Seven types of business entities in Malaysia.

Malaysia recognises seven basic types of business entities, each with different characteristics regarding liability, taxation, governance and operational requirements. The choice of business structure affects ownership restrictions, compliance obligations, capital requirements and the ability to engage in certain business activities.

This guide covers the seven main business entities available in Malaysia, including their key features, registration requirements and suitability for different business scenarios.

Sole proprietorship

A sole proprietorship is the simplest and most common form of business entity in Malaysia, particularly popular among small business owners and individual entrepreneurs, such as freelancers, lawyers, doctors or independent consultants. This business structure is characterised by a single owner who has complete control over the business operations and is entitled to all profits.

Sole proprietorships are not taxed as separate entities. The owner reports business income on their personal income tax return and is taxed at individual income tax rates.

The advantages are:

• Simple and inexpensive to set up
• Complete control over business decisions
• Direct profit retention
• Minimal regulatory requirements
• Easy to dissolve

While the disadvantages include:

• Unlimited personal liability for business debts and obligations
• Limited access to capital
• Lack of business continuity (the business ceases to exist upon the owner’s death)

Formation and registration

To establish a sole proprietorship in Malaysia, the owner must register the business with the Companies Commission of Malaysia (SSM) under the Registration of Businesses Act 1956. The process is relatively straightforward and requires minimal documentation, making it an attractive option for those looking to start a business quickly and with minimal cost.

However, it is important to note that sole proprietorships in Malaysia can only be registered by Malaysian citizens or permanent residents. This restriction may limit options for foreign entrepreneurs considering this business structure.

Once registered, maintaining a sole proprietorship involves minimal administrative burden. An annual fee is required to keep the company registration active, but notably, sole proprietorships are not required to submit audits or carry out annual filings.

This simplicity in ongoing compliance, combined with the ease of setup, makes sole proprietorships particularly appealing for small-scale local entrepreneurs who prefer a straightforward business structure with reduced regulatory obligations.

Partnership

A partnership is a business entity formed by two or more individuals or corporations who agree to share profits, losses and management responsibilities. Partnerships in Malaysia are limited to a maximum of 20 partners. Similar to sole proprietorships, only Malaysian citizens and permanent residents are permitted to register partnerships. This restriction is crucial for foreign investors to consider when exploring business options in Malaysia.

In Malaysia, partnerships are governed by the Partnership Act 1961. Partnerships are ideal for professional services firms (e.g., law firms, accounting practices) and small to medium-sized businesses with complementary skill sets among partners.

There are two types of partnerships:

• General partnership: All partners have unlimited liability for the partnership’s debts and obligations.
• Limited partnership: Combines general partners with unlimited liability and limited partners whose liability is restricted to their capital contribution.

Partnerships are not taxed at the entity level. Instead, each partner reports their share of the partnership’s income on their individual tax returns.

Advantages of a partnership include:

• Relatively easy and inexpensive to form
• Shared financial burden and expertise
• Potential for greater capital infusion compared to sole proprietorships
• Flexible management structure

The disadvantages include:

• Unlimited liability for general partners
• Potential for disputes among partners
• Lack of perpetual existence (dissolution upon a partner’s exit or death, unless otherwise agreed)

Formation and registration

General partnerships must be registered with the SSM, while limited partnerships are registered under the limited partnerships Act 2012. The partnership agreement, detailing the rights and responsibilities of each partner, is a crucial document in this business structure.

Limited liability partnership

Introduced in Malaysia through the Limited Liability Partnerships Act 2012, the limited liability partnership (LLP) combines elements of partnerships and companies, offering the flexibility of a partnership with the limited liability protection of a company.

LLPs are treated as tax-transparent entities. The income is taxed at the partner level, similar to conventional partnerships.

This structure is suitable for professional services, joint ventures and businesses seeking the benefits of limited liability with partnership flexibility.

Some of the advantages of an LLP are:

• Limited liability protection for all partners
• Flexible internal structure
• Lower compliance requirements compared to companies
• Separate legal entity status
• Perpetual succession

Some disadvantages are:

• Relatively new business structure in Malaysia, which may lead to some uncertainties in practical application
• Potential difficulties in raising capital compared to companies
• Partners are agents of the LLP, potentially leading to complications in large partnerships

Formation and registration

LLPs are registered with the SSM. At least two partners are required, which can be individuals or corporate bodies. An agreement between the partners governs the internal regulations of the LLP.

Private limited company

A private limited company, known as Sendirian Berhad or Sdn Bhd in Malaysia, is one of the most popular business entities for both local and foreign investors. It is a separate legal entity from its shareholders, offering limited liability protection. This business structure is well-suited for medium to large-scale businesses, foreign investors and companies seeking credibility and growth potential.

While private limited companies are popular among foreign investors and can be 100% foreign-owned in many sectors, certain industries have restrictions. For example, industries such as agriculture, banking, education, recruitment agencies and oil and gas may require at least 50% Malaysian ownership. Foreign investors should carefully research sector-specific regulations before establishing a Sdn Bhd.

Private limited companies are subject to corporate tax on their taxable income. The current corporate tax rate in Malaysia is 24%, with lower rates for small and medium enterprises (SMEs) on the first RM 600,000 of chargeable income.

This business structure offers several key advantages that can support growth and long-term stability:

• Limited liability for shareholders
• Separate legal entity status
• Enhanced credibility and professionalism
• Easier access to funding and capital
• Tax benefits and incentives available for certain industries

However, it also presents certain disadvantages that may require careful consideration and additional resources to manage:

• Higher setup and maintenance costs compared to simpler business structures
• More complex regulatory compliance requirements
• Potential restrictions on foreign ownership in certain sectors

Formation and registration

Incorporation in Malaysia is conducted through the SSM under the Companies Act 2016. The process involves several steps, including name reservation, preparation of incorporation documents and submission of the required forms and fees.

Key features of incorporation include the requirement for a minimum of one director and one shareholder, who can be the same person, and a maximum limit of 50 shareholders. Additionally, shares cannot be offered to the public, and the company benefits from perpetual succession.

Public limited company

A public limited company, or Berhad (Bhd), is similar to a private limited company but can offer shares to the public and be listed on the stock exchange. This entity type is suitable for large corporations seeking to raise capital from the public.

Public limited companies are taxed at the corporate tax rate, similar to private limited companies. However, listed companies may be eligible for certain tax incentives.

In Malaysia, there are two types of limited companies:

• Limited by shares: The most common type, where member liability is limited to the amount unpaid on their shares.
• Limited by guarantee: Typically used for non-profit organisations, charities, clubs or societies where member liability is limited to the amount they have guaranteed to contribute if the company is wound up. Profits in these entities are reinvested into the company rather than distributed to members. Charity organisations with more than 20 people must register with the SSM.

Companies can gain significant operational and financial advantages through this business structure:

• Access to public funding through share issuance
• Enhanced prestige and credibility
• Potential for rapid growth and expansion
• Liquidity for shareholders (if listed)

Despite its strengths, this structure also comes with challenges that businesses must be prepared to handle.

• Complex and costly setup and maintenance
• Stringent regulatory compliance and reporting requirements
• Less control for original founders as ownership is diluted
• Greater public scrutiny and disclosure requirements

Formation and registration

Public companies in Malaysia are incorporated through the SSM under the Companies Act 2016. The incorporation process is similar to that of a private limited company but includes additional requirements for public offerings and listings.

Key features of public companies include a minimum of two directors and no limit on the number of shareholders. These companies have the ability to issue shares to the public and are subject to stricter regulatory oversight, particularly if they are listed on the stock exchange.

Unlimited company

While the concept of a limited liability company (LLC) as found in some countries, is not directly applicable in Malaysia, the country does recognise unlimited companies, denoted by Sdn (Sendirian).

Key features of these companies include providing unlimited liability to members and shareholders, meaning members have personal responsibility for the company’s debts and losses. Additionally, an unlimited company can convert to a limited company through a special resolution and notice to the SSM.

This structure offers certain benefits that may appeal to specific business owners:

• Flexibility in internal structure
• Potential for greater trust from creditors due to unlimited liability

However, it also comes with significant risks that should be carefully considered:

• High personal risk for members
• Less attractive to investors due to unlimited liability

An unlimited company may be suitable for businesses where the owners are willing to accept personal liability in exchange for operational flexibility. However, this structure is less common due to the significant personal financial risk involved.

Foreign company

For foreign companies looking to establish a presence in Malaysia without fully incorporating, two options are available:

Representative office

• Allows foreign companies to study the Malaysian market and business environment
• Cannot engage in profit-generating activities or sign contracts
• Useful for market research, coordination and planning future business activities
• No independent legal standing; parent company responsible for debts and liabilities

Foreign branch office

• An extension of the foreign parent company, not a separate legal entity
• Must conduct the same activities as the parent company
• Suitable for short-term business expansion into Malaysia
• Requires at least one Malaysian resident as an authorised agent
• Must register with SSM before incorporation

These options provide flexibility for foreign companies exploring the Malaysian market or seeking a temporary presence without full incorporation.

Conclusion

The diverse range of business entities available in Malaysia offers entrepreneurs and investors the flexibility to choose a structure that best suits their business objectives, risk tolerance and operational needs. From the simplicity of sole proprietorships to the complexity of public limited companies, each entity type presents its own set of advantages and challenges.

Carefully evaluating the available options and aligning the choice of business entity with strategic objectives can establish a strong foundation for a venture in Malaysia’s dynamic and growing economy. Whether for local entrepreneurs or foreign investors, understanding these business structures is a crucial step toward success in the Malaysian market.

How Acclime can help with business entity selection in Malaysia

Acclime Malaysia offers complete support for business entity selection and company incorporation. From evaluating entity options and assessing liability protection to SSM registration and ongoing compliance setup, our team of experts can assist with everything from determining the most suitable business structure for your objectives to managing the entire incorporation process and ensuring regulatory compliance.

By partnering with us, entrepreneurs and investors in Malaysia can confidently choose the optimal business entity while navigating local regulations and establishing a strong foundation for growth. Contact us to learn more about how we can support your entity selection needs and company formation requirements in Malaysia.