Incorporate in Malaysia: What is the advantages?

As the Companies Act 2016 (CA 2016) came into force in Malaysia on January 31, 2017. Effectively, all companies in Malaysia will now have to operate under CA 2016 framework.

This is good news for all foreigner wanting to set up a company in Malaysia. Under the CA 2016, a company may be incorporated by or have only one foreign shareholder and that foreign shareholder can also be the sole director of the company. Doing business in Malaysia as a foreign, you have the choice of picking the sole proprietor model of business, partnership or a private limited company.

Among the three models of business ownership, the private company (Sendirian Berhad Company, Sdn. Bhd.) is the preferred choice as it has numerous advantages in legal matters as well as in raising financial capital.

There are several advantages and disadvantages of the Sendirian Berhad company. However, the advantages far outweigh the disadvantages. They include:

1. Personal Wealth Protection

The Sdn. Bhd. company is a limited liability entity. By the definition, the shareholders are not responsible for the company's debts. Shareholder assets cannot be attached to pay for the Sdn. Bhd. company's debts unless they has provided a personal guarantee for the debt.

This is unlike the sole proprietorship or partnership models where the owners are responsible for the debts of the company.

This means, as a shareholder they don't need to worry on their assets and wealth status as they are protected and not liable for company debts.

2. Continuous Existence

As a Sdn. Bhd., they are legal to buy and sell property which mean they able to operate continuously expanding its assets and business portfolio even as the owners come and go.

Until such a time when Sdn. Bhd. are dissolved by a court of law, that private companies will remain stand in his existence.

This means that an investor can achieve a long term business vision through a company, safer, in the knowledge that his goals will be achieved by those who come after him. This is unlike a sole proprietorship or partnership where the business dissolves upon the departure of one of the owners.

3. Transferable Ownership

Ownership in a private company is held among several shareholders. They are eligible to transfer their share among one another or to sell to outsiders who then legally become owners of the business together with other shareholder.

The investor is able to transfer his ownership to relatives, friends or other entities without changing the ownership structure of the company.

This flexibility gave advantage to business as the changing of ownership will not affect the business operations. Unlike a sole proprietorship or partnership where the ownership transfer is much complex compares to private company company.

4. Better Access to Capital

It is important for a company to have capital during start up process and as the company grew, the capital will be used for expansion purposes. A Sdn. Bhd. company will find it easier to raise the capital by issuing more shares or bonds which buyers hold as guarantee against debt.

A private company able to acquire more capital through the stock exchange by issuing an IPO, which makes its access money by selling shares to the general public.

Whereas, these options are unavailable to sole proprietorship or partnership as the owner of the company have to personally raise funds at a risk to their personal assets.

5. Lower Taxes

Malaysia tax laws are more favorable to the Sdn. Bhd. company than any other model of business or taxpayer entity. The corporate tax for the first RM500,000 profit is taxed at 20% and 25% beyond this amount.

Maximum corporate tax rate for Sdn. Bhd. company is 26%.

This is unlike tax rates applying to to individual tax payer which can rise up to 30% and beyond the rate.

However, foreign investors must be aware on the requirements and disadvantages of a Sdn. Bhd. company before they planing to invest and incorporate in Malaysia. The factor to be consider at is:

1. Local Partnership

Using Sdn. Bhd. company structures requires foreign investor to appoint or to have at least two directors living in Malaysia (with residence status). It is crucial for them to identify suitable partners or candidates in the ventures. They need to bears an elements of risk as their power to fully control the business is reduced.

2. Legal Compliance

Even when the time Sdn. Bhd. company become dormant, they will be forced to file tax returns, do annual returns and be open for auditing.

3. Annual Expenditures

According to corporate tax and governance regulations, the Sdn. Bhd. company must remain compliant with corporate requirement. Therefore, they are compulsory to engage with tax auditor and a company secretary annually to remain compliant. These are professionals whose the services do not come cheap. Regularly, a dormant Sdn. Bhd. company will spend RM4,000 up to RM5,000 on professionals for just staying legally compliant.

4. Strict Bookkeeping

Government will have more watchful eye on Sdn. Bhd. company that operate under them as there are many corporate regulations and laws to observe. Failure to do so will result in a risk of a heavy fines towards charged company.

Despite the disadvantages, the structure of Sdn. Bhd. company still offers the best flexibility and protection for anyone intending to do foreign investment in Malaysia.

It will help investors to reevaluate on the risk and opportunity they will have as the advantages of the structure outweigh the disadvantages and it will diminished the "sense of disadvantage" as they get used with the Malaysia governance compliance and regulations.