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Sole Proprietorships VS Private Limited Company (SDN BHD)
In Malaysia, there are several types of business entity and each of them has their own attributes that serve different business needs and offer different benefits. Therefore, it is important to understand the differences in order to choose the best-fitted business entity to start a business.
The following is the difference between a sole proprietorship and a private limited company:-
Sole Proprietorship
Sole proprietorship business is owned by one individual using their personal name or a trade name. It is the easiest and popular type of business to establish. There is no requirement for annual filings with the Suruhanjaya Syarikat Malaysia (SSM). The sole prprietor only needs to renew its licence with the SSM.
However, the sole prprietor has unlimited liabilities where he/she can be sued by any parties in regards to his/her business activites. The sole proprietor is also personally liable to the authorities such as the Lembaga Hasil Dalam Negeri, SSM in their personal capacity.
Private Limited Company
Private Limited Company, is known as Sdn Bhd. It is the most common business entity in Malaysia. A private company is considered as a separate legal entity. It can sue or be sued, buy or sell any property, perform any transactions in its own name as well as having a perpertual succession.
A private limited company is regulated by the Companies Act 2016 (CA 2016). It has to submit annual filings such as the annual return and the audited financial statements as required under the provisions of the Companies Act 2016.
The liability of its member is limited where the shareholders will not be personally held liable for the debts of the company. Their liability is only limited to the unpaid amount on their shares unless the shareholder provide a personal guarantee in relation to a loan given to the company.
The differences between a sole proprietorship and a private limited company are summarised below :-
| Private Limited Company (SDN BHD) | Sole Proprietorship | |
| Ownership | One or more. (Any person residing in Malaysia by having principal place of residence) | One. (Malaysian Citizen or Permanent Resident) |
| Entity Name Appearances | company name ends with the word “Sdn Bhd”. (Approved of name must be obtained from the SSM) | No specific word (Choice of Trade Name subjected to Registration of Business (ROB) approval). |
| Capital Contribution | Contributed by Shareholders | Self contribution. |
| Legal Status | Separate legal entity. | No separate legal entity status. |
| Party that is liable for debts of the business | Company. | Sole proprietor. |
| Legal liability | Limited. Personal assets & wealth are protected. | Unlimited. Sole proprietor’s personal assets & wealth are at risk depending on the business activates. |
| Management of business | Board of Directors. | Sole proprietor. |
| Personal liability | No personal liability unless entered into an agreement in their personal capacity. | Unlimited liability which may affect the personal assets of the sole proprietor. |
| No. of Shareholders | Minimum 1 and maximum 50. | None. |
| Requirement of Company Secretary | qualified/licensed Company Secretary required under CA 2016. | Not required. |
| Audit Requirement | Accounts required to be audited and submitted to the SSM annually. | Not required. |
| Yearly Compliance to SSM | – Circulation of audited financial statement to all Shareholders. – Submission of annual return and audited financial statements to the SSM within the stipulated time frame. | Not required. |
| Renewal of Licence | Not required. | Mandatory. Licence to be renewed annually. |
| Income Tax Status | Tax on Company | Tax on Sole Proprietor |
| Income Tax Rate Year Assessment 2020 (Subject to change yearly) | – Company with paid up capital not more than RM2.5 million: On first RM600,000 [17%]Subsequent Balance [24%] – Company with paid up capital more than RM2.5 million. [24%] | From 0% to 30%. |
| Controlling Law | Companies Act 2016 & Companies Regulations 2017. | Registration of Businesses Act 1956 & Registration of Businesses Rules 1957. |
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