Introduction
One of the primary reasons for converting from an enterprise to an Sdn. Bhd. (private limited company) is the potential tax benefits. As Sdn. Bhd. you'll have access to various tax incentives and lower tax rates that are not available to enterprises. For example, Sdn. Bhd. are subject to a lower corporate tax rate of 20% on the first RM500,000 of chargeable income, compared to the 24% rate for enterprises.
Another significant tax benefit of converting to an Sdn. Bhd. is the ability to separate personal and business income. As an enterprise (sole proprietor), the owner's personal income is taxed together with the business income. However, as an Sdn. Bhd. business entity the company's income is taxed separately from the owners' personal income, income tax, potentially resulting in lower overall tax liability.
As Enterprise, which can be a Sole proprietorship or Partnership, is commonly owned and managed by a Malaysian individual or multiple partners. In this business structure, the owner or partners assume full responsibility for the business’s liabilities, business entity and are subject to taxation through their personal income tax.
In contrast, a Sdn Bhd (Sendirian Berhad) operates as a private limited company, comprising shareholders who hold limited liability for the company’s obligations. Your Sdn Bhd is a separate legal entity to help you detach your personal liabilities from those of the company. It can receive income, acquire property, enter into a contract with a third party, and take part in legal proceedings just like an independent person.
Tax Rate Benefit
Sdn Bhd company (private limited company) are taxed at a lower rates than existing enterprise (sole proprietorship business) and partnerships, which can help you save money and reinvest it into your business. In addition to tax benefits, Sdn Bhd company offer limited liability protection, separate legal status, and easier access to funding.
In year assessment 2023, tax rates for personal income tax on RM 100,000 taxable income, it is at 24%. Whereby for corporate tax rate of the same taxable income, it is only at 15%.
Example:
| Taxable income = RM 600,000 | Sdn. Bhd. (private limited company) | Enterprise (sole proprietorship) | |
| First RM 150,000 | RM 150,000 x 15%
= RM 22,500 | Tax on first
RM 600,000 = RM136,400 | |
| RM 150,0001 to
RM 600,000 | RM 450,000 x 17%
= RM 76,500 | Tax on first
RM 600,000 = RM136,400 | |
| Exceeding RM 600,000 | RM 79,658 x 24%
= RM 19,117.92 | RM 79,658 x 28%
= RM22,304.24 | |
| Total Tax | RM 118,117.92 | RM 158,704.24 |
Total Saving if using Sdn Bhd: RM 158,704.24 – RM 118,117.92 = RM40,586.32
Here we summaries some comparison for help you decide should you convert your enterprise(sole proprietorship) into a Sdn Bhd company:-
Enterpise/ Sole Proporietorship | Sdn. Bhd. | ||
| Tax Rate | Rates from 1% to 28% after the deduction on relief | 15% or 24% | |
| Personal Income | - | Flexibility of being able to vary the mix of your personal income. You can determine how much you want to take out as salary, director’s fees, bonus, dividend or benefits-in-kind | |
| EPF & contributions scheme | Deduction limit to employee | Deduction for both employer and employee | |
| Tax Incentive | N/A | Chance to enjoy tax incentive such as investment tax allowance, reinvestment allowance, or MSC status |
Conversion Can Lead To Tax Savings
Companies or Sdn. Bhd. entities often enjoy lower tax rates compared to individual income tax rates. This means that your business can benefit from reduced tax liabilities, resulting in higher retained earnings and increased profitability. In Malaysia, the usual rate of corporate income tax is 24 percent. Whereby the same taxable income, it is only at 15%.
As a registered company, you can take advantage of a broader range of tax-deductible expenses. This includes business-related costs such as employee salaries, rental expenses, utilities, and other operating expenses. By properly managing and optimizing these deductions, you can minimize your taxable income and ultimately lower your tax bill.
Companies or Sdn Bhd in Malaysia entities are eligible for capital allowances, which allow you to claim deductions for investments in qualifying assets such as machinery, equipment, and technology. These deductions can help offset your taxable income and reduce your overall tax liability.
In certain industries or sectors, there may be specific tax incentives and grants available for companies or Sdn. Bhd. entities. These incentives are designed to promote business growth, innovation, and investment. By converting your business, you may become eligible for these incentives, leading to additional tax savings.
Converting to Sdn. Bhd. company structure provides greater flexibility in tax planning. You can strategize and optimize your tax position by utilizing various tax planning techniques, such as dividend planning, capital gains management, and restructuring options. These strategies can help you maximize tax efficiency and save on overall tax payments.
It's important to consult with a qualified tax professional or advisor to understand the specific tax implications and potential savings based on your unique business circumstances. They can provide personalized guidance and help you make informed decisions regarding the conversion to a company or Sdn. Bhd. structure. However, Sdn Bhd in Malaysia must be registered with the SSM and follow various legal procedures, such as appointing a company secretary and holding annual general meetings.
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