sole Proprietorship vs. Sdn Bhd Malaysia. Understanding the key differences between a sole proprietor and an LLC is essential when deciding how to register a company.

While an Sdn Bhd (private limited company) offers limited liability and separate legal entity status, sole proprietorships are simpler and easier to manage but have unlimited personal liability.

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