An enterprise is a licensed business that can either be a sole-proprietor or a partnership. They are mostly perceived as being a small-time business that handles small clients and generate low revenues.
Many business owners enjoy good returns and the ease of running an enterprise. Nevertheless, as their business expands rapidly, converting the business into a private limited company (“Sdn. Bhd.”) could be an option to be considered by the business owners.
There are many advantages of having a private limited company as compared to an enterprise. A private limited company is a separate legal entity, it has limited liability on its investment, it has perpetual succession, enjoy lower income tax rate, it may issue shares for capital funding, it may enjoy other corporate reliefs such as capital allowance, as well as have foreign ownership.
Below are some clarifications on when you should consider converting an enterprise to a private limited company:-
1. When the liability of the business is separated from the owner (Separate Legal Entity)
Separate legal entity means a company has a legal personality separate from its shareholders (i.e. members). A company can sue or be sued in its own name, holds its own property and is liable for the debts it incurred. This means that the owner is not liable for any lawsuits made against the Company. The liability of the owner is limited to only the amount they have invested in the company. However, an enterprise is not a separate legal entity and therefore, the owner is personally liable in case of lawsuits and debts.
2. When the business needs more funds
Every enterprise or private company needs capital to run its business. For an enterprise, the capital is pumped in by the business owner whilst for a company, the capital is increased by way of issuance of ordinary shares invested by the shareholders.
During the recent Covid-19 pandemic, most businessmen were faced with financial difficulties and probably sought for personal bank loans. Unlike an enterprise, a company may overcome its financial difficulties by issuing preference shares to raise capital without putting up their assets as collateral or by diluting the control of the company by the ordinary shareholders.
3. When the business continues its existence (Perpetual Succession)
An enterprise will cease to exist if there is a non-renewal of its license with Companies Commission of Malaysia or if the owner is deceased or became bankrupt.
A company will continue its existence despite the aforesaid events. In other words, the existence of a company does not rely on the life of its shareholders or directors as the shares in a company may be transmitted or transferred to their heirs or beneficiaries as defined in their will. Moreover, any assets owned by a company will remain in the company as long as the company is in existence, unless the assets are disposed off.
4. When it is time to enjoy Tax Benefits
As a result of the inseparability of the business owner from his enterprise, profits earned by the business will form as part of the owner’s personal income and might be taxed with a high rate of up to 30% as personal chargeable income. On the contrary, a company tax is lower, between 17% to 24%.
Therefore, if your personal tax rate exceeds 17%, it is definitely the time to consider converting your business to a private limited company.
A company may also enjoy a wide range of tax incentives that cover major industry sectors. For instance, a company that participates in a promoted activity or produce a promoted product, may apply for Pioneer Status (“PS”) with the Malaysian Investment Development Authority. PS grants for eligible companies enjoy a five-year partial exemption from the payment of income tax.
Furthermore, profit distribution in a form of dividends to the shareholders of a company is tax exempted in the hand of the shareholders. Malaysia practices the single-tier tax system where taxes paid under corporate tax is not taxed again when dividends are paid.
5. Foreigners are welcomed
An enterprise cannot admit a foreigner as its partner. Every partner must be a Malaysian Citizen or Permanent Resident of Malaysia. However, a company’s only basic requirement is that there must be at least 1 director who resides in the country. There is no restriction on foreign shareholders in a company.
This way, it is possible for companies to be created for the purpose of a joint venture or partnership with foreigners who are willing to invest in Malaysia.
Contact us
To learn more about converting your enterprise to a private limited company (Sdn. Bhd.), please speak to us.
We look forward to being of service to you.
Please do not hesitate to contact us should you require any further information and clarification.
EUROGAIN SECTA SDN. BHD.
22-1&2, Jalan 1/64, Off Jalan Kolam Air/Jalan Sultan Azlan Shah,
51200 Kuala Lumpur, Malaysia.
Tel: +603 4045 1080 (General Line)
Fax: +603 4045 1050
Mobile: +6 016 – 2069 480
Contact Persons:
Mr. Dennis De Witt dennisdewitt@eurogain.com.my
Ms. Salamiah Senusi amy.senusi@eurogain.com.my
Ms. Jeen Wong jeen@eurogain.com.my
