My article is out in NST: RED today! I was again asked to contribute an article so thought of submitting my thoughts on company incorporation which will lead to the introduction of the Limited Liability Partnership.
My article is reproduced below:
CHOICES: You have to weigh the pros and cons when choosing the right business vehicle
As the year draws to a close, the feeling of joy and festivity is in the air and many will begin to plan for their year-end holidays and celebrations. However, for many businessmen, the end of the year and the beginning of another signal that the new tax season is drawing near and many will begin to lament as they start to budget for another year of their generous yet grudging annual contributions (aka taxes) to the Inland Revenue Board (IRB).
This time of the year is also the best time for small business owners to start planning to mitigate their tax liability for the following year. One of the most overlooked, yet most beneficial ways to help save on taxes is to incorporate a company. A company is a separate legal entity, which functions just like an individual, but with some compelling advantages.
For a start-up business, it is generally recommended that you start up as a sole proprietor or partnership (Enterprise) first, due to the following reasons: Enterprises are faster and cheaper to set up, and are easier to close if the business fails. You can choose to subsequently convert to a company when your business stabilises and is ready for growth.
You are bound to make losses in your business at first. The losses from your Enterprise business can be used to offset against your other personal sources of income, for income tax purposes.
So why incorporate?
A company, registered under the Companies Act 1965 as a “Sdn Bhd”, has several advantages over an unincorporated business, which most laymen normally refer to as an “Enterprise”. Table 1 summarises the key differences between an enterprise and a company:
When do small businesses incorporate?
It is recommended that small businesses incorporate when one or more of the following conditions apply:
• Risk with regard to personal liability (a product, service or employees or even your partner could cause harm and leave the business open to legal action);
• A large capital investment is required to sustain/promote the business;
• The admission of a new major investor to the business; and
• Profits are at a level where it is more tax-advantageous to be taxed at corporate level rather than at individual level.
Why should I incorporate a company to run my business?
A company can be more tax-beneficial compared to unincorporated businesses and below are some of the key benefits:
• Individuals are chargeable to tax at rates ranging from 0 to 26 per cent, while companies with share capital of less than RM2.5 million are subject to a tax rate of 20 per cent on the first RM500,000 of their chargeable income and the remaining amount at a rate of 25 per cent. The income tax bracket for an individual already exceeds 20 per cent when his chargeable income is more than RM70,000.
• A company is a separate legal entity from the individual directors and each party is taxed in his own right. Therefore, you can decide how much you wish to draw as salary or other benefits and how much will be left in the company which will be taxed at only 20 per cent (where the chargeable income is less than RM500,000).
• You can choose to contribute to the Employee’s Provident Fund (EPF) and enjoy the tax deductions for both employer contribution (as a business expense), and employee contribution (as personal reliefs together with life insurance premiums, subject to a maximum of RM6,000).
By putting a business in a company and applying a combination of these factors, the taxpayer could reduce his taxes considerably. Naturally, one must quantify the net annual tax savings achieved from incorporating a company against the incremental annual costs of running one to determine whether there is any net cashflow advantage of doing so.
But there is another better business vehicle looming on the horizon, which will benefit small business owners and professionals… Next: Introducing the Limited Liability Partnership
To see how it appears in NST : RED today, check it out here:
Read more: When do you incorporate your business? – RED – New Straits Times http://www.nst.com.my/red/when-do-you-incorporate-your-business-1.189284#ixzz2FdqCnwLm