Incorporation of a Subsidiary in Malaysia
A foreign company may carry on business in Malaysia by incorporating a local subsidiary company.
What a subsidiary company is
A subsidiary is a business entity or company that is wholly owned or partially controlled by another company (called the parent company). The parent company usually holds a controlling interest in the subsidiary, ranging from 51% to 99%. If a subsidiary is fully owned (100%) by another company, the subsidiary is called a wholly owned subsidiary. If you form the subsidiary, issue all of its shares to the parent company.
A company can become a parent company in two ways:
1. Through a merger and acquisition (M&A), or
2. Create a smaller company (subsidiary) to handle a specific part of your operation so that the parent company can focus on other strategies and operations.
The amount of power a parent company has over its subsidiaries depends on their relationship. Some specialize in specific verticals, while others are considered "horizontally integrated" -- meaning that all companies operate on the same level. A "vertically integrated" parent company is one that has more than one company in the supply chain or product chain.
The advantages of a subsidiary
A subsidiary company has some advantages over a parent company such as:
1. Brand awareness. As subsidiaries grow in size, they can build their brand awareness and increase their overall market share.
2. Reduced risk. A parent/subsidiary framework reduces risk because it creates a legal separation of entities. When a subsidiary suffers losses, these losses cannot be easily transferred back to the parent company. In the event of bankruptcy, the obligations of the subsidiary company cannot be transferred to the parent company as the parent company and the subsidiary company are legally not the same company.
3. Improved efficiency and diversification. By creating subsidiary silos, they are able to achieve greater operational efficiency by establishing a management style and corporate culture that suits them.
4. Tax incentives. Subsidiaries can receive tax benefits.
5. Easier mergers and acquisitions. Subsidiaries can merge or sell a subdivision of a company more easily and less expensively than a parent company can.
6. Non-profit benefits. A non-profit organization can engage in for-profit activities while maintaining the non-profit status of the parent company.
Why form a subsidiary company
After forming a single member company whose single member is the parent company, you have created a subsidiary company. By compartmentalizing the risk of the subsidiary, you are separating all toxic assets that could cause damage to the parent company. The aim is to avoid financial or reputational damage to other subsidiaries.
When you are ready to break away from the identity and culture of your parent company, you may choose to create a new brand identity for your subsidiary. Here, you'll be able to build upon your parent's cache without compromising their name. You also enjoy the advantage of having multiple identities under the same roof, each with its own culture, management structure and legal structure.
A subsidiary can be a great way to expand your business reach and enter new markets.
How to set up a subsidiary company
Before adding subsidiaries to your small or mid-sized business (SMB), you need to first consider the advantages and disadvantages. Once you decide you are willing to weigh the risks and ensure the requirements are met, you can start creating your subsidiary.
1. Hold a meeting with your board of directors or management. In your meeting, you must state the subsidiary business entity is chosen to be formed in Malaysia and the resolution needs to be signed by the chairman and archived.
2. Organise your paperwork. Prepare the articles of incorporation and complete all of the necessary paperwork.
3. Name your subsidiary. Make sure to create one that isn’t in use in Malaysia.
4. Choose a registered agent.
After filing your formation documents with Bestar, you’ll be able to start your subsidiary.
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