Sdn Bhd vs Enterprise Tax Rate: Unpacking the Tax Difference
In Malaysia, the decision to register as a Sdn Bhd or Enterprise can have wide implications for business owners. Both entities contribute to the growth of the country but their tax structures are fundamentally different thus resulting in different taxation levels.
To illustrate the points with a hypothetical example, let us discuss in detail. For instance, a business that makes a chargeable income of RM300, 000. Here’s how the tax liability unfolds for both entities:
Sdn Bhd Tax Difference
- Tax rate: 17% for the first RM600,000 of chargeable income, 24% for the rest.
- Tax calculation: RM300,000 x 17% = RM51,000
Related: Kadar Cukai Syarikat
Enterprise Tax Difference
- Tax rate: Tiered system based on individual income tax brackets, ranging from 0% to 30%.
- Tax calculation
- First RM250,000 taxed at various individual income tax rates up to 24.5% = RM46,900
- Next RM50,000 taxed at 24.5% (individual income tax bracket for that income level) = RM12,250
- Total tax = RM59,150
Related: Enterprise Tax Rate
For instance, in the above scenario, it is clear that Sdn Bhd enjoys a tax benefit of RM8,150 over the Enterprise. However, this difference is due to the graduated Individual Income Tax Structure that applies to Enterprises in which a higher income results in higher rates.
Here’s a breakdown of the key reasons why Sdn Bhd often pays less tax
Lower tax rate for small and medium-sized enterprises (SMEs)
- The tax rate on the first RM600, 000 chargeable income for the Sdn Bhds that are treated as SMEs is 17 percent.
- Sdn Bhds can retain profits within the company as opposed to Enterprises where they are taxed personal income that make them not suitable for reinvesting which results in growth without incurring an immediate tax liability.
Tax planning opportunities
- Sdn Bhds enjoy more flexible accountability and greater financial structuring options, alongside using tax planning strategies with many deductions and allowances cutting down the amount in taxes they pay.
Factors affecting the decision between an Sdn Bhd and an Enterprise
Yet, one should bear in mind other factors relating to the decision to choose an Sdn Bhd or an Enterprise beyond tax. These factors might include:
Complexity and regulations
- Regulations and compliance requirements for Sdn Bhds are more stringent compared to the Enterprises.
- Sdn Bhds can be capitalized through share issues while Enterprises have to find personal savings or borrow as capital.
- Sdn Bhds are protected by limited liability, which ensures that their personal properties are not liable to hand debts of the business. However, enterprise owners are the ones with unlimited liability and they are personally responsible for most of the debts incurred by the business.
Certainly, the final choice between an Sdn Bhd and an Enterprise will vary according to individual business circumstances and objectives. This will enable you to choose the best entity structure that considers your financial goals, risk tolerance and growth aspirations for a successful business.
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