What is a company limited by shares

What is a company limited by shares

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The business environment in Malaysia is quite versatile, there are diverse types of structures that can accommodate different kind of businesses. According to the provisions in the Companies Act 2016, there are three main categories of companies suitable for incorporation based on some distinct aspects and functions.

  • Company limited by shares (private and public companies);
  • Company limited by guarantee; and
  • Unlimited company

Company limited by shares

When a company is considered to be “limited by shares”, its shareholders or members (who are in fact the owners of the company) have legal liability for the debts of the companies up to their unpaid amount of share capital. This principle is referred to as limited liability. The two cases are however similar to limited liability framework in which shareholders are unable to receive personal culpability that is beyond the subject of investment. In the case of private limited companies, share transfer is restricted with a maximum number of shareholders while public ones are at liberty to offer the shares in stock exchanges for sale to members of the public.

i) Private limited company (“Sdn Bhd”)

In Bahasa Malaysia, a private limited company is known as ‘Sendirian Berhad,’ which is commonly abbreviated as ‘Sdn Bhd’. This kind of company formation is the only available option for non-Malaysian individuals to incorporate in Malaysia. Public companies limited by share or guarantee which essentially are public companies foreigners are not allowed to form.

Shares in the private limited companies are used to sell shares privately to natural persons or juridical entities. The number of shareholders allowed is a minimum of 1 and a maximum of 50. All the directors of a private limited company must be Malay citizens only having some degree their principal residence in Malaysia. In the case of public companies too, it is not company’s requirement to publicly disclose its financial statement but there is no mandatory annual general meeting in such corporations.

Private limited companies can also be used for strategic purposes as joint ventures and the management of holding and subsidiary company relations. Exempt private companies, which are those companied owned by not less than twenty individuals’ according to the Companies Act would be exempted from filing for financial statements with CCM after getting a certificate that confirms the company is an exempt private company. Nevertheless, they must still compile reports of financial statements on an annual basis for internal books.

In addition, the private company may change to registration as a public company and conversely on passing of a special resolution and after filling in notice indicating the conversion from PDT ‘RBEB’ to CBSA ‘BESA’ with Companies Commission of Malaysia.

ii) Public limited company (“Bhd”)

A public limited liability company in Bahasa Malaysia is referred to as ‘Berhad’ which is often abbreviated as Bhd placed after its name. Public limited companies may or may not be listed in the stock exchange but most of them go for listing so that they can enjoy all the features as a public entity, like accepting equity investments from the latter.

It does not have any maximum limit for public limited company unlike private limited companies. Annual general meetings and annual reports, regarding their financial performance, are mandatory aspects for public limited companies. As public companies, they are required to meet higher accountability and listing standards regulated by the Companies Commission of Malaysia and the Malaysian Securities Commission.

Public Limited Company is mandated to require at least 2 directors who typically live in Malaysia with a dominantly resident address. Some of the well-known public limited companies include major banks, telecommunication companies, construction firms property development companies and many more are listed on the stock exchange.

Company limited by guarantee (“CLBG”)

A Company Limited by Guarantee (CLBG) as discussed previously is one form of a limited company and the word ‘Berhad’ or its abbreviation ‘Bhd’ appears in most CLBG names although this derivative can be left off by having an application submitted for it to be omitted.

CLBGs are widely used for non-profit organizations, such as charities, community projects, clubs and societies etc. No sharing of profits or dividends to the company’s members.

CLBGs are different from other company types in that they cannot be endowed with a share capital and must have a company constitution following incorporation. This document sets the important specifics such as the company’s limited guarantee position, its objects powers and liabilities, rights and privileges of officers, as well as a proposed number of members.

It should be noted that there is the provision in the Companies Act which prohibits unincorporated associations and therefore, any charity organization consisting of more than 20 people must be registered with the CCM.

Some examples of CLBGs are usually groups where organizations’ names often consist of terms such as Foundation (Yayasan), Institute (Institut), Academy (Akademi), Corporation (Badan), Alliance, Fund, Centre and many others.

Unlimited Company

As the name suggests, an unlimited company does not provide the limited liability opportunity for its members or shareholders. As a result, the members or shareholders are liable for all the losses of the company. It should be noted that unlimited companies are rarely used in Malaysia. In spite of this unique liability framework, all other costs and considerations associated with starting up the company and running its operations are similar to that for limited companies.

The option of converting to a limited liability company may also be exercised by an unlimited company. This can be done through a special resolution and the filing of notice of conversion with the Companies Commission of Malaysia.

Foreign Companies

Foreign companies, as the name implies, are corporate entities incorporated outside of Malaysia. These companies have two options for incorporation or registration within Malaysia.

  1. A local company (i.e. Sdn Bhd) can be established with foreign shareholders
  2. a foreign branch (i.e. branch office) can register the foreign company with the Companies Commission of Malaysia (SSM)

A foreign company which registers as a foreign branch office on the other hand will not be treated as a distinct legal entity under the provisions of Companies Act since they are just an arm of their parent companies and so they have not been incorporated afresh. It is also expensive in establishing a foreign branch where registration fees for SSM are exorbitant that ranges from the minimum of RM 5,000 to RM70, 000 depending on the share capital employed by the foreign company. Branch offices are, however popular with international companies which want to start off short term operations in Malaysia. Otherwise, we would nearly always be better off setting up a local subsidiary company.

FastLane Group offers professional services for company incorporation and business advisory. If you’re uncertain about the most suitable company types for your business, reach out to us for a complimentary consultation. We’re here to assist you in making informed decisions and achieving your goals.