Name: Pavittra a/p Chandra Segar

Intake: Foundation In Business, July 2022

Course Title: Introduction to Accounting

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Table of Contents

Introduction...........................................................................................................................................3

Types of Business Entities in Malaysia.................................................................................................3

Similarities and Differences between Three Types of Business Entities...............................................4

Advantages and Limitations of The Three Types of Business Entities..................................................7

Conclusion: Recommendations To Overcome Challenges Faced By The Business Entities.................9

Reference:............................................................................................................................................10

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Introduction
A business entity is an organization formed by one or more people with the intention of

conducting trade, doing business, or engaging in similar activities. The idea of a business

entity is important because it keeps the owner and the business apart. This report discusses

about three types of business entities in Malaysia, which are sole proprietorship, partnership

and private limited company.

Types of Business Entities in Malaysia

The most popular and straightforward option for a legal business structure in Malaysia is the

registration of a sole proprietorship. Companies Commission of Malaysia (Suruhanjaya

Syarikat Malaysia) and the Registration of Businesses Act of 1956 both regulate sole

proprietorship. A sole proprietorship is a company that is entirely owned by one person who

uses his or her own name on identification documents or a trade name. The business owner

must be a Malaysian citizen or permanent resident in order to form a sole proprietorship. In

Malaysia, sole proprietorship registration is not permitted for foreigners or corporate legal

entities. Unique characteristics of a sole proprietorship include quick and simple registration,

minimal corporate tax obligations, fewer formal business requirements, ease of winding up,

and lowest annual upkeep.

Secondly, A partnership is a business entity owned by two persons but not exceed to twenty

persons at one time. An entity cannot use the name on its identity card as its company name.
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To operate a business, only a Malaysian citizen or permanent resident may register a

partnership. Partnerships are intended to help start up companies test their business plans and

investigate new markets. A designated legal advisor typically develops the partnership

agreement, which specifies the obligations and liabilities of each partner, the terms

oftermination, and the procedures for resolving intra-partner disputes. Depending on how

much each partner has invested, they are all obligated to split the business's assets and

liabilities.

Moving on to the next business entity, a private limited company is a small or medium-sized

business with a simple registration procedure at a low registration fee of MYR 1,060. This

kind of business structure is referred to as a "legal person." The Company is able to bind

contracts, own property, and bring legal actions against third parties in its own name. The

finest feature is that it enables an entrepreneur to maintain their assets and finances

independently of their firm. They are only responsible for the Company's debts in the amount

they contributed to the venture. Therefore, this corporate structure allows a company to make

investments without putting stockholder personal money at risk. Foreign investors are now

permitted to solely own a company following the amendment of the Company Act of 1965 to

the Company Act of 2016, eliminating the requirement to name a local nominee director.

With the exception of vital sectors for national interest, this is permitted in the majority of the

industries that are present in the nation. To launch a business, forming a private limited

company is the best option.

Similarities and Differences between Three Types of Business

Entities
When sole proprietorship is compared to partnership, the similarities are the owners of both

business entites pay only personal income tax, not business income tax. A partnership does

not pay taxes on its own; however, it is required to file an annual partnership return with the

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Internal Revenue Service. Instead, much as sole proprietorships transmit income through to

the owners, gains and losses are "passed through" to the owners. There is no "double

taxation" involving any entity. That aside, because they are easy to set up and typically do not

require registration with the state business registrar, sole proprietorships and partnerships are

both fairly common business structures. Just as a partnership is created when two people start

a business together, a sole proprietorship is created when one person starts their own firm. In

general, neither firm must pay state filing fees associated with other business types, including

corporations, in order to be established.Furthermore, partnerships and sole proprietorships

have a limited lifespan since they are not distinct from their owners. The company also ends

if the owners leave or pass away. If another person is taking over the company, he must form

his own sole proprietorship or partnership. The number of owners in a partnership vs a sole

proprietorship is the most prominent difference. The owner of a solo proprietorship is the

only one. In contrast, a partnership requires two or more people to create. Along with that, a

sole proprietor will only be able to rely on his or her own ability to raise the necessary capital

for the business and may need to approach banks and other financial institutions to apply for

financing. With partnerships, multiple partners have the ability to combine their resources to

raise the required amount of money. When it comes to risk, there is no doubt that sole

proprietor carries more of it than partnership as all the partners share the risk of running the

business.

Moving on to private limited company and sole proprietorship, the main distinction between

the two is that whereas the stockholders of a private limited company have some defined

liabilities, the proprietor of a sole proprietorship firm has vast liabilities. Additionally, in the

case of a sole proprietorship business, failing to pay debts can lead to the confiscation of the

owner's personal assets; whereas, in the case of a private limited business, only the

shareholders' investment is at danger in the event of nonpayment of obligations. Secondly,

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the board of directors in a private limited company has the authority to make decisions. In

contrast, the owner or proprietor of a sole proprietorship firm is independent and responsible

for all decisions. When it comes to taxes, a private limited company pays more than a sole

proprietorship. Due to the fact that a sole proprietorship is regarded as a single entity, the

owner is only required to file income taxes on an individual basis. A private limited company

is regarded as a division distinct from its owners and as such must pay corporate taxes.

Besides, unlike sole proprietorship businesses, which have limited financial resources, private

limited companies have unlimited resources. The explanation is straightforward: unlike a

private limited company, which can have up to 200 shareholders at once, a sole

proprietorship has just one shareholder, meaning that more money can be raised by selling

firm shares to more investors.

The biggest difference when it comes to partnership and private limited company is the

creation of the firm. While a Private Limited Company must get Compulsory Registration,

the registration of a partnership firm is not required. A partnership must have at least two

partners in order to form. There must be a minimum of two members and a maximum of fifty

for private corporations in order to form a private limited company. Another difference

between a private limited company and a partnership is that there is no minimum capital need

for establishing a partnership firm, but it is 1 lakh for a private company. Other than that,

there are no formalities that must be completed in the event of a dissolution of the partnership

firm. However, there are numerous legal procedures that must be followed in order to wind

up a Private Limited Company. Liability is one of the most significant distinction between a

partnership and a private limited company. The joint and individual liability of partners in a

partnership firm is uncapped. In contrast, the shareholder's obligation is restricted to the

shares they own.

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Advantages and Limitations of The Three Types of Business Entities
The business entities stated above comes with its own pros and cons. One of the advantages

of choosing a sole proprietorship is that one can become his or her own boss. A sole

proprietor business owner is free to decide for themselves without wasting time consulting

with others. As a result, the owner would considerably benefit from the money without

having to share it with others if the option taken resulted in a fruitful path. Moreover, there

will be no corporate tax payments. Since the owner will directly benefit from the business's

profits and losses, they only need to report it as business income when calculating their

personal taxes. Besides that, forming a sole proprietorship is inexpensive. While the states

where they operate may have licencing requirements, additional paperwork and procedures

are often not as demanding for sole proprietors. As a result, starting one is less expensive than

starting a corporation. The drawbacks of sole proprietorship business structure is that it does

not protect personal assets from creditors. Through addition to making a claim against ones

corporate assets, such as in a lawsuit, someone else may also do so against his or her personal

assets, such as a house. The lacking of investors is also a disadvantage of sole proprietorship.

Most of the time, investors pass up chances to participate in sole proprietorships because they

prefer to acquire equity in return for their money. A sole proprietorship can only have one

owner, hence equity cannot be distributed. On top of that, the owner is responsible for all

debts, duties, and obligations. That holds true even if an employee or freelancer is to blame.

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When it comes to partnership, the advantages are that it has the lowest annual cost. In

contrast to other commercial entities in Malaysia, a partnership merely needs to submit an

annual renewal fee for its trade name, which costs MYR 60. The fact that a partnership firm

is not required to publish its accounts is also an advantage. As a result, business-related

matters are kept within the business. Thus, there is no possibility of trade secrets leaking, and

the firm's privacy is preserved. In addition, in a partnership, the partners share the work

among themselves according to their expertise. The division of labour, management is more

effective, which raises profitability. However, equal liability of each partner for losses and

debts is counted as a disadvantage. As a result of each partner's limitless personal liability,

that person is liable for any unethical commercial practises that their partner engages in.

Every choice a partner takes has the potential to have an impact on their own assets and

financial situation. The eventual decrease in stability of a business is also a disadvantage in

partnership. High levels of independence are available in partnerships, and this is in contrast

to the stability offered by an incorporated corporation. A death, birth, illness, or other

unforeseen event may have a significant impact on how well the firm operates because it

depends solely on the partners. More to that, in the same way that they share labour costs and

overhead costs, partners must also share earnings. While having a partner increases the

possibility of increasing revenue, it also implies that revenue must be divided in accordance

with the terms of the contract.

Moving on to private limited company, the owners' limited liability is a private limited

company's most important advantage. This indicates that the assets of the shareholders are

safeguarded in the event of a firm collapse. The owners' liability in the event of bankruptcy is

limited to the amount they invested in the business. To add more, private limited firms can

claim corporation tax relief on their profits, making them tax efficient. Businesses may save a

lot of money and see an increase in earnings as a result. Furthermore, private limited

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corporations have the option of paying their shareholders dividends, which are taxed at a

reduced rate.d Nonetheless, the disadvantage is that unlike sole proprietorships, a private

limited company's owners do not have complete authority over how the business is run. More

owners join the company when the founders choose to privately issue shares to others.

Founders often cannot make and carry out significant decisions when they have less control

without engaging other shareholders. Besides that, private limited businesses are subject to

stricter legal restrictions than sole proprietorships and partnerships since they have a distinct

legal personality from their owners. To add up, limited companies have higher costs than

other business structures, due to the need to comply with company law and file accounts at

Companies House.

Conclusion: Recommendations To Overcome Challenges Faced By

The Business Entities
To sum it up, although plenty of limitations in the business entities, it is also possible to

overcome it. Like mentioned above, taking all the responsibility can be challenging for a sole

proprietor. The best thing one can do to get through this difficulty is to create and follow a

business plan. Putting things into perspective and developing a backup plan can also be

accomplished by speaking with a business development coach or mentor. It will be much

simpler to assume the duty if the woner can anticipate potential problems before they occur.

Furthermore, most of the time, partnerships end. A person may leave because they are

dissatisfied with the situation or just to explore another opportunity. Because of this, it's

crucial to be ready for two potential outcomes. Create backup measures to safeguard oneself

and one's business before the partner decides to quit. Second, if the business ceases to be

profitable for him, the owner should mentally be ready to go. Another way to overcome

limitations faced by a private limited company is that to replace old strategies with new ones.

Some barriers are the product of our ingrained behaviours, where we cling to outdated

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business practises since they are what we are most familiar with. Using outbound marketing

techniques exclusively without taking into account the benefits of inbound marketing

techniques is one such instance.

Reference:
1. Prakash, P. (2020). Types of Business Entities. [online] NerdWallet.

2. www.carboncollective.co. (n.d.). Business Entity Concept | Importance, Limited

Liability, Types, Examples.

3. L & Co. (n.d.). What is Sole Proprietorship - L & Co Chartered Accountants.

4. Malaysia Company Registration Specialist | Paul Hype Page & Co. (n.d.). Business

Partnerships in Malaysia.

5. Tiwiyah Kumaran (2019). What is a private limited company in Malaysia? | Setting

Up a Company. [online] Paul Hype Page & Co (Malaysia).

6. Shopify. (n.d.). 4 Advantages and 5 Disadvantages of a Sole Proprietorship.

7. Malaysia Company Registration Specialist | Paul Hype Page & Co. (n.d.). Sole

Proprietorship in Malaysia

8. Legal Beagle. (n.d.). Similarities Between Sole Proprietorships and Partnerships

9. FundsNet. (2022). Sole Proprietorship vs Partnership

10. Prasanna (2021). Advantages and Disadvantages of Partnership Business | What is

Partnership? [online] A Plus Topper

11. www.ledgermax.pk. (n.d.). LedgerMax.

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12. www.linkedin.com. (n.d.). Difference between Partnership Firm and Private Limited

Company

13. Qureshi, J. (2022). Advantages And Disadvantages Of A Private Limited Company.

[online] Clear House Accountants

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