You want to start a business.
It could be a cafe, an online store, or simply you are working for yourself by providing some services, or selling commissioned products like insurance and unit trusts.
Do you need first to register a business entity?
What type of entity is the most appropriate?
What if your business couldn’t take off at all?
Having gone through the process myself, I would love to share my experience with you so that you can make the best decision for your current situation.
First thing first: Test your Business
First of all, don’t worry about business registration. What is more important is whether your new startup is a viable idea. If you don’t need a physical shop to operate, why not test your business viability first? See if it is profitable.
For example, John wanted to become a unit trust agent. He went through the required examination and training in the first month. Then John started to sell unit trust fund to his circle of friends and family. If he is making progress and see some income in the first month, he can then go on to register a business entity with SSM.
On the other hand, what if John didn’t like it, or he gave up after a month? Then he just wasted the effort and fees involved in registering the business if he had already done so. Because when you don’t operate a business any longer, you will want to officially close it, which means to deregister your company at SSM.
Well, I bet you would love to see your business successful. Once you know for sure it is something you would pursue a while, at least like 2-3 years, now is the best time to register your business. What’s the entity you should register? There are a few choices. Different industry, business nature and liability risk do require a distinct entity.
The Simplest Form of Business Entity
Most often, the most suitable choice as a start is the sole proprietorship or partnership. These are generally known as enterprises. The registration is simple and the most cost-effective among all business entities. You need to walk-in to the nearest SSM branch with your IC and at least three business names in mind. It will cost around RM100 to get it done. The yearly renewal is also less than RM100.
It is perfectly normal to start with the SP or Partnership, unless you have some circumstances that require a more costly business entity.
Do you need to incorporate an LLP or Sdn. Bhd.?
Are you in one of these situations?
- You are pretty sure that your net profit is going to be over RM200,000 in the first year, then an LLP or Sdn Bhd will give you some tax advantages.
- You have investors, and you need to have them as shareholders in your company.
- You need to hire foreign workers. A Sdn. Bhd. is more likely to get a permit for that.
- You are a foreigner (not a Malaysia citizen). Foreigner can’t register a Sole-Proprietorship
- Your business nature is high-risk, and you want to protect your wealth from exposure to business liability.
- You have many partners in the business.
Then you can consider jumping straight into the incorporation of a Sdn Bhd or an LLP. The procedure will be a little longer and more costly, requiring anything from RM500+ to RM5000. The first step to incorporate a Sdn. Bhd. is to engage reliable Company Secretary firm. They will guide you through the process. By the way, their service is required and you can’t DIY.
However, for LLP, you can do it on your own. There is a guide written by my friend Aaron Tang.
Other than the one-time set up fee, you will also need to pay recurring maintenance and reporting compliance cost.
- Company secretary
- Accounting fee
- Audit fee (compulsory for a Sdn. Bhd.)
- Tax submission
Annual reporting compliance:
- Submit tax payable estimation to LHDN
- Prepare Audited Financial Statements for shareholders
- Submit Annual Return with the Registrar (SSM)
- Submit Tax Return to LHDN
Please also take note that if you have an employee, you will need to comply with the recurring monthly administration and contributions in regards to:
- EPF: Employees Provident Fund
- SOCSO: Social Security Organisation
- EIS: Employment Insurance System
- PCB: Potongan Cukai Bulanan
- HRDF: Human Resources Development Fund
The Best Time to Upgrade from an Enterprise to an LLP or Sdn. Bhd.
Usually, a business owner who operates as an enterprise can “upgrade” to a Sdn Bhd or an LLP when your business grows and become more tax-efficient to be incorporated.
Consider Susan, who started her cafe two years ago. She didn’t make much profit until this year. Foreseeing that her business will be pulling in RM200,000 net income, she can incorporate a Sdn Bhd or an LLP to save the total amount of income tax burden.
She can draw a salary by putting herself as an employee of her business. She can pay not higher than 16% tax on her salary. Meanwhile, the remaining profit in her company is subjected to a 17% tax rate. If not, she will be paying a higher tax rate without a separate business entity. Furthermore, she can contribute to EPF and max out the employer’s contribution to 19%, which is essentially a business expense. Meanwhile, that contribution will be tax-free, and she can withdraw for her retirement also tax-free.
The tax saving has to justify the recurring cost involved in operating a Sdn. Bhd or LLP business entity. In Susan’s case, let’s assume that she saves RM11,000 income tax for this year. After paying her company’s maintenance cost of RM5000, she still nets an RM6000 saving.
Talk to an Accounting Firm Before Making Up Your Mind
Before you decide to incorporate a business, I suggest that you consult a full-service accounting firm. Full-service means a firm that not only does accounting, but also provides company secretary and auditing services. Ask them to project your financials before and after incorporation. Most of them will do these for you without charges. Then you can make an informed decision if it benefits you.
If you are looking for a recommendation of an accounting firm, contact:
JB & KL: L&Co (Ms Kai Tian +60 18-778 9800)
Penang: Shinewingtyteoh.com (Richard Oon)
Inform them you are referred by KCLau so you can get a special discount package to incorporate your business if you proceed with them.