Company Law Column Part 2: Carrying on Business in Malaysia

2018/12/17

1. Business Structure

To carry on business in Malaysia, there are various types of business structure other than a company limited by shares depending on the size and responsibilities of the business. They are roughly divided into three types: sole proprietor, partnership and company. The following table shows main characteristics of each business type.

	Characteristics	Sole proprietor	Partnership	Company (limited by shares)
1	Legal personality	None	None	An artificial legal person
2	Procedure for formation	None	None	Incorporation process and registration with the Registrar of Companies (ROC)
3	Membership	One individual	Two persons and not more than 20 persons Persons can be individual as well as a company	A minimum of one person, who may be an individual or a company
4	Transferability of interest	Subject to sole proprietor’s consent	Subject to consent of partners	Through share transfer forms Scriptless, for public listed company Subject to company constitution
5	Limited liability	Sole proprietor is liable for all the business debts	Partners are liable for all the firms’ obligations that are incurred by any partner acting within his powers. In a general partnership, where the capital is insufficient to pay off their debts, all the partners will be liable for the shortfall In a LLP[1], a partner will be liable only if he acted without authority or for any wrongful act or omission.	Members’ liability is limited to the amount of shares that they have taken but not paid for Creditors cannot sue the members for the company’s debts.
6	Management	Managed by sole proprietor	In a general partnership, every partner has the right to participate in the management of the firm. In a LLP, only general partners can be involved in managing the business.	Management is vested in the board of directors assisted by a company secretary
7	Duration	Subject to sole proprietor’s consent	A partnership can be terminated by the provisions under PA 1961[2] or LLPA 2012[3] A partnership is dissolved by any changes in membership structure of a partnership	Enjoys perpetual succession The liquidation process is subject to CA 2016[4] The lifespan of a company is not affected by any changes in its shareholding or membership structure
8	Taxation	Taxed individually	Partners are taxed individually	Subject to corporate tax
9	Reporting and disclosure	None	None	Required to lodge annual audited accounts, prescribed forms and annual returns

2. Foreign Company Setup Option

In addition to the three types of business structures mentioned above, a foreign company can carry on business as a branch office or a representative office. For foreign companies which generally carry on large-scale business, it is common to setup a local subsidiary, branch office or a representative office.

3. Foreign Company carrying on business in Malaysia

(1) Definition of Business

A foreign company needs to register as a foreign company to carry on business in Malaysia (Companies Act 561). The Thirteenth Schedule of the Companies Act specifies activities not regarded as carrying on business such as holding meetings and conducting an isolated transaction that is completed within a period of thirty one days (Companies Act 561(2)). Therefore, it is interpreted that a broad range of activities are regarded as business. “Carrying on business” includes establishing or using an office whether by servants or agents or otherwise (Companies Act 561(3)). A person who is guilty of an offence under this Act shall be liable to a penalty not exceeding fifty thousand ringgit (Companies Act 588).

(2) Branch Office

Foreign companies need to register with Companies Commission of Malaysia (CCM) to carry on business. In a case of branch office, a foreign company shall appoint an agent (Companies Act 563) and submit a prescribed application form with required documents. In practice, it is required to provide reasons for the necessity of carrying on business for which branch office is suitable (such as a time-limited project with a Malaysian company). Also, a foreign company is required to establish a local subsidiary in some industries such as distributive trade and service industry.

(3) Representative Office

A Japanese company may establish a representative office to conduct market research or gather information prior to the commencement of business activities. It is required to obtain approval from Malaysian Investment Development Authority（MIDA） to establish a representative office. According to the guideline issued by MIDA[5], representative offices are not allowed to carry out any business transaction, and the duration of establishment is minimum of two years. In practice, the duration is set for 2 years in many cases. With these conditions, representative offices are considered as a transitional stage during which companies can judge whether or not a local subsidiary should be established.

* In the subsequent columns, I will mainly focus on a local subsidiary (a company limited by shares) which is a common form of a foreign company to carry on business in Malaysia.

[1] Limited Liability Partnership

[2] Partnership Act 1961

[3] Limited Liability Partnerships Act 2012

[4] Companies Act 2016

[5]http://www.mida.gov.my/home/administrator/system_files/modules/photo/uploads/20181109094747_GD-RERO-05112018_2.pdf

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