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Quintessential Steps to Incorporating a Company and Basic Responsibilities

A notification was published by the Companies Commission of Malaysia (“SSM”) regarding the implementation of the Companies Act 2016 (“CA 2016” or “the Act”) on a gradual basis with the first phase being effective from 31st January 2017. Hence, with the introduction and enforcement of the first phase of the CA 2016, the Companies Act 1965 is annulled.

It is often perceived that incorporating a company is a burdensome procedure but hopefully after reading this article, I succeed in providing you with at least a minimum amount of reassurance that it is not as irksome as you would think.

Essentially, a company should have:

  • A name;

  • One or more members, having limited or unlimited liability for the obligations of the company;

  • In the case of a company limited by shares, one or more shares; and

  • One or more directors.

For starters, I have listed below the three main types of companies commonly incorporated, how these companies differ:

A Company Limited by Shares

Companies are categorized as limited by shares if the liability of its members is limited to the unpaid amount on shares (if any) held by the members. A company limited by shares shall be either a private or a public company;

A Company Limited by Guarantee

A company limited by guarantee has members who undertake to contribute an amount towards any shortfall in the company’s assets to settle its debts in the case of the company being wound up. A company limited by guarantee shall be a public company; or

An Unlimited Company

Unlimited companies have no limit on the liability of its members. Such companies shall be either a private or public company.

A person who desires to form a company will need to apply for incorporation with the Registrar of Companies. The applicant will need to produce a statement to submit to the Registrar, containing the following particulars:

  • The of name the proposed company;

  • The status of whether the company is private or public ;

  • The nature of business of the proposed company;

  • The proposed address of the registered office of the company;

  • The name, identification, nationality and the ordinary place of residence of every person who is to be a member of the company; and if the member is to be a corporate body – the corporate name, place of incorporation, registration number and the registered office of the corporate body;

  • The name, identification, nationality and the principal place of residence of every person who is to be a director;

  • The name, identification, nationality and principal place of residence of the company secretary;

  • In the case of a company limited by shares, the details or class and number of shares to be taken by a member;

  • In the case of a company limited by guarantee, the amount up to which the member undertakes to contribute to the assets of the company in the event of it being wound up; and

  • Any other information upon request by the Registrar.

If the Registrar is satisfied that all the necessary requirements of the Act related to the application for incorporation are complied with, and upon payment of the prescribed fee, the Registrar will proceed by:

  • Entering the particulars of the company in the register;

  • Assign a registration number to the company as its ; and

  • Issue a notice of registration.

Next, the Registrar may issue a certificate of incorporation to the company.

Choosing an appropriate name for the company

In accordance with best practices, three names should be considered when incorporating a company. Under Section 26 of the Act, a name can be used if it is NOT

  • Undesirable or unacceptable;

  • Identical to an existing company, corporation or business;

  • Identical to a name that is being reserved under the Act;

  • A name of a kind that the Minister has directed the Registrar not to accept.

The power to approve a chosen name ultimately rests with the Registrar. The approved name of the company will also end with the following:

  • For a public company, the word "Berhad" or the abbreviation "Bhd";

  • For a private company, the word "Sendirian Berhad" or the abbreviation “Sdn Bhd"; or

  • For an unlimited company, the word "Sendirian" or the abbreviation "Sdn"

From my standpoint, I would highly recommend that the services of a competent professional are rendered to ensure that the incorporation of the company not only adheres to the requirements of the Act, but also to guarantee that all procedures involved in forming a company is fulfilled without any setbacks and unnecessary delays.

Company Directors

In accordance with CA 2016:

  • A company shall have a minimum number of one (1) director in the case of a private company, and two (2) directors if it is a public company.

  • The director shall be a person who is at least eighteen years of age.

  • A director is disallowed from resigning or vacating his office if by his resignation or vacation, the number of directors of the company is reduced below the minimum number required – and any purported resignation or vacation in regards of this section will be coined as ineffective unless a person is appointed in his place.

  • For the purpose of the above section, the minimum number of directors –

  • Shall ordinarily reside in Malaysia by having a principal place of residence in Malaysia; and

  • Shall not include an alternative or substitute director.

Furthermore, there is a written law which disqualifies certain people from holding office as a director of a company or whether directly or indirectly be concerned with or takes part in the management of the company, if the person –

  • Is an undischarged bankrupt;

  • Has been convicted of an offence relating to the promotion, formation or management of a corporation;

  • Has been convicted of an offence involving bribery, fraud or dishonesty; and other reasons as determined by the Registrar.

The duties of directors are a sequence of statutory laws and corporate governance owed by the members of the company to the corporation that employs them. The primary duties of directors, out of the string of many is that:

  • A director shall at all times exercise his powers in accordance with the Act, for a proper purpose and in good faith in the best interest of the company.

  • A director of a company shall exercise reasonable care, skills and diligence with –

  • The knowledge, skill and experience that is reasonably expected of a director; and

  • Any additional knowledge, skill and experience which the director inherently has.

With the strict implementation of the Act, it has been stated that a director who contravenes with this section and commits an offense, and upon conviction, will be liable to imprisonment for a term not exceeding five years or to a fine not exceeding three million ringgit or both.

Accounts & Financial Statements

Companies are required to maintain proper books and records and to comply with approved accounting standards, which are applied to the financial statements of a company or the consolidated financial statements (if it is a holding company). In Malaysia, the two accounting standards issued by the Malaysian Accounting Standards Board (“MASB”) are:

  • The Malaysian Financial Reporting Standards (MFRS) for companies other than private entities

  • The Malaysian Private Entities Reporting Standards (MPERS) for private entities.

Companies are not only obliged to apply the appropriate approved accounting standards, but to also have in place a system of internal controls which can provide reasonable assurance that the assets of a company are safeguarded against loss from unauthorized use or disposition and to give a proper account of assets. Furthermore, appropriate internal controls ensure all transactions are properly authorized and that the transactions are recorded as necessary to enable the preparation of the financial statements of the company.

Directors have the utmost responsibility to prepare the financial statements –

  • Within eighteen (18) months from the date of the company’s incorporation; and

  • Subsequently, within six (6) months of its financial year end.

Exempt Private Companies

For the benefit of my readers, I would like to make a précis of what an exempt private company (EPC) is. Companies can be classed as EPC if there are no corporate shareholders and there are not more than twenty (20) members. EPCs are still compelled to adhere to approved accounting standards, maintain proper books and records for not less than seven (7) years and to have their financial statements audited (SSM has recently announced the audit exemption criteria). However, one of the benefits of an EPC is that the audited financial statements will not need to be submitted to SSM, thus providing a fragment of privacy to the company as the audited financial statements will not be available for public viewing.

To declare one’s company as an EPC, the company must lodge a certificate relating to its EPC status for each financial year. This certificate will need to be signed by a director, auditor and company secretary, confirming that:

  • The company is and has, at all relevant times, been an EPC;

  • The audited financial statements and report has been circulated to its members;

  • The company is able to meet its liabilities as and when they fall due as at the date to which the financial statements has been made up.

At Mahzan Sulaiman, we not only provide our clients with an extensive understanding of how a company is incorporated; we also believe that it is of enormous importance that clients are fully aware of the consequences of incorporation and every statutory law that they, as directors or management, will need to comply to.

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