We get it. You're excited to commence business and you wish to take the easiest (arguably more convenient) route in setting your business up officially and formally. After all, setting up via an enterprise may also cost just a fraction of what it be incorporating a Sdn Bhd.
However, below are certain key legal considerations you may want to take into account when deciding on setting up an enterprise instead of incorporating a Sdn. Bhd.
What is an Enterprise?
An enterprise is an uncomplicated business entity that can be swiftly registered. Numerous business proprietors are attracted to its straightforwardness and convenience, all while retaining full authority over the business's earnings.
This option is solely available to citizens of Malaysia and permanent residents. However, the ease of registration does come with certain risks. It functions as an ongoing business entity rather than a distinct legal entity, as it is closely linked to its owners.
What is a Sdn. Bhd.?
A private limited company known as a Sendirian Berhad (Sdn Bhd) can be formed in Malaysia by both Malaysian residents and individuals from other countries.
Difference in legal framework
From a perspective of legal organization, an enterprise is overseen by the Registration of Business Act 1956 and the Partnership Act 1961. It lacks a distinct legal identity, leading to the owner(s) and the business being viewed as a unified entity. As a result, any debts accrued by the business would entail personal responsibility on each owner.
In contrast, a Sdn Bhd functions under the Companies Act 2016, designating the Sdn Bhd as an autonomous legal entity with limited liability. It possesses the ability to generate income, own assets, enter into contracts, and engage in legal actions, thereby segregating your liabilities from those of the Sdn Bhd.
Ownership and Management
Regarding an enterprise, you have the option to either possess and oversee a Sole Proprietorship independently or partake in ownership and obligations through a Partnership alongside a maximum of 20 business associates. In addition to the business proprietors, it's feasible to employ staff to supervise the enterprise. It may be worth noting that in the event you wish to exit an enterprise that you co-own with another, you may be compelled under the law to post an advertisement in the public gazette, signifying your exit from the enterprise. Such inconvenience and not to forget the expenses to be incurred in doing so!
In the case of a Sdn Bhd, ownership is attributed to shareholders who contribute to the company's paid-up capital, while its management falls under the purview of directors. It's possible to be the sole shareholder and director of an Sdn Bhd without requiring a business partner. The upper limit for the number of shareholders an Sdn Bhd can accommodate stands at 50. This cap on shareholders can be extended by converting the Sdn Bhd structure into a public company status, denoted as a Berhad. The aforesaid requirement on posting an advertisement in the gazette when you exist as a shareholder is not present under the law with regard to a Sdn Bhd.
Signing of Agreements/Contracts
While you may assume the role of the designated individual signing the contract (irrespective of whether you're operating an enterprise or a Sdn Bhd), there's a fundamental distinction in how the agreement is entered into. In the case of an enterprise, you become a party to the agreement in your individual capacity. Conversely, for a Sdn Bhd, you sign the agreement representing the Sdn Bhd itself. The legal responsibility for the agreement rests with your Sdn Bhd, given its status as a distinct legal entity that is separate from its owner. This enables the Sdn Bhd to engage in agreements in its own right.
In a stricter sense, due to the separate legal entity status of a company, any agreement signed by a director or an authorized representative necessitates approval and endorsement from the board of directors. To elaborate, the directors must pass a board resolution granting consent for the agreement's execution and empowering a designated individual within the company—such as a director or CEO—to finalize the agreement. In practice, the board might delegate these powers to specific roles, often referred to as the "limit of authority," such as the CEO or manager. This delegation minimizes the need for the board to convene each time a company agreement requires signing. (Note that the Companies Act 2016 allows for a company to just have one director).
However, for an enterprise, the absence of a distinct legal personality means that in the event of a breach of agreement, you assume personal liability and run the risk of going bankrupt.
Summary of key differences:
| Enterprise | Sdn Bhd |
|---|---|---|
Legal Framework | Registration of Business Act 1965 & Partnerships Act 1961 | Companies Act 2016 |
Ownership & Management | May be managed alone (Sole-prop) or in a partnership of a maximum of 20 partners | May have just one shareholder and up to a maximum of 50 shareholders. Managed by 1 or a group of directors. |
Requirement to advertise in the Federal Gazette upon exiting the entity | Yes, in a business partnership, the other partners have the right under the law to compel you to advertise your exit by publishing in the Federal Gazette. | No such requirement |
Signing of Agreements/Contracts | You are personally liable | Sdn. Bhd. will be liable. |
Although it is entirely acceptable to commence your business as a Sole Proprietorship or Partnership it is wise to transition your business into a Sdn Bhd when your business is expanding or has expanded. Should you remain as an enterprise, the bigger your business is, the bigger your personal liability shall be!
Let's Chat
Regardless of whether you wish to set up an enterprise or a Sdn Bhd., we as your business lawyers are here to assist you at each step of the way. We are also able to assist you in converting your existing enterprise into a full fledged Sdn. Bhd. Contact us now if you wish to have a chat on this topic. We offer free consultation.
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