This post is a part of a series based on my Law for Startups workshop at MaGIC in September 2015. It’s a basic introduction to legalities for startup founders. You can access the slides here.
Read the earlier posts for context:
- Law for startups in Malaysia — building on the best foundations.
- The legal landscape in Malaysia for startups — a hybrid of traditional corporate practices and Silicon Valley models.
One of the earliest decisions that a startup or small business founder will have to make is choosing the right business vehicle through which the business/idea will be carried out.
Business vehicle options
The most common business vehicle options in Malaysia are —
- sole proprietorships / partnerships;
- private limited liability companies (Companies / Sdn Bhd); and
- most recently, the limited liability partnership (LLP).
Sole proprietorships or partnerships are commonly where many businesses or ventures start off. But once your business shows promise for at least medium-term growth, I’d strongly advise incorporating a company and using that as your business vehicle.
Staying as a sole proprietorship or partnership for too long exposes you (and your business partner) to too much risk and personal liability.
LLPs are fairly new to Malaysia and still largely untested. For jurisdictions like Malaysia which have their legal foundations in English law, the LLP is a new concept. For Commonwealth jurisdictions, the legalities surrounding LLPs are very much a hybrid of European/US and English legal concepts.
The attraction of an LLP is that it provides the protection of limited liability, but also involves less cost and administrative and compliance obligations than a Sdn Bhd. An LLP is essentially a middle-ground between a sole proprietorship / partnership and a company.
Companies (specifically private limited liability companies, or Sdn Bhd in Malaysia) are straightforward and well-established — Malaysia’s Companies Act is dated 1965 and hasn’t really changed much since then.
A private limited liability company is a separate legal entity, and the shareholders are not liable for the company’s debts beyond the amount of paid-up share capital they have contributed (hence limited liability).
A company / Sdn Bhd is usually the best option
Each of the business vehicles above have their pros and cons. As every startup and business has its own unique circumstances and medium to long-term goals, there will obviously be many different factors to consider when choosing a business vehicle.
For a startup which has at least medium-term ambitions — such as attracting more co-founders, seed or angel funding, and Series A funding or a material amount of investment, I would generally always recommend a company / Sdn Bhd as a business vehicle.
Here’s a quick run-through of the benefits of a company / Sdn Bhd:
- I’ve already mentioned above that a company comes with the limitation of liability on the part of the owners. The LLP vehicle also comes with this benefit. With a sole proprietorship / partnership, the business owners are exposed to personal liability for the debts of the business.
- It is a very established business vehicle compared to an LLP. Being established comes with many benefits. It will be easier to deal with third parties on administrative issues such as opening bank accounts and applying for permits and licences. It will be easy to find accounting and tax advisers who are able to offer comprehensive advice.
- It is well-established in the law compared to an LLP. A business which is in the form of a company has many tried-and-tested options which are supported by law (statute, case law, and practice) — different classes of shares, option plans, convertible notes, regulations on Board seats and votes, and shareholders rights and votes. If your business is expecting or hoping for investment from third parties, equity investment is very common, and investors will almost always want a company as a legal entity for the business.
The above collectively gives an impression of permanence, familiarity, and stability to potential customers, co-founders, partners, and investors.
A common argument against choosing a company as a business vehicle is the high cost of incorporation and continued compliance. My advice is always to find out exactly what these costs are and then make an informed decision. Ask a company secretary for a quote.
It does not make sense for a business which is expecting a RM100,000 investment to be concerned with the relatively small cost of incorporating a company.
Many of the compliance requirements (such as holding annual general meetings) may also be scrapped once the amendments to the Companies Act come into force.
How to incorporate a company in Malaysia
Some brief points on setting up a company in Malaysia:
- Total cost is around RM3,000.00 (excluding GST). Covers professional fee of a company secretary (always engage a company secretary to avoid the hassle, and you will eventually need to engage one post-incorporation anyway) and the capital duty of RM1,000.00 (for authorised share capital of up to RM400,000.00). You may be able to get this cheaper, but I would always advise retaining an experienced and recommended company secretary, instead of taking a risk with an unknown to save RM200-300.
- Takes around 2-5 working days. Depends on name search issues (anything from two days to three weeks). Can buy shelf companies immediately.
- Minimum two resident directors. Professional service firms provide a nominee director service, though this may be expensive if the company is active — high director fees or deposits required due to the liability.
- Ongoing compliance and filing requirements. Holding of annual general meeting and various filing requirements with the CCM.
The basic post-incorporation corporate secretarial costs include secretarial retainer fees of approximately RM100.00 per month, and registered office address fees of approximately RM10.00 per month.
In the next post in the series, I tell you why startups should always get a good lawyer.