Sdn Bhd vs Sole Proprietor vs Partnership: Tax Compared

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disbursements not wholly and exclusively laid out to produce gross income, and paragraph (c) disallows any capital withdrawn.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.