A commonly asked question among entrepreneurs who want to start a new business for the first time is whether to register an enterprise or to incorporate a Sdn Bhd. In practice, it is common for many entrepreneurs to start their business using an enterprise before deciding to set up a Sdn Bhd several years later. Let’s say you have started your business as an enterprise and you are unsure of the advantages a Sdn Bhd can offer. Here’s what you need to know:
Laws and regulations
From a legal structure point of view, an enterprise is regulated under the Registration of Business Act 1956. It has no legal status, whereby the owner and the business are considered as one entity. Thus, you will be personally liable for debts incurred by your business.
On the other hand, a Sdn Bhd is regulated under the Companies Act 2016, whereby the Sdn Bhd is considered as a separate legal individual with limited liability and is capable of earning incomes, owning properties, signing contracts, as well as suing and getting sued, which separates your liabilities from the Sdn Bhd’s.
Compliance with laws and regulations
An enterprise requires regular renewal with the Registrar of Business to keep the business running. No renewal is required for a Sdn Bhd, but there are more compliance requirements from the SSM, such as:
- Appointment of a company secretary within 30 days of the Sdn Bhd incorporation
- Lodgement of annual returns and audited financial statements every year
- Update company information such as directors and shareholders details, paid-up capital, registered address, etc.
Other than that, both enterprise and Sdn Bhd are required to adhere to the regulatory requirements of governmental authorities such as business licence application, EPF and SOCSO registration for employees, tax filing, etc.
Ownership and management
For an enterprise, you can either own and manage a Sole Proprietorship on your own or share the ownership and responsibilities of the Partnership with up to 20 business partners. Other than the business owners, you can hire employees to manage the business under the enterprise.
A Sdn Bhd is owned by shareholders who contribute to the paid-up capital of the company and is managed by directors. You can be the sole shareholder and director of a Sdn Bhd without a business partner. The maximum number of shareholders a Sdn Bhd can have is 50. This shareholders limit can be increased by converting the Sdn Bhd structure into public company status i.e. a Berhad.
Signing of agreement
While you may be the authorised person who signs the agreement (regardless of whether you are running an enterprise or a Sdn Bhd), you enter into an agreement in your personal capacity for an enterprise. However, for a Sdn Bhd, you sign the agreement on behalf of the Sdn Bhd. Your Sdn Bhd will bear the legal liability of the agreement, as a Sdn Bhd is a separate legal entity and is separated from its owner; hence, the Sdn Bhd can enter into agreements in its own personal capacity.
Strictly speaking, due to the separate legal personality of a company, every agreement that is signed by a director or a representative of the company must be sanctioned and approved by the board of directors. In other words, the directors must pass a board resolution approving the entering of such agreement and authorising a specific person in the company i.e. a director, CEO and so on to sign off the agreement. In practice, the board may delegate the powers to certain roles like the CEO or manager (usually known as the limit of authority) so that the board may not have to convene every single time an agreement needs to be signed by the company.
However, for an enterprise, there is no legal identity; hence, in case of a breach of agreement, you are held personally liable.
Business income and personal income
All profits earned from a Sole Proprietorship or share of a Partnership will form part of your personal income.
A Sdn Bhd is an entity by itself. The income of the company stays within itself and the company pays its own taxes. Directors of the company can be remunerated via director’s remuneration while shareholders of the company receive dividends as declared by the board of directors of the company based on the profits such as retained earnings available.
Personal income tax and corporate tax
Since a Sole Proprietorship or a Partnership is not a separate legal entity from its owner(s), profits earned by the business will be taxed together with your personal income.
On the other hand, since a Sdn Bhd is an entity on its own, it will pay corporate taxes based on the profits it earns. Director’s remuneration received from the company is considered as personal income to the directors and will be taxed as part of the directors’ personal income. You do not have to pay personal income tax for dividends you receive as a shareholder because dividends are distributed based on its retained earnings which have already been taxed under corporate tax.
While running your business as a Sdn Bhd has its benefits, it is totally fine to start your business as a Sole Proprietorship or Partnership before transitioning it to a Sdn Bhd when you are ready to fully commit to growing your business. Understanding the differences between enterprise and Sdn Bhd helps you make the decision that suits your business most.