Pros and Cons in Changing a Small Business to Bhd Sdn
When you are a businessman, you want the best option for your company. In fact, the first decision that you need to make is the scale size of your business. If you have a large capital, you can opt for a large scale company. If you don’t, you can have a small one. In Malaysia, however, these are further different options to choose from for your small scale business. There is the category Small Business Partnership and there is the Private Limited Company which is also known as Sendirian Berhad (Bhd Sdn).
How the two types of business mentioned previously are different from each other? Which one to choose when you have a small capital and how it’s going to benefit you? Before you make any decision, it’s wise to gather more information first.
Things to Consider When Migrating a Small Business to a Bhd Sdn: Pros and Cons
Additional Costs to Comply With Bhd Sdn
|No pros in here as these are expenses.||In order to comply with the annual requirements of Bhd Sdn once it is incorporated, you need to pay for some processing fees like auditing fees, tax filing, and secretarial fees. The estimated processing fees would cost around 5000 Malaysian Ringgit (RM). But this could be higher or lower depending on where you are going to services.|
Tax Personal Reliefs
|No pros in here as you’re only going to get tax exemption on EPF and Life Insurance Premiums only when you’re a Small Business Partnership.||As a consequence of migrating from Small Business Partnership to Shd Bdn, all taxes under the Tax Personal Reliefs have to be paid. This is a contradiction to Small Business Partnership where the majority shareholder can opt not to get income from their business partnership, hence, she doesn’t have to pay the EPF or the Employees’ Provident Fund and the Life Insurance Premiums under the Malaysian Tax Reliefs. This can save her some amount of money from taxes.|
Approximated Tax Savings
|Since you’re incorporating an Shd Bdn or Private Limited Company, you’re creating another entity that is taxable. In Malaysia, this entity has lower rates than the Small Business Partnership, hence, it will lower the tax payable of the company for its yearly sales.||If the Salary Income of either one or both of the business partners is low, the Total Taxes when all combined will be high.|
How Much Taxes Are You Going to Save Exactly?
In a Small Business Partnership, the tax rate for all the shareholders is RM 10,900 for the first 100,000. Then after that, for the succeeding RM 100,000, it will increase to 24%.
Let’s have an illustrative scenario about this. Let’s say A and B are in an Shd Bdn company and both have invested a 50/50 share of RM 500,000 and A has an income of RM 100,000 annually for his salary as an office worker. B, however, has a salary of also RM 100,000 being the manager of their Small Business Partnership. For that, the company has started with a capital of RM 1,000,000. By the end of the year, their ice cream house business earned RM 150,000.
Since A and B both have the Salary Tax of 10,900, their total Salary Taxes is RM 21,800. Their Business Sales, however, earned RM 150,000 and would be taxed at RM 29,000. Adding all together, the Total Taxes would be RM 44,700.
The Total taxes for Shd Bdn would be different, however. The fixed tax rate of 17% would be applied instead of 21-28% for Small Business Partnership. Our new Total Taxes would then be RM 47,300. This is a con. This happens when the Salary Income of either one or both of the persons in Shd Bdn is low.
But what if the two business partners are medical doctors and earning, let’s say, RM 200,000 each annually, for a total of RM 400,000. Would Total Taxes be different? Let’s compute once again.
The first RM 100,000 for their Salary Income would be taxed at RM 10,900 and the remaining RM 200,000 at 24%. By processing this, we would compute a tax of RM 69,800 on their combined Salary Income alone. Let’s add this to the Corporate Tax of their business to get the Total Taxes. The annual income earned by their ice cream is RM 150,000 which would generate a tax of RM 22,900. Adding altogether all the taxes, we would have RM 92,700. This is a plus to the company as it has lessened the overall taxes.
Capacity to Borrow
|Borrowing involves interest rates. If you don’t borrow, the company saves money.||Unfortunately, your capacity to borrow would depend on the amount of tax your company generates. More taxes would mean a higher loanable amount. If your company is just starting, it would probably incur a lot of loans especially when you are acquiring things to expand your business.|
After examining the pros and cons of migrating your business from a Small Business Partnership to Shd Bdn, here are some recommendations. Stick with Small Business Partnership in the first 3 years of the company as it needs to lend more things to expand the business. After 3 years, choose Shd Bdn especially when the Salary Income of the business partners in Small Business Partnership is higher than RM 120,000 annually.
If you are still having difficulty deciding and the technicalities are not clear to you, we at the 3E Accounting would like to help. As a Malaysia Incorporation Specialist, we offer assistance with corporate affairs, including Incorporation and Nominal Director services.