Sdn Bhd vs Partnership: Which Business Structure is Right for You?

In Malaysia, deciding on the appropriate business structure is crucial for entrepreneurs embarking on their business journey. Choosing between Partnership and Sdn Bhd company can significantly impact the business's operations, legal liabilities, and tax obligations. This article will comprehensively compare Sdn Bhd vs Partnership to help entrepreneurs make informed decisions about their business structure. For more information, refer to 6 Key Things Businesses Must Know About Company Registration in Malaysia

Understanding Partnership

Partnership registration in Malaysia offers a flexible and straightforward business structure governed by the Suruhanjaya Syarikat Malaysia (SSM) and the Registration of Businesses Act 1956. Limited to a maximum of 20 individuals, partnerships provide swift registration processes, exemption from corporate taxes, minimal formalities, easy dissolution, and low maintenance costs.

However, only Malaysian citizens or permanent residents can register partnerships, and individual identity card names cannot be used as business names. Partnerships are ideal for new business ventures with multiple partners and allow the exploration of new markets and business strategies. Business owners can later transition to a Private Limited Company (Sdn Bhd) for business expansion or convert to a Sole Proprietorship in Malaysia if partners reduce to one.

5 Advantages of Incorporating Partnerships

Partnerships offer several benefits for businesses, including flexibility, shared responsibility, and cost-effectiveness. Here are five advantages of incorporating partnerships.

a. Simple Formation: Easier and less expensive to set up than a company incorporation Requires company registration with the Registrar of Businesses.

b. Operational Flexibility: Partners have direct control over business decisions without formal meetings or board approvals, allowing for quick and flexible decision making.

c. Lower Costs: Lower initial setup costs and minimal ongoing compliance costs and make it cost-effective for small businesses.

d. No Corporate Tax: Profit sharing is taxed at the individual partners' tax rates, potentially simplifying the tax process.

e. Shared Responsibility: Partners can share the burden of managing and running the business, bringing diverse skills and expertise.

5 Disadvantages of Incorporating Partnerships

Discover the potential drawbacks of partnerships in business, from unlimited liability to limited growth potential, and make informed decisions for your venture.

a. Unlimited Liability: Partners are personally liable for the business's debts and obligations. If the business incurs debt or has legal issues, personal assets can be at risk.

b. Limited Growth Potential: Raising capital is more challenging, as partnerships cannot issue shares. Growth is often limited to the partners’ ability to invest.

c. Instability: The partnership can be dissolved if a partner leaves or dies unless an agreement is in place to handle such situations.

d. Potential for Conflict: Disagreements between partners can impact the business. Clear agreements and communication are essential to managing relationships.

e. Limited Perception of Credibility: Partnerships may be perceived as less stable or credible compared to Sdn Bhd companies, potentially affecting business opportunities and relationships.

Understanding Sdn Bhd

An Sdn Bhd is a Private Limited Company, and its business structure is accessible to both Malaysian residents and foreigners. Company registration occurs through the Suruhanjaya Syarikat Malaysia (SSM). Entrepreneurs, locally and internationally, favour this structure due to its limited liability protection and distinct legal identity, enabling it to engage in contracts, own assets, and conduct business transactions autonomously. Sdn Bhd's appeal lies in its ability to safeguard shareholders' assets from company liabilities and its streamlined business operations management. For more information, refer to Step-by-Step Guide on Registering a Sdn Bhd Company in Malaysia.

5 Advantages of Incorporating Sdn Bhd (Private Limited Company)

Explore the advantages of incorporating Sdn Bhd (Private Limited Company) in Malaysia.

a. Limited Liability: Shareholders’ liability is limited to their share capital. Personal assets are protected from business debts and liabilities.

b. Separate Legal Entity: Sdn Bhd is a distinct legal business entity that can own property, enter contracts, and sue or be sued independently of its shareholders.

c. Perpetual Succession: The company continues to exist even if the ownership changes or shareholders leave.

d. Access to Capital: Equity financing makes raising funds easier, as investors may be more willing to invest in a limited liability company.

e. Credibility and Trust: Customers, suppliers, and financial institutions often perceive Sdn Bhd as more credible and stable, which can benefit business relationships and opportunities.

5 Disadvantages of Incorporating Sdn Bhd (Private Limited Company)

Exploring the drawbacks of incorporating Sdn Bhd (Private Limited Company) can provide valuable insights for entrepreneurs.

a. Complex Formation and Maintenance: Setting up an Sdn Bhd requires compliance with legal requirements, documentation, and registration with the Companies Commission of Malaysia (SSM).

b. Higher Costs: There are higher initial setup costs and ongoing compliance costs, including annual audit, filing fees, and the need for a company secretary.

c. Regulatory Compliance: There are more stringent regulatory requirements, including the need to submit annual financial statements, hold regular board of directors meetings, and comply with corporate governance standards.

d. Less Operational Flexibility: Decisions must often undergo formal procedures involving the board of directors and shareholders, which can slow down the decision making process.

e. Public Disclosure: Financial statements and certain company information must be disclosed publicly, which can reduce privacy.

7 Key Comparisons of Partnership and Sdn Bhd

Choosing the right business structure is crucial for entrepreneurs in Malaysia. This Partnership vs Sdn Bhd (Private Limited Company) comparison elucidates the key differences in ownership, liability, taxation, regulatory compliance, and flexibility, aiding entrepreneurs in making informed decisions for their ventures.

Aspect	Partnership	Sdn Bhd (Sendirian Berhad)
Ownership and Management	Partnerships are owned and managed by two or more individuals who share decision making authority. They can be established with minimal formalities, making them suitable for small businesses and startups.	Owned by shareholders who elect a board of directors to oversee company operations.Directors are responsible for making strategic decisions and ensuring compliance with regulatory requirements. Sdn Bhd companies have a more formalised management structure, which can provide stability and clear lines of authority.
Legal Liability	Partnerships do not have limited liability protection, meaning partners are personally liable for the business's debts and obligations. This exposes partners' assets to potential risks and liabilities arising from business activities.	Shareholders of Sdn Bhd companies enjoy limited liability protection, meaning their assets are generally shielded from their debts and liabilities. This protection provides shareholders with greater financial security and reduces their risk exposure.
Tax Implications	Partnerships are taxed based on the partners-individual income tax rates. Profits and losses flow through to the partners, who report them on their tax returns. Partnerships are not subject to corporate income tax.	Sdn Bhd companies are subject to corporate income tax on their profits. Corporate tax rates may vary depending on the company's annual income and tax advantages. Additionally, shareholders may be subject to personal income tax on dividends received from the company.
Capital Requirements	Partnerships generally have lower initial capital requirements compared to Sdn Bhd companies. Partners contribution capital to the business based on their agreed-upon share of ownership, but there are no minimum capital requirements mandated by law.	Sdn Bhd companies often require a higher initial capital investment to establish and operate the business. The Companies Act 2016 stipulates minimum paid-up capital requirements for Sdn Bhd companies, which must be met upon incorporation.The required amount may vary depending on factors such as the nature of the business and regulatory requirements.
Regulatory Compliance	Partnerships have fewer regulatory and compliance requirements compared to Sdn Bhd companies. While partnerships are required to register with the Registrar of Businesses, they are not subject to as many regulatory obligations as Sdn Bhd companies.	Under the Companies Act 2016, Sdn Bhd is subject to stricter statutory compliance and reporting requirements.These requirements include maintaining proper accounting records, conducting the annual audit, and submitting annual returns to the Companies Commission of Malaysia (SSM). Non-compliance with regulatory obligations may result in penalties or legal consequences for the company and its directors.
Flexibility	Partnerships offer greater flexibility in decision making and management structure. Partners have business autonomy and can adapt quickly to changing market conditions. This flexibility allows partnerships to respond promptly to opportunities and challenges, making them ideal for agile and dynamic businesses.	Sdn Bhd companies provide a more structured and formal business environment. While this structure may offer stability and clear lines of authority, it may also limit decision making and operational management flexibility. However, Sdn Bhd companies can still adopt flexible management practices within corporate governance and regulatory or statutory requirements.
Long-Term Considerations	Partnerships may lack long-term sustainability and scalability compared to Sdn Bhd companies. Their informal nature may pose challenges in attracting investors and financing for expansion. Additionally, partnerships may need help in ownership transfer or structure as the business grows.	With their formalised structure, Sdn Bhd companies offer many benefits for long-term growth and expansion. They provide credibility and trustworthiness, making it easier to attract investors, secure financing, and enter into contracts with third parties. The flexibility to adapt and evolve as the business grows makes Sdn Bhd companies a preferred choice for businesses with ambitious growth aspirations, offering greater longevity and stability.

What Are the Registration Fees for Sdn Bhd and Partnership?  

You may refer to the Registration of Company (ROC) fees for various application SSM costs. Below is a screenshot table from Suruhanjaya Syarikat Malaysia (SSM) about Registration Fees Based On Business Entities in Malaysia as a reference.

What Are the Tax Rates for Partnerships?

Partnership income is treated as personal income and taxed based on individual rates. You may refer to the latest tax rate for personal income tax on the LHDN website. 

What Are the Tax Rates for Sdn Bhd?

The business is registered as Sdn Bhd and will be subject to corporate tax rates ranging from 15% to 24% in Malaysia. Remember to stay updated on the latest corporate tax rates announced by LHDN Malaysia.

Below is a screenshot of the corporate tax rate from the LHDN website. 

What Is the Annual Maintenance Costs for a Sdn Bhd in Malaysia?

Understanding the annual maintenance costs for an Sdn Bhd company in Malaysia is crucial for budget planning and financial management. Below are the estimated fees for maintaining an Sdn Bhd, sourced from MalaysiaCo. The fees may vary over time, so engaging with authorised agents for accurate information is advisable.

What Is the Annual Maintenance Cost for a Partnership in Malaysia?

Gaining insight into the annual maintenance costs of a Partnership is crucial for strategic financial planning. The following are the estimated maintenance fees for a partnership from L & Co Plt. As these fees may fluctuate over time, it's recommended to consult authorised agents for precise and up-to-date information.

5 Factors to Consider When Choosing Between Partnership and Sdn Bhd

Choosing between a Partnership and Sdn Bhd involves careful consideration of various factors. Understanding your business's nature, long-term goals, financial resources, tax implications, and legal liabilities is essential.

a. Nature of business: The type and size of your business activities affect whether a Partnership or Sdn Bhd is a better fit. Your industry, the size of your business, and the complexity of your operations all matter.

b. Long-term goals and business expansion plans: If you want your business to grow a lot, you might prefer an Sdn Bhd. They're set up to handle big growth business plans and can make getting funding or expanding into new areas easier.

c. Financial resources and risk tolerance: Think about how much money you have and how much risk you're comfortable with. Partnerships offer more flexibility with money but also come with higher personal risk. Sdn Bhd protects your money, but you might need more cash to start.

d. Tax considerations: Understanding how each type of business is taxed is important for tax advantages such as saving money and staying out of trouble with the taxman. Partnerships and Sdn Bhd companies have different tax rules, so it's worth looking into which makes more sense for your situation.

e. Legal liabilities and protection: Knowing how much legal protection you have and how much you could be personally responsible for is crucial. With partnerships, you could be on the hook for everything, but Sdn Bhd gives you some protection for your assets.

While Partnership and private companies are common choices for starting a business in Malaysia, you might wonder whether to go with Partnership vs Sdn Bhd. Don't worry—I'll break down the different types of people and their characteristics to help you decide which business structure is right for you.

Partnerships is suitable for:

a. Entrepreneurs Seeking Flexibility: Individuals who value flexibility and autonomy in decision making may find partnerships appealing. Partnerships offer a less formal structure, allowing partners to collaborate closely and make decisions collectively without complex corporate governance.

b. Small Business Owners: Startups and small business owners with limited capital resources may prefer partnerships. Partnerships have lower initial capital requirements and fewer regulatory obligations, making them accessible and cost-effective for small-scale ventures.

c. Service-Based Businesses: Entrepreneurs in service-based industries, such as consulting, freelancing, or creative services, may find partnerships suitable. Partnerships accommodate collaborative working arrangements and are well-suited for businesses that rely on teamwork and shared expertise.

d. Entrepreneurs with Short-Term Goals: Individuals pursuing short-term or experimental business ventures may opt for partnerships. Partnerships offer flexibility and agility, allowing partners to test different business ideas or market strategies without the long-term commitments associated with a more formal organisational structure.

Sdn Bhd is suitable for:

a. Entrepreneurs with Growth Ambitions: Individuals with ambitious growth aspirations and long-term business goals may prefer Sdn Bhd. Sdn Bhd companies offer stability, scalability, and external funding access sources, making them ideal for ventures seeking to expand and evolve over time.

b. Investors and Stakeholders: Entrepreneurs looking to attract investors or secure financing for their ventures may opt for Sdn Bhd. Sdn Bhd provides limited liability protection to shareholders, enhancing investor confidence and reducing personal risk exposure for stakeholders.

c. Businesses in Capital-Intensive Industries: Ventures in capital-intensive industries, such as manufacturing, technology, or real estate, may find Sdn Bhd suitable. Sdn Bhd companies allow for higher capitalisation and investment, facilitating growth and business expansion initiatives in industries with significant capital requirements.

d. Individuals Seeking Formalised Structure: Entrepreneurs who prefer a formalised business structure with clear governance and management processes may choose Sdn Bhd. Sdn Bhd companies offer a structured framework, including the appointment of directors and adherence to corporate governance standards, providing stability and accountability for the business.

Conclusion

Choosing between Partnership vs Sdn Bhd is a significant decision for entrepreneurs in Malaysia, with implications for the legal, financial, and operational aspects of the business. Understanding each business structure's difference between Sdn Bhd and partnership, advantages, and drawbacks is essential for making an informed choice aligned with business goals and objectives. 

Consulting with legal and financial advisors can provide valuable guidance in navigating the complexities of business formation and structuring. The proper business structure will ultimately pave the way for sustainable growth, profitability, and success in the Malaysian business landscape.