Converting from an Enterprise to a Sdn. Bhd. (Private Company)

Sole Proprietorship (Enterprise) is one of the most popular and easiest way to start your business. You can register your business as sole proprietorship under Registration of Business Act 1956 via SSM website and the registration cost for an enterprise are very affordable at only: 

New business registration/Business renewal

  • Personal Name = RM30.00 per year
  • Trade Name = RM60.00 per year 

The advantages of sole proprietor (enterprise) are:

  • Very affordable to start your business
  • Lesser corporate compliance requirements (such as filing of audited accounts, annual return and etc)
  • Easy to maintain
An enterprise has no legal status, whereby the owner and the business are considered as one entity. Thus, you will be personally liable for debts incurred by your business. It is very suitable if you running a small micro enterprise business on your own such as food stall, online commerce seller, optical shop and etc 

1. When should I consider to convert from a Sole Proprietorship (Enterprise) to a Private Company (Sdn Bhd)?

Usually when you feel your business are getting stable and aim to expand further, you may start considering what the benefits of Sdn. Bhd. and if you should convert your business into a Sdn. Bhd.

ComparisonSole Proprietorship (Enterprise)Private Company (Sdn. Bhd.)
1. Separate legal entityNo, the owner and the business are considered as one entityYes, separate legal entity
2. Ownership
1 person1- 50 shareholders
3. GovernanceNoneStated in Companies Act to segregate role of shareholder and director
4. Income taxTaxed under personal tax filing with graduated scale of rates at a maximum of 30%Corporate tax rate for SMEs (17% for the first RM600K chargeable income) and subsequently at 24%
5. Compliance requirementsMinimalFiling of annual return, financial statements and updates with SSM
6. FundingLimitedA variety of choices- bank loan, government funding, Equity crowd funding (ECF), Peer to peer financing (P2P) and etc

Once you understand the difference between sole proprietor (enterprise) and private company (Sdn Bhd) better, you may still trying to decide when it is a good time to convert. Here we try anaylze for you to compare cost to register and maintain a Sdn. Bhd. vs the potential tax savings

Simple IllustrationSole Proprietorship (Enterprise)Private Company (Sdn. Bhd.)
Annual cost to maintainRM1,000 (SSM and tax fee)From RM5,000 and above (depending on sale turnover/expenditure)
(Co sec, audit and tax fee)
Tax Calculation
Annual net profits (assumed same as taxable income)RM500,000RM500,000
Estimated income taxRM108,450
  • First RM400,000 income with RM83,450 tax
  • Next RM100,000 income @ 25% with RM25,000 tax
  • First RM600,000 @ 17% with RM85,000 tax

Total cost (annual cost + income tax)RM109,450RM90,000
Estimated SavingsRM19,450 (RM109,450 - RM90,000)
The potential tax savings of a Sdn Bhd could be even more if you do a proper tax planning and structure your remuneration package. Based on individual income tax scale rate, income exceeding RM70K will be taxed at 21% or more subsequently.
Below are 3 things to remember if you decide to proceed to convert from a enterprise to a Sdn Bhd ,
Tick √
Understand the relevant compliance requirements of a Sdn. Bhd.
Set aside a budget to pay cost to maintain a Sdn. Bhd.
Proper set of accounts and records are kept

2. How do i convert from a Sole Proprietor (Enterprise) to a Private Company (Sdn Bhd)

Technically a sole proprietor (enterprise) cannot “convert” directly into a private company (Sdn. Bhd.) because it is a different legal structure and set up.

The process of converting your business into a Sdn. Bhd. is more like a migration where you set up a Sdn. Bhd. and migrate your business from your enterprise.   

1. To register and incorporate a Sdn. Bhd.
You can check your preferred company name if it is available at SSM database. Usually SSM does not allow the exact same name as your enterprise business. You are advised to use a similar name.

Then you need to prepare the following information which are required for incorporation:
Company details
◼️ Proposed company names with its meaning
◼️ Principal business activities of the proposed company
◼️ Business address and contacts
◼️ Number of shares Paid-up capital information

Directors/Shareholders details
◼️ Photocopy of all directors and shareholders NRIC or Passport
◼️ Latest proof residential address of all directors such as utility bills (if different from NRIC)
◼️ Business occupation, email and contact number of all directors and shareholders
◼️ Percentage of shareholding of each shareholder

You may then hire a licensed company secretary to help with the incorporation with SSM which usually take 2-3 working days. If all are in order, you will be given the incorporation details (*incorporation date and company reg no*) and relevant documents:
◼️*Sec 14 Superform*
◼️*Sec 15 Notice of Registration*
◼️*Sec 17 Certificate of Incorporation*

2. To open company bank account, apply relevant licenses, and registration with various agencies (to prepare it ready for business)
After your Sdn. Bhd. is incorporated, you need to prepare it to be “ready for business”, such as:

  • To open bank account
  • To register with other agencies under your new Sdn. Bhd. – EPF, PERKESO, HRD Corp
  • To apply business license under your new Sdn. Bhd.
  • To update name card, signboard and etc
3. To decide a cut off date and inform all customers, suppliers, landlord and employee to Sdn Bhd and if any document/agreement to sign

Once the new Sdn. Bhd. is ready for business, you can then set a cut-off to inform and work with your customers, suppliers, landlord and employee to the new Sdn. Bhd.
  • To novate or sign agreements
  • To update job offer letters
  • To ensure invoicing/billing after the cut-off date are addressed to the new Sdn. Bhd.
4. To update and finalize accounts of enterprise and transfer the assets/liabilities
Based on the cut-off date, you will then need to finalize the assets/liabilities – inventory, plant and equipment to move to your new Sdn. Bhd. Please take note there may be some potential tax implications on controlled transfer. You are advised to seek professional advice to plan your business migration. 

Finally, after the assets/liabilities have been transferred, you may then close the accounts by owner withdrawal. Then you may officially cease your business, close the bank account and de-register your enterprise with SSM.

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