If you’ve ever tried to search for more information about starting a business, you may have come across a certain term before: sole proprietorship.
Of course, this may have made you wonder, “What exactly is a sole proprietorship?”
While it may sound rather intimidating at first glance, do not worry, as we’ll discuss the 5 most important things to know about sole proprietorship in Malaysia:
- What is a sole proprietorship
- Why a sole proprietorship is preferred
- How to register for a sole proprietorship in Malaysia
- What risks are associated with a sole proprietorship
- What options you have for funding a sole proprietorship Malaysia
What is a sole proprietorship?
A sole proprietorship is basically the simplest form of business ownership there is, and in Malaysia, it is governed by the Registration of Businesses Act 1956. Unlike a corporation, a sole proprietorship is not a separate entity from the person who owns it.
Basically, this means you are the business, and the business is you. You, as the owner of the business, are not separate from it. So, whatever you earn through your business counts directly as your personal income.
Additionally, since there is no separation between the owner and the business, this means that all the owner’s personal assets, or the things you own (such as your house or car) are also liable in the event of any payments that need to be made.
If you’re unfamiliar with a liability, it basically is something that you’re answerable for. So in the event you have a debt to pay, your personal assets (such as your car) are liable (can be claimed to cover that debt).
Why a sole proprietorship is preferred?
Simply put, a sole proprietorship is the simplest form of business to set up and manage due to:
- the lower amount of paperwork
- the lower cost for setting up the company
- the overall simplicity of execution
Additionally, setting up a sole proprietorship still allows an opportunity for the business to grow. Should the owner ever decide to expand, there is always the opportunity to change the business to either a partnership or a private limited company (the ones with the Sdn. Bhd. at the back) in the future.
Furthermore, it is still the lowest cost alternative to starting a business, making it a popular option for many aspiring entrepreneurs who may not necessarily have the money to begin a private limited company.
Additionally, being the sole owner of a business can be quite an attractive option, as this means that you have full control over the business and how it is run.
Plus, there are much less regulatory requirements to be met as a sole proprietorship. You’re free from corporate taxes, the need to audit your business, or to publish any financial statements.
Basically, the attractiveness of a sole proprietorship lies in its simplicity. Less paperwork, less costs, and less fuss makes it an easy go-to solution to form a business for anyone who might want to do so.
Say, for instance, you want to begin a business selling fried ice cream. Yum. As a sole business owner, it might not necessarily be the best idea to register a private limited company just so you can start selling your fried ice cream on the corner of the block.
Instead, it’s much simpler to just register for a sole proprietorship, and begin selling your product to the masses. Simple, cheap, and efficient.
How to register for a sole proprietorship in Malaysia?
In order to begin such a business, you must first go through registration with the SSM (Suruhanjaya Syarikat Malaysia/Companies Commission Malaysia)
To do so, you will need to register your business at an SSM branch near you.
To register with the SSM, you will need to first complete this form and then choose a name for your business.
To name your business as a sole proprietorship, you can either opt for a personal name, or a trade name.
A personal name is rather straightforward, as this is just using your own name to register your business. Using your own name (as per your MyKad) means that you don’t actually have to wait for approval for your name, and you get almost instant approval for your business.
On the other hand, you have the option of choosing a trade name, which is basically a name that you come up with for your company.
If you wish to register your company under a trade name (e.g. Kedai Dobi Untung Besar-Besar), then you would need to submit your trade name to the SSM through this form. This process is subject to certain guidelines as well.
Once you have done so, you will need to wait for approval for your trade name, which is subject to Rules 15, Rules of Business Registration 1957. Your business can be registered for anywhere between one to five years, but no longer than that.
Of course, this registration process comes together with certain costs:
- A trade name will have a fee of RM60 per year
- A personal name will have a fee of RM30 per year
If you’d like to know more about this process, you can visit this SSM page to find out more.
Do note, however, that you must be either a Malaysian citizen or a permanent resident to apply for a sole proprietorship in Malaysia.
What risks are associated with a sole proprietorship?
Two main characteristics of a sole proprietorship naturally make it a riskier option for business:
- Being tied completely to the owner of the business
- Having no separation between the owner and the business in the eyes of the law
How might these generate more risk for would-be entrepreneurs?
Well, a sole proprietorship is ultimately still tied to the owner of the business, and does not exist as a separate entity. Essentially, you are one with your business.
This means that in the event you accrue debt as an owner of a sole proprietorship and you are unable to pay using your business assets, then your own personal assets can be used to cover that debt as well.
Say you took an RM2500 loan to pay for a deep frying machine, but you happened to run out of cash when it comes time to make your payment. Uh oh. Now, your personal belongings (like your beloved car) can be taken to cover that debt of yours. No!!
This basically means there is unlimited liability, so there is no protection for losing money in a sole proprietorship. Simply put, you’re putting everything you own on the line here.
Additionally, this also means that any legal issues (or even lawsuits) directed toward the business will ultimately be directed at you, since your business is tied to you directly.
Also, the business will be considered dissolved in the event the business owner passes on or is incapacitated (unable to continue running the business). This means that the business cannot be transferred to a family member, or to a friend.
Despite these risks and the overall lack of protection, a sole proprietorship nonetheless remains a popular option for many aspiring business owners.
What options you have for funding a sole proprietorship Malaysia?
A major concern that always appears when discussing business opportunities is in obtaining the necessary funds since money plays a key role in being able to start your business.
As opposed to a corporation that can sell shares of the company to fund their business activities, the funding options for a sole proprietorship can seem rather limited. However, this does not mean that you have to pay entirely out of your own pocket to fund your business.
Of course, you could always borrow from friends and family, although this may not necessarily be the most attractive option for some. Luckily, there are many opportunities to obtain funding in Malaysia.
For instance, SME Bank has a fair selection of financing options available on their website which you can find out more about here.
Additionally, as a young entrepreneur, you may have access to certain funding schemes targeted directly at your age group, such as the Young Entrepreneur Fund (YEF) which specifically provides funding for young Malaysian entrepreneurs around the ages of 18-30.
In fact, a quick Google search will bring up a large number of funding programs and schemes available for Malaysian business owners. So fret not! There will always be more and more opportunities to find a way to fund your next big idea!
This article was initially published by Trustmaven - Mica Lee, on the 1st July 2020.