In Malaysia, a sole proprietorship business is owned by one person who is called a sole proprietor and only a Malaysian citizen or permanent resident who has attained the age of 18 years and above is eligible to register for a sole proprietorship.

Since the sole proprietor is not a legal entity, the owner is entitled to all profits generated from the business. However, the owner’s liability is unlimited, not just when the business is having financial difficulty, but also when the business fails and he faces bankruptcy. In this case, the creditors may sue him for debts incurred and also obtain a court order to claim against his personal assets, including his house.

Normally, a person’s ability to run a sole proprietorship business is limited to his area of expertise, which means he relies mainly on himself. He has the freedom to use his entrepreneurial skills to the maximum, make his own decisions and run the business as he wishes. However, to be a successful entrepreneur, he will need to get relevant advice from experts in fields he is unfamiliar with. This expertise is sometimes unavailable when one operates as a sole proprietor.

Furthermore, there are disadvantages pertaining to the availability of accounting information as there is no obligation for sole proprietorship businesses to submit audited accounting reports to CCM every year. Therefore, most owners of sole proprietorships tend to neglect the preparation of proper accounting records. Some owners also exaggerate or underestimate the company’s financial position for their own purposes. So, it becomes a tedious process to access the sole proprietor’s true financial stability when, for example, the owner wishes to apply for a bank loan.

It becomes difficult to expand the business because of the above problems.

The owner of a sole proprietorship usually has to work very hard to sustain his business. If the business is having financial difficulties, he may not be able to get public funds. His capital is limited to the availability of his funds and the profit generated from the business, This would be the reason why many sole proprietorship businesses never take off in a big way.

In many cases, even when a sole proprietorship business is successful, all profits generated are taxed on a personal basis and tax exemptions are limited to personal and family matters. Therefore, as profits increase, so will the taxes. Due to these reasons some owners choose to convert the business from a sole proprietorship to a limited company, incorporated under the Companies Act 1965. Limited companies benefit from tax incentives like capital and manufacturing allowances, to reduce the amount of tax payable to the Inland Revenue Board.

Children or successors will inherit the family business only by way of transfer of ownership. The owner nominates his children via a will or a notarised power of attorney prior to death. In the absence of a written will, the issue will be decided by the courts.

Very often in sole-proprietorship operations, there is no business succession plan and the business no longer operates with the retirement or demise of the sole proprietor.