Company Incorporation Definition, Advantages, and Process

Company Incorporation: Definition, Advantages, and Process

Company incorporation is the process of creating a company as a separate legal entity, offering the possibilities of distinguishing assets and revenue from those of its owners and investors.

This legal body is referred to as a “corporation”. The major implication is that a corporation, no matter its size, belongs to shareholders and is run by a director rather than a typical sole proprietor.

Malaysia permits the formation of corporations, which are typically identified as such by the use of phrases such as:

  • Inc.
  • Limited (Ltd.)
  • Sendirian Berhad (Sdn. Bhd.)
  • Berhad

Why Should a Company Incorporate?

Below are more advantages of incorporation but the most important reason why entrepreneurs such as SME owners incorporate their businesses is to shield their personal assets from liabilities that the business accrues.

Incorporation provides a shield of limited liability to encapsulate the company’s owners (shareholders) and directors. Therefore, companies are able to run risks essential for development without putting shareholders, members and directors at the risk of financial loss greater than their initial contribution.

How Incorporation Works

Different countries may have different details on how a business is formed and its structure. However, most corporations have several common characteristics, including:

  • By being legally structured and incorporated.
  • Having a set of legal documents that outlines important company details such as the company constitution
  • Having business assets separate from those of owners and investors

Company Constitution

A significant stage in the creation of a corporation is preparing and filing a company constitution. This document uncovers crucial information about the firm – its main goals, several addresses, board of directors, number of shares and where necessary type of stock.Related article : Memorandum and Articles of Association (M&A) & Constitution

Directors and shareholders

The duty of managing daily operations for the benefit of the company is vested in the company director. A single director may be enough in small companies, but big ones usually have boards with more than twelve directors. The directors are not personally liable for the company’s debts unless there is fraud involved or any specific tax laws apply. Shareholders usually appoint directors each year, and a shareholder being any entity owning at least one share of a given company’s equity could be an individual or even thousands in publicly listed organisations. Shareholders are normally liable only for paying their own shares. They also have the opportunity to enjoy some of the companies profits distributed in form of dividends.

Advantages of company incorporation

Compared to sole proprietorships or partnerships, corporations enjoy several distinct benefits: The corporate incorporation benefits include flexibility and autonomy, perpetual succession, limited liability, separate property, corporate identity, transferable shares and the right to sue.

Continued Progression

Unlike the sole proprietorship, the company has an inherent ability to withstand a number of situations that would normally drive a sole proprietor out of business. With death to the owner or a member, bankruptcy, change in membership status and Departure from the firm even personal challenges, it still stands. It maintains its rights, privileges, domain and property unaffected by the possible changes among its members. This consistency guarantees that the company will be in existence for a long time and continue to operate.

Limited Liability

If there is a legal closure or dissolution of the company, it needs to be noted that members of the firm are responsible only for any contribution towards liabilities made by such a company. Nevertheless, it is essential to note that this obligation can be limited up to the face value of the uncovered shares held by each member. This implies that the monetary responsibility of the members is restricted to that specific value from the unpaid shares held by them in relation to the company.

Property Seperation

Being a known legal entity, the firm serves as the custodian of assets which are vested in it, controlled by it, managed by it and finally disposed possible. This implies that the firm can control its assets as per the law and regulations. As a result, if an individual who is a stakeholder of the company steals money by using assets of the company to benefit him or herself personally, then he or she may have serious consequences such as criminal charges. All stakeholders need to know and adhere to the legal and ethical duties of managing and using company resources.

Corporate Credibility

The clear legal division between the company’s assets and those of its owner, often in a limited liability format, also means that it is normally easier to secure financial support from banks and private investors. Such a separation offers some level of protection to the investors who may be willing to invest in such an organization as it would mean that their personal liability cannot be tied directly with that company’s liabilities. Further, apart from the conventional sources of funding including bank loans, funds can also be generated through share sales. This enables the provision of working capital into the business and at the same time gives investors a chance to own part of its success. Additionally, this structure often allows for the option of buying back the shares at an agreed price in future which is favorable to both company and its shareholders.

Shares That Can Be Transferred

For any member to have shares in a business, their interest must be regarded as movable or transferable property. This condition allows for the monetary investments in shares so that members can withdraw their share at any time. In addition to this, such a structure is advantageous for investors since it gives them the opportunity of liquidity whereby they can easily offload their shares at any time. This mechanism creates a system that allows financial agility, which in turn enables smooth operations between the various components of the business world.

Incorporated Company Meaning

The process of incorporating a company in Malaysia

All businesses that operate in Malaysia are required to register with the Companies Commission Malaysia known as Suruhanjaya Syarikat Malaysia or SSM, under the terms of the Companies Act 2016. Through MyCoID 2016 online portal, it enables the digital integration of a business where the directors or promoters of a company that is yet to be incorporated can commence this process. However, a compulsory one-off validation process has to be conducted at the nearby SSM counter face-to-face. In order to make this process easier and simpler, many business owners prefer to hire a company secretarial service.

Pre-incorporation

Before moving forward with incorporation, you must meet these requirements:

1. Company Name

You will need to obtain permission from SSM regarding the name of operation of the proposed company before.

2. Director

For the private limited companies, at least one director is needed who has a Malaysian residential address of a principal place of residence and not disqualified from being appointed as director under section 196 of the Companies Act 2016. For public limited companies, they must furnish a minimum of two directors who are non-disqualified under the Companies Act 2016.

3. Shareholder

There should be at least a shareholder (either person or corporate) up to 50 shareholders for private limited corporations. For public limited companies, at least two shareholders are needed.

4. Company Secretary

All business entities have to engage a Company Secretary not later than 30 days after their incorporation. A company secretary is a person who has been given the duty to see that the Companies Act 2016 is observed, ensure implementation of directors’ decisions and also file an annual return for the company.

5. Business Address

However, if the principal place of business differs from the address for registration then this address should be included. Your company address is highly recommended.

6. Registered Address

This section typically includes the Company Secretary’s address.

7. Share Capital

A minimum paid-up capital of RM1 is obligatory.

No documents have to be shown during the application process unless SSM has asked for them. Nevertheless, all the facts and statements presented or submitted during this stage should be true.

When applying through an agent on behalf of the company, scanned copies of the shareholders’ and directors’ identification cards such as NRICs or passports for individuals, incorporation documents for body corporations together with other proof of documents are usually required to be verified.

The incorporation process

Step 1: Choose Name Of Firm For Incorporation by Direct Application

With our online free name search tool, you can check on the availability of your desired name.

Where the name is available but one is not sure of going ahead with incorporation, you can pay RM50 to secure a name for a maximum of 30 days and an additional RM50 at every subsequent 30-day extension.

Step 2: Fill Out Company “Super Form”

Once a proposed company name has been approved, the following form that needs to be filled out is called “Super Form,” which requires information about the business such as; proposed company name, type of company and planned trade.

Secondly, details of the directors, shareholders and promoters of the proposed company have to be provided together with a declaration by the directors or promoters that they are not undischarged bankrupt either in Malaysia or elsewhere and have not been convicted of any offences either in Malaysia or elsewhere.

Step 3: Incorporation Fee payable and Compliance Declaration.

After the review of information that you have filled and declared that all requirements under the Companies Act are met, you can then proceed to pay for your incorporation fee.

The registration fee is RM1,000 for companies limited by shares and RM 3,000 for those limited by guarantee.

Once the SSM does not give any rejections, or inquiries, the review process generally takes one to two business days and you are done with incorporation!

Post-incorporation

This will be followed by issuance of a registration notice to the company upon successful incorporation and allocation with unique number as evidence for incorporation.

After registration, corporations must apply for additional required documents first before opening an account with any bank and follow all the rules as per the Companies Act 2016. It is recommended that before you commence your operation as a business person, sought the necessary advice from the relevant authorities and acquire any other additional license, permit or approval which may be required depending on the nature of business in question.

If you need more details about registering a company in Malaysia or business incorporation for specific industries, we would be glad to help. We also have a comprehensive guide on company registration in Malaysia here. Contact us today.