Why It Is Important For Startups To Select The Right Business Structure?

Why It Is Important For Startups To Select The Right Business Structure_

The entity you select has legal, financial, and operational implication. It is prudent to do it right from the start. Find out which one suits you the best

The entity you select has legal, financial, and operational implication. Though one may start with an easy structure and move on to another structure later one, it might be prudent to do it right from the start.

Sole Proprietorship

The type of business structure you choose impacts your personal liability and which taxes you or your business must pay. For example, a sole proprietorship is the easiest to form and has less government regulations and tax obligations compared to other business structures. It is taxed at the personal level because you and your business are considered the same legal entity. This means you are solely responsible for the capital of the business, running of the business, liabilities of the business as well as repayment of the debts incurred by the business. For instance, in the medical line where liability is high, it is advisable to explore other business structure instead.

Company in Malaysia

On the other hand, a company enjoys various benefits and perks, but it comes with higher operational and compliance costs. The company is recognised by law to have a separate legal entity from its shareholders and directors. It also has unlimited capacity in the sense that it can sue and be sued; acquire, own, hold, develop or dispose of any property and do any act which it may do or to enter into transactions. Unlike partnership, the death of a business partner will not affect its legal personality – it continues to run until such entity is removed from the register through liquidation or deregistration by SSM.

Partnership

Partnership is governed by the Partnership Act 1961 where it states that the maximum number of partner in a partnership is capped at 20. However, if the partnership is governed by other specific written laws, such maximum limit does not apply. For example, doctors, lawyers, accountants, and architects. In Malaysia, the businesses which make the best use of partnership structures are small and medium-sized enterprises (SMEs). Partnership are relatively easy to form, has low startup and compliance costs. The liability is shared among all partners, and tax rates tailored to suit each partner. However the business continuity of the partnership will be affected if a partner dies, quits, or leaves the partnership in any other manner. In such a situation, the business could be closed or the beneficiaries might not receive what the departed partner left behind.

Limited Liability Partnership (LLP)

Over the years, the business scene has developed a new form of entity by merging the features and concepts found in traditional partnership vis-à-vis company to form this new concept called Limited Liability Partnership (LLP). An LLP must have at least 2 partners (who may be individuals or body corporates) but there is no cap on the maximum number of partners. The biggest advantage of forming an LLP is that an LLP is a body corporate and has a separate legal personality from its partners (hence limited liability!). It also has perpetual succession whereby any change in its partners will not affect its existence. Even though the partners will not be personally liable for the debts and liabilities of the LLP, they will still be personally liable if they commit a tortious wrong. Another distinctive feature of an LLP is that it only needs to keep a true and fair financial statement, where such statement does not need to be audited or lodged with SSM.

Why should you hire a professional firm specialised in incorporation, rather than trying to incorporate their company on your own?

Hiring a professional firm specialised in company incorporation can help you with all the registration formalities and to provide advice so that you can avoid common errors or mistakes. Business owners will be able to clarify matters pertaining to structure, taxes, compliance from professionals before making a decision on which business structure to form. There are many more documents to be prepared and filed with the relevant authorities after incorporation which are time consuming and usually unfamiliar by business owners. Therefore, it is best to leave those to the professionals so that you can focus on your business.

MISHU has resources and partnerships in many key areas required by a business owners and would be able to provide a more holistic advice and services.

The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.

The entity you select has legal, financial, and operational implication. Though one may start with an easy structure and move on to another structure later one, it might be prudent to do it right from the start.

Sole Proprietorship

The type of business structure you choose impacts your personal liability and which taxes you or your business must pay. For example, a sole proprietorship is the easiest to form and has less government regulations and tax obligations compared to other business structures. It is taxed at the personal level because you and your business are considered the same legal entity. This means you are solely responsible for the capital of the business, running of the business, liabilities of the business as well as repayment of the debts incurred by the business. For instance, in the medical line where liability is high, it is advisable to explore other business structure instead.

Company in Malaysia

On the other hand, a company enjoys various benefits and perks, but it comes with higher operational and compliance costs. The company is recognised by law to have a separate legal entity from its shareholders and directors. It also has unlimited capacity in the sense that it can sue and be sued; acquire, own, hold, develop or dispose of any property and do any act which it may do or to enter into transactions. Unlike partnership, the death of a business partner will not affect its legal personality – it continues to run until such entity is removed from the register through liquidation or deregistration by SSM.

Partnership

Partnership is governed by the Partnership Act 1961 where it states that the maximum number of partner in a partnership is capped at 20. However, if the partnership is governed by other specific written laws, such maximum limit does not apply. For example, doctors, lawyers, accountants, and architects. In Malaysia, the businesses which make the best use of partnership structures are small and medium-sized enterprises (SMEs). Partnership are relatively easy to form, has low startup and compliance costs. The liability is shared among all partners, and tax rates tailored to suit each partner. However the business continuity of the partnership will be affected if a partner dies, quits, or leaves the partnership in any other manner. In such a situation, the business could be closed or the beneficiaries might not receive what the departed partner left behind.

Limited Liability Partnership (LLP)

Over the years, the business scene has developed a new form of entity by merging the features and concepts found in traditional partnership vis-à-vis company to form this new concept called Limited Liability Partnership (LLP). An LLP must have at least 2 partners (who may be individuals or body corporates) but there is no cap on the maximum number of partners. The biggest advantage of forming an LLP is that an LLP is a body corporate and has a separate legal personality from its partners (hence limited liability!). It also has perpetual succession whereby any change in its partners will not affect its existence. Even though the partners will not be personally liable for the debts and liabilities of the LLP, they will still be personally liable if they commit a tortious wrong. Another distinctive feature of an LLP is that it only needs to keep a true and fair financial statement, where such statement does not need to be audited or lodged with SSM.

Why should you hire a professional firm specialised in incorporation, rather than trying to incorporate their company on your own?

Hiring a professional firm specialised in company incorporation can help you with all the registration formalities and to provide advice so that you can avoid common errors or mistakes. Business owners will be able to clarify matters pertaining to structure, taxes, compliance from professionals before making a decision on which business structure to form. There are many more documents to be prepared and filed with the relevant authorities after incorporation which are time consuming and usually unfamiliar by business owners. Therefore, it is best to leave those to the professionals so that you can focus on your business.

MISHU has resources and partnerships in many key areas required by a business owners and would be able to provide a more holistic advice and services.

The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.

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