1. Reduction of business owner’s liability
As its name suggests, the owners (or directors) of a registered limited liability company are only liable for debts owing by the company. In other words, business owners and entrepreneurs keep their own assets and liabilities separately from that of the business. This allows business owners to preserve personal wealth and assets and prevent adverse actions – which are being taken against the company – to be taken up against its owners as well. In contrary, if the business is a sole proprietorship, legal action like lawsuits and letter of demands are issued directly to the owners, hence risking the business owner’s or entrepreneur’s personal belongings.
2. More protection under the law
Companies set up in Malaysia are governed under the Companies Act 2016. The Act prescribes various laws and conditions to set up and run businesses in Malaysia, and contains rules which protect businesses under the local jurisdiction. In the event of legal action being taken against your company, the court will usually fall back on the statutes passed in the Companies Act 2016. Due to the detailed statutes prescribed in the Companies Act 2016, and various actual cases which makes reference to the Companies Act 2016, it will be easier to for your legal counsel to help you prepare for any court case or legal action taken by/against your business. On the other hand, sole proprietorships in Malaysia are governed under the Registration of Business Act 1956, which experts have agreed is much more ambiguous and provide far less legal protection to the business owners compared to the Companies Act 2016.
3. Better funding and investment options
As a registered company, your accounts will have to be audited by an external auditor and lodged with the Companies Commission of Malaysia (SSM) on an annual basis. The benefit of being audited is that it will be easier for your company to obtain external funding and investments. This is mainly because as your financial results have been reviewed by an external party, this provides assurance to banks and investors that your business results are accurate and not made up. In addition, another alternative to debt financing is equity financing – whereby you can issue shares of your company to potential investors instead of taking up additional debt. This is a common method for startups to raise funds, as they do not want to be burdened by excessive debt. Sole proprietors do not have these financing tools available to them, and will have to rely on personal loans to obtain the necessary financing for their business.
4. Easy transfer of ownership and business continuity
Ownership of a registered company is determined by its shareholdings. Shareholders of the company own a portion of the company. In the event one of the business shareholders want to give up his share of ownership, his shareholdings can be easily transferred to another investor or share among the remaining existing shareholders. Furthermore, the value of the business and shares can be easily determined, as registered companies are required to have audited accounts verified by an external auditor, which can be used to derive the value of the business and the value of shares of any non-listed entities. For sole proprietorships, it is significantly more difficult to transfer ownership, as there are no shares or consideration to be transferred between the existing owner and potential buyer. It is difficult to determine the value of a sole proprietorship without any proper audited accounts or financial evidence to refer to. Due to the easy transfer of ownership of registered companies, this indirectly allows company owners to have business continuity, whereby it means that even when the original owners are no longer around, he or she can sell/transfer their shares to pass on business ownership to relatives or children to carry on the business.
5. Higher administrative costs
One of the cons of registering your business as a company is the higher costs associated with setting up a company. These costs mainly includes audit fees, tax agent fees, secretarial fees and other annual registration fees. As mentioned above, because a company is a formal legal structure, these are some of the additional costs which have to be incurred due to its status. A sole proprietor usually does not have to incur these expenses.
6. More regulatory and reporting requirements
A company requires significantly more paperwork like audited accounts, tax computations and lodgement of directors’ resolutions with the respective authoritative bodies. There are also various deadlines which companies have to adhere to, which includes annual return filing and annual tax computation which have to be submitted to the SSM and IRB in a timely manner. Failure to comply with these requirements will result in hefty fines and penalties. In the worst case scenario, your business might be suspended due to violation of the Companies Act 2016 and other local legislations.
Despite the few cons above, the positives of setting up a registered company significantly outweighs the negatives. With proper business advice, these cons can be easily addressed and resolved. As such, we usually propose to our clients to consider setting up a limited liability company for the benefit of their business and to protect their personal interest and assets. If you are interested to learn more about setting up a registered company, feel free to contact us at Rockwell Global Solutions and we will get our representatives to assist you.
Published by : Leanne Chong - Marketing Counselor of Rockwell Global Solution
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