[Malaysia Tax Perspective] Should I start my business under sole proprietorship or a private limited company?
When starting a business, one of the most important decisions to make is choosing the right business structure. The two most common business structures are sole proprietorship and company (commonly known as “Sdn Bhd”). Both options have advantages and disadvantages, and it is important to consider these factors from a tax perspective before deciding.
A sole proprietorship is a business owned and operated by a single individual whereas a company is a legal entity incorporated under Companies Act 2016.
On Tax Rate
Sole proprietors report their business income and expenses on their personal tax returns (i.e. Form B) and there is no requirement to file a separate tax return for the business. The business income will be taxed at a progressive tax rate and the tax rates for the year of assessment 2023 are as follows:
| Category |
Chargeable Income (RM) |
Calculations (RM) |
Tax Rate (%) |
Tax (RM) |
| A | 0 - 5,000 | On the First 5,000 | 0 | 0 |
| B | 5,001 - 20,000 | On the First 5,000 | 0 | |
| Next 15,000 | 1 | 150 | ||
| C | 20,001 - 35,000 | On the First 20,000 | 150 | |
| Next 15,000 | 3 | 450 | ||
| D | 35,001 - 50,000 | On the First 35,000 | 600 | |
| Next 15,000 | 6 | 900 | ||
| E | 50,001 - 70,000 | On the First 50,000 | 1,500 | |
| Next 20,000 | 11 | 2,200 | ||
| F | 70,001 - 100,000 | On the First 70,000 | 3,700 | |
| Next 30,000 | 19 | 5,700 | ||
| G | 100,001 - 400,000 | On the First 100,000 | 9,400 | |
| Next 300,000 | 25 | 75,000 | ||
| H | 400,001 - 600,000 | On the First 400,000 | 84,400 | |
| Next 200,000 | 26 | 52,000 | ||
| I | 600,001 – 2,000,000 | On the First 600,000 | 136,400 | |
| Next 1,400,000 | 28 | 392,000 | ||
| J | Over 2,000,000 | On the First 2,000,000 | 528,400 | |
| Next ringgit | 30 | …… |
Example: If your chargeable income is RM700,000, the tax calculation would be: [RM133,450 + (RM100,000 x 28%)] = RM161,450
On the other hand, the corporate tax rate for a company is illustrated as follows:
|
Chargeable Income (RM) |
Tax Rate (%) |
| First RM150,000 | *15% |
| RM150,001 to RM600,000 | *17% |
| RM600,001 and above | 24% |
*The preferential tax rate is only applicable to Small and Medium Enterprises (SME).
Generally, a company must fulfil the following criteria in order to qualify as ‘SME’:
- Has less than RM2.5 million ordinary shares paid-up capital;
- gross business income not exceeding RM50 million; and
- less than 20% of the paid-up capital is owned by foreign companies or non-Malaysian citizen individuals.
Using the same example as above, the tax payable for the same chargeable income of RM700,000 is computed as follows:
| Chargeable Income | Tax Rate (%) | SME (RM) | Non-SME (RM) |
| First RM150,000 | 15% | 22,500 | n/a |
| RM150,001 to RM600,000 | 17% | 76,500 | n/a |
| Next RM100,000 | 24% | 24,000 | n/a |
| RM700,000 | n/a | 168,000 | |
| Total | 123,000 | 168,000 |
Based on the above situations, SMEs pays the lowest tax compared to non-SMEs and sole proprietorship even though everyone has the same RM700,000 chargeable income.
In short, if the income level of your new business is not expected to be high, choosing a sole proprietorship makes more sense.
Comparison 2: Tax Administration
Sole proprietorship
It’s important to note that the Inland Revenue Board (IRBM) will estimate your tax payable in advance and provide you with a tax instalment schedule (CP500). You are required to make bi-monthly payments according to the schedule, and any late payment for each instalment will incur a 10% penalty.
If you don’t agree with the proposed schedule, you have the option to submit an appeal to request a revision. Starting from Year 2023, you will be granted two opportunities to revise your instalment schedule, with the latest deadline being the 30th of June and the 30th of October.
It’s crucial to keep in mind that if the final tax payable amount varies significantly from the revised tax estimation, additional penalties will be imposed under section 107B(4).
How’s the penalty works?
If the tax payable exceeds the total of the instalments payable and the difference is more than thirty per cent of the tax payable, then, the amount of the difference which exceeds thirty per cent of the tax payable will be imposed penalty of 10%.
| RM | ||
| Tax payable as per Form B [A] | 100,000 | |
| Less: | Tax estimation as per CP500 | (30,000) |
| 70,000 | ||
| Less: | 30% of the tax payable (30% x 100,000) | (30,000) |
| Differences [B] | 40,000 | |
| Sec. 107B(4) penalty @10% [C = 10% x B] | 4,000 | |
| Total payable to IRB [A + C] | 104,000 |
If no revision was submitted and you pay promptly according to the CP500 schedule, there will be no penalty under sec. 107B(4).
Company
Companies are required to submit their tax estimation via Form CP204 30 days before the commencement of the basis period of a year of assessment. For instance, if your company’s account is expected to close on 31 December 2024, then the last date to submit tax estimation is 30 November 2023. As for newly incorporated companies, CP204 must be submitted within 3 months from the date of commencement of operation.
Why submission of tax estimation is important?
If no CP204 is submitted, IRB will impose penalty under sec. 107C(10) and the calculation will be as follows:
Example A:
| RM | ||
| Tax payable as per Form C [A] | 100,000 | |
| Less: | Non-submission of CP204 | – |
| 100,000 | ||
| Sec. 107C(10A) penalty @10% [B = 10% x A] | 10,000 | |
| Total payable to IRB [A + B] | 110,000 |
Example B:
If you have submitted CP204, but the tax estimation is nil. The penalty calculation will be different.
| RM | ||
| Tax payable as per Form C [A] | 100,000 | |
| Less: | Tax estimation as per CP204 | – |
| 100,000 | ||
| Less: | 30% of the tax payable (30% x 100,000) | (30,000) |
| Differences [B] | 70,000 | |
| Sec. 107C(10) penalty @10% [C = 10% x B] | 7,000 | |
| Total payable to IRB [A + C] | 107,000 |
It’s crucial to submit your CP204 on time to avoid incurring a hefty penalty. Neglecting to do so can lead to unnecessary financial strain on your business, especially if you’re already struggling with cash flow issues.
However, it’s not just the penalties that you need to be wary of when it comes to tax estimation. Overly estimating your tax liability can also lead to monthly cash flow liquidity issues, which can negatively impact your business operations. It’s important to strike a balance between accurate tax estimation and ensuring that you have enough cash flow to keep your business running smoothly.
It’s also important to note that the existing refund mechanism may not guarantee that overpayments will be refunded on time. This can further exacerbate your cash flow issues and create unnecessary financial stress.
Is there a chance to revise my tax estimation?
If you’ve submitted your tax estimation and realize that you’ve underestimated the tax, don’t worry, you still have a chance to revise it. You can do this by filing a CP204A form during the 6th or 9th month of the basis period.
Conclusion:
While tax implications are undoubtedly an important consideration when choosing between a sole-proprietorship and a company, it’s important not to overlook the legal perspective. By setting up a separate legal entity, you can reduce your business’s risk and ring-fence your liability.
Sole-proprietorship may seem like an attractive option due to its simplicity and ease of setup, but it exposes you to unlimited personal liability. This means that your personal assets, such as your home or car, could be at risk if your business incurs debts or legal issues. On the other hand, setting up a company provides a legal shield that helps protect your personal assets and limits your liability.
There are many more differences between running a business via sole proprietorship and a company. It’s important to take a holistic view and consider all factors, including legal and financial implications, before making a decision. Seeking professional advice from a licensed tax agent or lawyer can help you make an informed decision that sets your business up for success.
Disclaimer:
Please note that the information provided is intended solely for the purpose of sharing knowledge and should not be construed as professional advice for any other purpose. We highly recommend that you seek the guidance of a licensed tax agent or lawyer for any professional advice you may require.
