Starting a business in Malaysia requires one crucial decision that will affect everything from your personal liability to how much tax you pay: should you form a partnership or incorporate a company? Both structures have distinct advantages and disadvantages, and the right choice depends on your specific circumstances, goals, and risk tolerance.
This guide breaks down the key differences between partnerships and companies in Malaysia to help you make an informed decision.
Understanding the Basic Structures
What is a Partnership?
A partnership in Malaysia is governed by the Partnership Act 1961. It is defined as a relationship between persons carrying on business in common with a view to profit. A partnership requires at least two partners and, for most businesses, is limited to a maximum of 20 partners (though certain professional partnerships like law firms and accounting practices may have more).
Partnerships are registered with the Companies Commission of Malaysia (SSM) under the Registration of Businesses Act 1956, making the process relatively straightforward and inexpensive.
What is a Company?
A company, specifically a private limited company (Sdn Bhd), is governed by the Companies Act 2016. Unlike a partnership, a company is a separate legal entity from its owners. This means the company can own property, enter contracts, sue, and be sued in its own name.
A Sdn Bhd requires at least one director, one shareholder (which can be the same person), and a company secretary. Registration is done through SSM and involves more documentation and ongoing compliance requirements.
Liability: The Most Critical Difference
Partnership Liability
In a general partnership, every partner has unlimited personal liability for the debts and obligations of the business. This means if your partnership cannot pay its debts, creditors can pursue your personal assets—your house, car, savings, and other property.
Furthermore, each partner is jointly and severally liable. If your partner makes a business decision that results in a massive debt, you could be held personally responsible for the entire amount, even if you had no knowledge of the transaction.
Company Liability
A Sdn Bhd offers limited liability protection to its shareholders. Your personal liability is generally limited to the amount of your investment in the company (your share capital). If the company fails, creditors typically cannot pursue your personal assets.
However, this protection is not absolute. Directors can be held personally liable in cases of fraud, wrongful trading, or breach of fiduciary duties. The corporate veil can also be lifted in certain circumstances where the company structure has been abused.
Taxation: Understanding the Financial Impact
Partnership Taxation
Partnerships in Malaysia are tax-transparent entities. This means the partnership itself does not pay income tax. Instead, each partner is taxed individually on their share of the partnership profits at their personal income tax rates.
For Malaysian tax residents, personal income tax rates are progressive, ranging from 0% to 30% depending on your chargeable income. If your share of partnership profits is substantial, you could find yourself in a higher tax bracket.
Company Taxation
Companies are taxed as separate entities at the corporate tax rate. For SMEs (companies with paid-up capital of RM2.5 million or less and not part of a group exceeding this threshold), the first RM150,000 of chargeable income is taxed at 15%, the next RM450,000 at 17%, and any amount exceeding RM600,000 at 24%.
Large companies pay a flat rate of 24% on all chargeable income. Dividends distributed to shareholders are single-tier dividends and are not subject to further tax in the hands of shareholders.
Depending on your profit levels and personal circumstances, a company structure may offer tax planning opportunities that partnerships cannot.
Governance and Management
Partnership Governance
Partnerships offer flexibility in management. Unless the partnership agreement states otherwise, all partners have equal rights in the management of the business and must be consulted on major decisions. This can be efficient for small operations but may become unwieldy as the business grows.
A well-drafted partnership agreement is essential. It should cover profit-sharing ratios, decision-making procedures, dispute resolution mechanisms, and exit strategies. Without a written agreement, the default provisions of the Partnership Act 1961 will apply, which may not suit your intentions.
Company Governance
Companies have a formal governance structure separating ownership (shareholders) from management (directors). Directors manage the day-to-day operations, while shareholders make major decisions through resolutions at general meetings.
The Companies Act 2016 imposes various compliance requirements: annual returns, financial statements, maintenance of statutory registers, and holding of annual general meetings (for public companies). While this creates administrative burden, it also provides structure and accountability.
Other Practical Considerations
Business Continuity
A partnership is inherently tied to its partners. The death, bankruptcy, or retirement of a partner can dissolve the partnership unless the partnership agreement provides otherwise. Companies enjoy perpetual succession—the company continues to exist regardless of changes in shareholders or directors.
Raising Capital
Companies can issue shares to raise capital, making them more attractive to investors. Partnerships are limited to contributions from partners or loans. If you anticipate needing significant external investment, a company structure is generally preferable.
Credibility and Perception
A Sdn Bhd often carries more credibility with banks, suppliers, and potential clients. Some government contracts and larger corporate clients may require you to be an incorporated entity to do business with them.
Cost and Complexity
Partnerships are cheaper and simpler to set up and maintain. Registration fees are lower, and there are fewer ongoing compliance requirements. Companies involve higher registration costs, mandatory company secretary fees, audit requirements (for most companies), and more extensive record-keeping obligations.
Making Your Decision
Consider forming a partnership if you are starting a small business with trusted partners, want minimal administrative burden, and the nature of your business carries low liability risk.
Consider incorporating a company if you want to protect your personal assets, plan to raise capital from investors, aim to build a business that can operate independently of its founders, or need the credibility that comes with a corporate structure.
Many businesses start as partnerships or sole proprietorships and later convert to companies as they grow. This is a common and practical approach, though it involves additional costs and procedures.
Seek Professional Advice
The choice between a partnership and a company has long-term implications for your liability, taxes, and business operations. Before making this decision, consult with a lawyer who can assess your specific situation and advise on the most suitable structure for your needs.
Disclaimer: This article provides general information about business structures in Malaysia and does not constitute legal advice. Business and tax laws are subject to change, and individual circumstances vary significantly. You should consult a qualified lawyer and tax advisor before making any decisions about your business structure.