Comparison or differences enterprise (sole trader & partnership) with private limited
company (Sdn. Bhd) in Malaysia
A private limited company advantages and disadvantages compared with retaining Enterprise extends beyond purely tax advantages. A private limited company will limit your liabilities for the debts of company. Here we summarise some of the advantages for help you decide should you convert your enterprise into a private limited
1. Liabilities of Owner
Enterprise – Unlimited
There is no distinction between business and personal money for self employed or partnership as all business debts & risks are the owners' personal responsibility.
Sdn Bhd – limited
Advantages are that the company is a separate corporate body and liability for payment of debts stops with the private limited company, the owners, shareholders are not personally liable.
2. Taxes rate
Enterprise – Personal Tax
Not subject to income tax. The Profits made are added to the sole proprietor or partners' Personal income tax and the owner or partners are liable for this profit under personal income tax.
Sdn Bhd – Corporate Tax
Only subject to the 20% & 25% corporation tax rate (for small middle size company)
Enterprise – less flexible
Sole proprietor or partners (resident individual) is taxed on his chargeable income at graduated rates from 2% to 26% after the deduction of tax relief.
Sdn Bhd – more flexible (advantages)
Advantages come from the flexibility of being able to vary the mix of your personal income. You can determine how much you want to take out as salary, director's fees, bonus, dividend or benefits-in-kind and how much you want to leave in the company.
Employment income for family members
Your wife and family members as staff or directors, making company's income into their income. As you can control the company, this flexibility can create the most tax-efficient way.
Certain benefits-in-kind, e.g. motor car can taking advantage of prescribed scales. Many benefits are taxed on a more favourable basis for employees, including directors, than for the Enterprise.
EPF or approved schemes
For Contributions to EPF to give tax deductions for both employer and employee contributions, As Enterprise, your relief is limited to the
available to an employee.
There is the chance to enjoy tax incentives such as investment tax allowance, reinvestment allowance, pioneer status and others which only for company.
Personal Income 26% Tax Rate
The advantages increase where net taxable profit is above the self employment upper earnings limit as money can be left in the business and therefore only subject to the 20% & 25% corporation tax rate (for small middle size company) thereby avoiding the sole proprietor or partners 26% tax rate. Another possibility is to distribute the shares among family members to
reduce the risk of 26% tax.
Potentially small issues but there differences in the accounting treatment of deductible expenses such as charitable donations, entertaining expenses and use of home as office. A private limited company advantages consist of being able to claim such expenses as valid business expenses which would not be claimable in the sole trader basic accounts as treated as personal