The selection of a business structure for your business will be a key decision to be made when starting up your business.
This decision requires careful thought and consideration as the consequences of choosing an unsuitable business structure could risk you losing your personal savings and even expose you to the risk of bankruptcy.
The few primary aspects which you should take into consideration when choosing your business structure include:
- Budgets and procedures
Firstly, ascertain the budget which you would allocate for the formation and running of your business. The costs of forming certain business structure are higher as it takes a longer time to set up and the process of setting up these business structures are more tedious. The operating and administrative costs are also higher as these business structures are required to comply with the mandatory bookkeeping requirements imposed under the law.
- Confidentiality concerns
For certain business structures, information with respect to its owners and the basic financial information of the business is publicly available. If confidentiality is a huge concern for owners of the business, a business structure which does not require the information of its owners and its financial information to be published will be the more favoured option.
- Future funding
If you aspire for your business to grow and expand, it is likely that your business would require additional funding and capital in the future. It is therefore important to choose the right business structure which will enable you to grow and expand your business. Certain business structures will render the business with limited access to capital where the owners will have to rely on their own funds or creditworthiness to secure a loan for growing or expanding the business.
- Business continuity/ transferability
Certain business structures are closely connected to the identity of its owner(s). These are structures which will dissolve following bankruptcy, death or resignation of one or more of its owners. If your intention is to keep the business despite bankruptcy, death or resignation of the owners, choosing a business structure which provides for business continuity and allows for the ownership of the business to be transferred should be the key consideration.
- Liabilities of owner/ shareholders
Certain business structures do not have not a separate legal identity from its owners. The owners of the business are responsible for all the debts and liabilities incurred by the business and must bear all losses of the business. This gives rise to the risk of bankruptcy of the owners as there is no distinction between the assets of the business and the owners.
In Malaysia, the most common types of business vehicles are as follows:
Unincorporated structures: (i) Sole proprietorship and (ii) Partnership
A summary of the key considerations in respect of each of these business structures are as follows.