Choosing the Right Option for Your SME, Business Structure & Tax Impact

1. Partnership

A Partnership is a business owned by two or more individuals who share the business profits, losses, and responsibilities. It is registered under the Registration of Businesses Act 1956 and is relatively easy to set up.

Tax impact

A Partnership is not taxed as a separate legal entity. Each partner is taxed individually on their share of the profits. Profits are reported under Form B for sole proprietors and partnerships. The personal income tax rates apply, which are progressive from 0% to 30%, depending on total income and tax reliefs. You cannot retain earnings in the partnership, profits are treated as personal income of the partners.

Pros

• • • Simple and low-cost to register and maintain.
    • Shared responsibilities and costs, reducing the individual burden.
    • Easier decision-making with close working relationships.

Cons

• • • Unlimited liability, if the business can’t pay its debts, partners’ personal assets can be seized.
    • One partner’s mistake can put the others at financial and legal risk.
    • Less attractive to investors or for business scaling.

Best For

• • • Small businesses or family-run ventures.
    • Businesses where trust is high between partners.
    • Entrepreneurs who want to keep things simple and low-cost.

2. Private Limited Company (Sdn Bhd)

A Private Limited Company is registered under the Companies Act 2016 and is a separate legal entity from its shareholders and directors. It can own assets, enter contracts, and sue or be sued independently of its owners.

Tax impact

The company files a Form C and pays corporate income tax on its net profit after deducting allowable business expenses. 17% on the first RM600,000 of taxable income for SMEs with paid-up capital ≤ RM2.5 million and annual revenue ≤ RM50 million. 24% for the remaining taxable income. The company can retain earnings for future reinvestment without passing them on to the owners which is useful for growth. Eligible for capital allowances on business assets, like machinery, vehicles, and equipment.

Pros

• • • Limited liability: Shareholders are only liable up to the amount they invested.
    • Can enjoy corporate tax benefits and better access to financing.
    • More credibility with banks, investors, and clients.
    • Easier to transfer ownership or bring in new investors.

Cons

• • • More paperwork: Must prepare audited financial statements annually.
    • Higher setup and compliance costs such as company secretary, auditor and SSM filings
    • Must adhere to corporate governance rules such as board resolutions and AGM/EGM

Best For

• • • Entrepreneurs planning to grow and expand their business.
    • Business owners seeking investors, government contracts, or bank loans.
    • People who want asset protection and lower long-term tax rates as income grows.

Quick Comparison Table

Resources: www.hasil.gov.my