Home Business Advise Decoding The Best Business Structure For Dental Practitioners
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Decoding The Best Business Structure For Dental Practitioners

Unlock the secrets of the best business structure for dental practitioners. Explore key considerations, legal frameworks, and financial advantages to optimize your dental practice.

A dental practitioner has the freedom to adopt different business models for operating a clinic – this could be in the form of a sole proprietorship or partnership, a private limited company (Sdn Bhd), or a Limited Liability Partnership (LLP). Each of these alternatives entails specific responsibilities and potential advantages. In this article, we aim to summarize these key distinctions and hopefully aid you in identifying the best-fit model for your clinic or future business venture.

Setting Up

To establish an Sdn Bhd, you can begin as the sole shareholder and director. Meanwhile, for an LLP, a minimum of two members is mandatory. A sole proprietorship or partnership simply refers to a business registered under an individual’s name.

Understanding Liability

In both Sdn Bhd and LLP structures, your liability is limited. This means that in case of any financial burden or debt, your personal assets remain untouched – it’s the business that bears the brunt. For example, if the business incurs a debt of RM1 million but only has assets worth RM500,000, the remaining RM500,000 debt does not fall onto the individual owners. The debt ends with the business’s assets except in specific circumstances where the liability can flow to the owner such as in the case of personal guarantee undertaken or fraud. However, under a sole proprietorship, the business and the proprietor are regarded as a single entity, making you personally liable for any business-related debts or legal issues. In simpler terms, you bear the brunt of the business’s risks alongside its profits.

Analyzing the Legal Entity

A sole proprietor or partnership income, including clinic earnings, rental income, commission, etc., is collectively taxed, potentially up to a maximum rate of 30% based on the personal tax scale rate. On the contrary, an LLP or Sdn Bhd, as a separate legal entity, can employ you, and your salary from the entity is tax-deductible expenses. The LLP and Sdn Bhd pay a reduced tax of 17% on the first RM600,000 of chargeable income/ profit while the excess is taxed at 24%. The director or partner must declare any salary/fees drawn from the LLP or Sdn Bhd in their personal tax return. With proper planning, the tax for both the legal entity and the owner, collectively, can be optimized. This structure creates an avenue for legal tax mitigation, offering an advantage over the high-risk, illegal tax evasion. Net profits (after tax) retained by the LLP and company can be accrued and distributed to partners or shareholders, and this distribution is tax-exempt in the hands of the recipient.

LLP vs. Sdn Bhd: Which is better?

We typically advocate for the LLP model as the more cost-efficient business vehicle for businesses yielding a net profit between RM300,000 to RM600,000. This choice, however, necessitates identifying another partner, who can be a minority stakeholder. Though the lack of statutory audit in an LLP could pose difficulties in acquiring bank loans, these challenges can be circumvented. The LLP could either opt to have its financial statements audited or you may instead use an Sdn Bhd as your business vehicle, as banks often favor loan extensions to entities with audited financial statements. With this brief summary of the various business models, we hope you can make an informed decision that best suits your business needs. If this article piques your interest and you’d like further guidance or assistance, feel free to email at lowchinann@calow.co or krishnan@vaersa.my. We’re here to provide comprehensive tax as well as business advice tailored to your unique requirements.

Pondering the Cost Advantages of LLP

LLP presents a key advantage over Sdn Bhd primarily in relation to lower compliance costs. Unlike a company, an LLP does not require statutory audits, company secretaries, annual general meetings, or statutory records maintenance, thus reducing overhead costs. An LLP simply needs a compliance officer, who is one of the partners, to ensure the annual accounts and tax responsibilities are met. The compliance requirements of an LLP are similar to that of a sole proprietor.

Managing the Scrutiny from the Taxman

Tax audits, conducted by the Inland Revenue Board, are routine procedures that apply to all tax-paying entities, be they individuals, LLP, or private limited companies. However, the implications and scope of these audits may vary significantly based on the structure of your business. In the case of a sole proprietorship, the audit may be more exhaustive as the Inland Revenue often casts a wider net to thoroughly examine your income, expenses, and assets. The tax authorities may request additional documents such as personal bank statements, credit card invoices, and an inventory of personal assets to ascertain if the tax returns are accurately filed. The rationale for this extensive scrutiny lies in the fact that under a sole proprietorship, the business and owner are seen as a single entity. Consequently, any discrepancies in the tax returns could potentially emanate from either the business or personal transactions of the owner. This increased surveillance demands meticulous record-keeping and can potentially be more intrusive for the proprietor.

 In contrast, the tax audit process for LLP and Sdn Bhd is usually more streamlined and confined to the business entity itself. In these structures, the entities are distinct from their owners, hence the audit primarily focuses on the business’s records. The Inland Revenue does not typically request personal financial documents from partners or shareholders in the course of auditing the LLP and Sdn Bhd.

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