It could be a café, an online store or simply an individual providing a service or selling commissioned products such as insurance or unit trusts. Setting up a business is not as straightforward as signing the forms and paying the fees.
First, there are some questions: Is it necessary to register a business entity right at the beginning? What type of entity is the most appropriate? What if the business does not take off?
Here are some pointers for those contemplating setting up a business.
First things first: Test the business
First of all, don’t worry about business registration. What is more important is whether the new start-up is a viable idea. If a physical shop is not needed to operate the business, test its viability first. See if it can be profitable.
For example, someone wants to become a unit trust agent. They did the required training and took the examination in the first month and then started to sell a unit trust fund to their circle of friends and family.
If there is progress and some income within the first month, they can then go on to register a business entity with the Companies Commission of Malaysia (SSM).
But what if they had registered the business first and for whatever reason gave it up soon after getting it off the ground? The effort and fees involved in registering the business would be wasted. If one wants to stop operating a business, it must be officially closed, which means deregistering the company at SSM.
Once the business has seen some success and the individual knows it is something they would pursue for a while, at least two or three years, now is the time to register it.
What type of business entity should be registered? There are a few choices. Different industries, nature of business and liability risk do require distinct business entities.
The simplest form of business entity
Most often, the most suitable choice as a start is the sole proprietorship (SP) or partnership. These are generally known as enterprises. The registration is simple and the most cost-effective among all business entities.
Walk in to the nearest SSM branch with one’s MyKad and at least three names for the business in mind. It will cost about RM100. The yearly renewal is less than RM100.
It is normal to start with an SP or partnership unless there are circumstances that require a more costly business entity.
Limited liability partnership (LLP) or a Sdn Bhd
Under certain circumstances, it would be advisable to set up a limited liability partnership (LLP) or a Sdn Bhd, a private company limited by shareholding. These include:
- If net profit is going to be over RM200,000 in the first year, an LLP or Sdn Bhd would provide some tax advantages.
- Investors are needed as shareholders in the company.
- Foreign workers are required. A Sdn Bhd is more likely to get a permit for that.
- The person registering the business is not a Malaysia citizen. Foreigners cannot register an SP.
- The nature of the business is high risk and it is necessary to protect one’s wealth from exposure to business liability.
- There are many partners in the business.
The procedure to incorporate a Sdn Bhd or an LLP is a little longer and more costly than an enterprise. It can cost RM500 to RM5,000.
To incorporate a Sdn Bhd, one is required to engage a reliable company secretary firm that will guide one through the process. It cannot be done on one’s own.
However, registering an LLP can be done on one’s own. Personal finance blogger Aaron Tang has written a useful guide for this. Other than the one-time set up fee, there will be recurring maintenance and reporting compliance costs.
- Company secretary.
- Accounting fee.
- Audit fee (compulsory for a Sdn Bhd).
- Tax submission.
Annual reporting compliance:
- Submit tax payable estimation to the Income Tax Department (LHDN).
- Prepare audited financial statements for shareholders.
- Submit annual return to the registrar (SSM).
- Submit tax return to LHDN.
If the company has even one employee, it must comply with the recurring monthly administration and contributions to:
- Employees Provident Fund (EPF).
- Social Security Organisation.
- Employment Insurance System.
- Monthly income tax deductions.
- Human Resources Development Fund.
When to upgrade from an enterprise to an LLP or Sdn Bhd
A business owner who operates as an enterprise can “upgrade” to a Sdn Bhd or an LLP when the business grows and it becomes more tax-efficient to be incorporated.
Take someone who started a café two years ago. Until this year, there was not much profit but now it is slated to make a net income of RM200,000. Incorporating a Sdn Bhd or an LLP can reduce the tax burden.
The proprietor can put themselves as an employee of the business and pay themselves a salary. The tax rate on the salary will not be higher than 16% and the remaining profit in the company is subject to a 17% tax rate. Without a separate business entity, the tax rate would be higher.
Furthermore, contributions can be made to the EPF and the employer’s contribution can be maxed out to 19%, which is essentially a business expense. Meanwhile, that contribution will be tax free and can be withdrawn for retirement tax free.
The tax saving has to justify the recurring cost involved in operating a Sdn Bhd or LLP.
Assume the café proprietor saves RM11,000 income tax for this year. After paying the company’s maintenance cost of RM5,000, they still net a savings of RM6,000.
Talk to an accounting firm before making a decision
Before one decides to incorporate a business, it would be wise to 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 the financials before and after incorporation. Most will do these without charge. Then one can make an informed, beneficial decision.
This article first appeared in kclau.com
KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.