# Sdn Bhd vs Sole Proprietor vs Partnership: Tax Compared

> A worked tax comparison of a sole proprietorship, partnership, LLP and Sdn Bhd at the same level of profit, including director salary, EPF and the point where incorporating actually wins.

- Category: taxation
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/taxation/business-structure-tax-comparison

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Most comparisons of Malaysian business structures stop at “companies pay 15% and
individuals pay up to 30%,” which is true and useless. At RM100,000 of profit the
sole proprietor pays less tax than the company. The company only wins once profit
climbs, and how much it wins by depends entirely on what you do with the money.

Here is the same profit run through four structures, with the arithmetic shown.

## The rates you are actually choosing between

**Individuals** are taxed on the scale in paragraph 1 of Part I of Schedule 1:
nil on the first RM5,000, then 1%, 3%, 6%, 11% and 19% through to RM100,000, then
**25% from RM100,001 to RM400,000**, 26% to RM600,000, 28% to RM2 million and 30%
above. The 25% band is where sole proprietors start losing.

**Companies** are taxed at 24% under paragraph 2, unless paragraph 2A applies:
**15% on the first RM150,000, 17% on the next RM450,000, and 24% above
RM600,000**. Paragraph 2A requires the company to be resident *and* incorporated
in Malaysia, hold paid-up ordinary share capital of RM2.5 million or less at the
start of the basis period, and have gross business income not exceeding
RM50 million.

**Partnerships** are transparent — the partnership files, but each partner is
assessed individually on their share of divisible income at the scale rates.

**LLPs** are taxed as entities, and paragraph 2D gives them the same 15, 17 and 24
tiers where capital contribution is RM2.5 million or less and gross business
income does not exceed RM50 million.

## The deduction a sole proprietor can never take

A sole proprietor and their business are one legal person. Money taken out is an
appropriation of profit, and section 39(1) blocks it three ways over: paragraph
(a) disallows domestic or private expenses, paragraph (b) disallows disbursements
not wholly and exclusively laid out to produce gross income, and paragraph (c)
disallows any capital withdrawn.

A Sdn Bhd is a separate person, so a director's salary is an ordinary business
expense, deductible under s.33(1) — and so is the **employer's EPF contribution**
on it. That single structural difference drives most of the numbers below.

The same logic applies to a conventional partnership. A “partner's salary” is an
allocation of divisible income, not a deduction against it.

## Worked comparison at RM300,000 of profit

Assume a Malaysian resident owner, RM300,000 of business profit before any
owner's remuneration, and only the individual relief of RM9,000 claimed, so the
two sides are compared like for like.

**Sole proprietorship**

| Step | RM |
| --- | --- |
| Statutory business income | 300,000 |
| Less individual relief | (9,000) |
| Chargeable income | 291,000 |
| Tax: cumulative to RM100,000 | 9,400 |
| Tax: RM191,000 at 25% | 47,750 |
| **Total tax** | **57,150** |

**Sdn Bhd paying a director salary of RM10,000 a month**

| Step | RM |
| --- | --- |
| Profit before remuneration | 300,000 |
| Less director salary | (120,000) |
| Less employer EPF at 12% | (14,400) |
| Less employer SOCSO at the top band, RM104.15 a month | (1,250) |
| Company chargeable income | 164,350 |
| Company tax: RM150,000 at 15% | 22,500 |
| Company tax: RM14,350 at 17% | 2,440 |
| **Company tax** | **24,940** |
| Director employment income | 120,000 |
| Less individual relief | (9,000) |
| Director chargeable income | 111,000 |
| Director tax: cumulative to RM100,000 | 9,400 |
| Director tax: RM11,000 at 25% | 2,750 |
| **Director tax** | **12,150** |
| **Combined tax** | **37,090** |

The company structure saves roughly **RM20,000** at this profit level, and
separately diverts **RM27,600** into the director's EPF account — RM14,400 from
the employer and RM13,200 as the employee's 11% share. That is not tax; it is
deferred savings the sole proprietor would have to fund voluntarily.

One caveat on the EPF figure: contributions are read off the Third Schedule by
wage band, not computed as an exact percentage, except for monthly wages above
RM20,000. Treat RM14,400 as the band-level approximation.

## Where the crossover actually falls

Strip out the salary split and compare the simplest question — sole proprietor
versus a company that retains everything.

| Profit before remuneration | Sole proprietor tax | Sdn Bhd tax, all retained | Winner |
| --- | --- | --- | --- |
| RM100,000 | RM7,690 | RM15,000 | Sole proprietor |
| RM200,000 | RM32,150 | RM31,000 | Roughly level |
| RM300,000 | RM57,150 | RM48,000 | Sdn Bhd by RM9,150 |
| RM500,000 | RM108,060 | RM82,000 | Sdn Bhd by RM26,060 |

The reason the company loses at RM100,000 is that the individual scale gives away
the first RM5,000 free and charges only 1% to 19% up to RM100,000, while the
company pays a flat 15% from the first ringgit. The individual's low bands and
personal relief beat the preferential corporate rate until profit is roughly
double the point most people assume.

Two adjustments move the line:

- **Splitting profit between salary and retained earnings beats both columns**, as
  the RM300,000 example shows — the salary uses up the individual's low bands
  while the balance sits at 15%.
- **Compliance cost pushes the line up.** A Sdn Bhd carries company secretarial
  fees, accounting, an SSM annual return and, unless it qualifies for audit
  exemption, a statutory audit. Those are real ringgit that the tax saving has to
  clear before incorporating is worth doing.

## Getting the money out is a second, taxed step

Profit retained in a Sdn Bhd at 15% is not yet in the owner's pocket. Under the
single-tier system dividends from a resident company are exempt in the
shareholder's hands — but from **YA2025** an individual shareholder receiving
dividend income exceeding **RM100,000** in a year is charged **2%** on the excess
under Part XXII of Schedule 1, with the taxable amount determined by the Income
Tax Rules gazetted as P.U. (A) 148/2025 on 7 May 2025. LHDN's Form BE explanatory
notes work the example: RM2,500,000 of dividends becomes RM2,400,000 of dividend
statutory income after the RM100,000 deduction.

Two percent will not reverse the comparison at these profit levels, but it does
mean the company's headline advantage is not the whole story once cash has to
reach the owner.

## The ownership condition that flips the answer

Paragraph 2B removes the 15% and 17% rates entirely if more than **50%** of the
ordinary share capital is owned directly or indirectly by a **related company** —
one with paid-up ordinary capital above RM2.5 million — in either direction or
through a common parent. Paragraph 2C defines that related company.

From **YA2024** there is a fourth limb. Paragraph 2B(d) disqualifies a company
where more than **20%** of the paid-up ordinary share capital at the beginning of
the basis period is owned directly or indirectly by one or more companies
incorporated outside Malaysia, or by one or more individuals who are not Malaysian
citizens.

Public Ruling No. 8/2025 shows how sharply it bites. In Example 15, a Malaysian
company is wholly owned by a Singapore company whose two shareholders are both
Malaysian citizens. The company **fails** the 20% test, because the immediate
holder is incorporated outside Malaysia. Example 14 aggregates a German
individual's 30% direct holding with 28% held indirectly through another Malaysian
company, reaching 58% and failing.

If your company falls into either category the rate is a flat 24% from the first
ringgit, the sole proprietorship becomes competitive again far higher up the profit
curve, and the same conditions cost you the s.107C(4A) CP204 waiver and the
uncapped small-value-asset allowance as well.

## What about an LLP?

An LLP gets the corporate-style tiers under paragraph 2D on a capital contribution
test rather than a paid-up capital test, and members' profit shares are not taxed
again. What it does **not** get is the two-year CP204 waiver: paragraph 6.6.3 of
Public Ruling No. 8/2025 confirms that s.107C(4A) is for companies only, and does
not extend to a newly registered LLP or to a company that converted into one, even
where the business is treated as continuous.

## Common mistakes

- **Comparing 15% against 30%.** The relevant individual rate at SME profit levels
  is 19% to 25%, not the top band, and the first RM100,000 of chargeable income
  attracts far less.
- **Forgetting that the owner still has to be paid.** A company's 15% applies to
  retained profit. Remuneration is taxed on the individual anyway; only the split
  is optimised.
- **Treating employer EPF as a pure cost.** It is deductible to the company and it
  lands in the director's own account, so it belongs on both sides of the ledger.
- **Assuming a Malaysian-registered company is automatically on the SME rate.**
  Residence, paid-up capital, gross business income, the 50% related-company test
  and the 20% foreign ownership test all have to hold.
- **Ignoring compliance cost.** Below roughly RM200,000 of profit the tax saving
  is small or negative, and the secretarial, accounting and audit bill is not.
- **Assuming a partnership behaves like an LLP.** One is transparent and taxed on
  the partners; the other is an entity taxed on the corporate tiers.

## What's next

Confirm which rate your company would actually qualify for before modelling
anything, since the preferential tiers carry five separate conditions. Then check
the estimate and instalment mechanics, because a newly incorporated company that
qualifies for the two-year CP204 waiver has a materially easier first two years
than one that does not.

## Sources

- Income Tax Act 1967 (Act 53), reprint as at 21 May 2024 — section 39, Schedule 1 Part I paragraphs 1, 2, 2A, 2B, 2C and 2D — https://www.hasil.gov.my/wp-content/uploads/20240521-akta-cukai-pendapatan-1967-akta-53.pdf (LHDN)
- Public Ruling No. 8/2025 — Tax Treatment for Micro, Small and Medium Companies — https://www.hasil.gov.my/wp-content/uploads/pr-8-2025-tax-treatment-for-micro-small-and-medium-companies.pdf (LHDN)
- Tax Rate of Company — https://www.hasil.gov.my/en/syarikat/kadar-cukai-syarikat/ (LHDN)
- Explanatory Notes, Form BE — Dividend Tax under Part XXII of Schedule 1 — https://ef.hasil.gov.my/eBE2026/Pdf/Nota_BE_e.pdf (LHDN)
- Employer Mandatory Contribution — https://www.kwsp.gov.my/en/employer/responsibilities/mandatory-contribution (EPF)

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