Benefits of Registering Limited Liability Company in Saudi Arabia: Most of the business investors in the Kingdom analyze different business types to know which will be more beneficial for establishing a small startup. In this article we have discussed in detail some important information related to LLC like what is the LLC business structure, its features, changes through new law and its benefits, etc.
What is Limited LIability Company in KSA
The limited liability company (LLC) in Saudi Arabia is one of the most popular and preferred business structure or type to be established by a GCC individual or foreign investors. A limited liability company in KSA is considered as a separate legal identity from its shareholders in the eyes of Saudi law. As its name reflects, the liability of shareholders in LLC are limited or we can say that they are only liable as per their share capital or invested sum of shares and can’t be liable to or responsible for the company’s debts or obligations.
Features of Limited LIability Company in KSA
A limited liability company in Saudi Arabia is considered as equivalent to private limited companies and is the most common form of business module in the Kingdom. Let’s us discuss the main characteristics of limited liability companies (LLCs) in KSA with the help of differents for establishment point of view, for example:
Number of Shareholders or Partners in Saudi LLC
According to Saudi New Companies Law 2022 a limited liability company can be established by a minimum of one and maximum of 50 shareholders or partners. A sole partner may only form a single person LLC in KSA but that single partner LLC may not own or establish another single partner LLC in Saudi Arabia.
Capital Required to Incorporate an LLC in KSA
There is generally no minimum capital requirement in general for registering a limited liability company in Saudi Arabia except for certain types of business activities through companies licensed by the Ministry of Commerce and Industry (MOI) or the Capital Market Authority (CMA) which require different minimum capital. For example, SAR 30 million is required for property investment projects, SAR 500,000 (with revenue or asset value requirements) for contracting business activity, and SAR 30 million for commercial activity with a commitment to invest at least SAR 200 million over the first 5 years in case of 100% foreign ownership of LLC.
Foreign Ownership of LLC in Saudi Arabia
A foreign investor can establish a limited liability company in KSA with 100% ownership or share capital and run by its own foreign management except in some business activities where he or she needs some Saudi partners. For example a foreign owned LLC in the business activity of Communication requires at least 25% shares and in Transport business activity 30% shares by Saudi citizens.
No Public Participation in Saudi LLC
There is no legal provision in the LLC to offer its participation interests (shares) for public subscription. If a limited liability company in Saudi Arabia wants to open for public participation in share capital funding the LLC must be converted to a joint stock company (JSC).
Liability of Shareholders in Saudi LLC
As per Saudi New Companies Law 2022 there is no personal liability of shareholders for the debts of the limited liability company (LLC) in Saudi Arabia. A shareholder in an LLC can not be personally liable for the financial loss or debts of the company except:
- If such partner causes in bad faith the company to be dissolved or suspended prematurely,
- If fails to separate company business from his or her own, and
- If started business on behalf of the company’s account before completing legal incorporation of the company.
Management of LLC in KSA
A limited liability company (LLC) in Saudi Arabia is managed by either a sole manager or a board of managers or directors. Thus LLCs business entities in KSA can be managed by a single general manager or by a board of directors, as the shareholders of the company may decide.
Maintenance of Confidentiality in Saudi LLCs
It is the duty of all shareholders or partners of an LLC in KSA to maintain its confidentiality in respect of company information they receive in their personal capacity as partners of the company.
Transfers of Shares in Saudi LLC
The shares of an LLC in KSA can be transferred to third parties and are subject to a statutory pre-emption right of the company’s own shareholders. Transfers of LLC shares must be:
(i) recorded in the company’s share register lodged with the Ministry of Commerce and Industry (MOCI) and
(ii) should be reflected in the company (LLC’s) articles of association (AOA) through execution of amended articles of association of the company before a Saudi notary public. Partner shareholders of the LLC are able to specify a valuation method for their interests in the company in the articles of association.
Changes in Saudi Limited LIability Company 2022
In comparison to the old Companies Law, the Saudi new law introduces important required changes to attract more investment especially foreign in the following areas:
1. Incorporation Documents Required
The Saudi New Companies Law specifies that the declaration, documents, and articles of association are required to be submitted for the incorporation of a limited liability company (LLC) in KSA. Two of the above documents must be submitted for the establishment of new companies, for example:
- A statement from shareholders or partners stating that the new LLC company complies with the requirements of the Saudi New Companies Law relating to the registration of companies.
- A statement or report prepared by an accredited valuer showing its fair value if there is any share capital contribution in kind.
2. Issuing Security Instruments for LLCs in KSA
Creation of security instruments for limited liability companies (LLCs) in Saudi Arabia in the past was difficult practically due to the lack of required regulatory framework. The New Companies Law 2022 permits LLCs to pledge their shares, issue Sukuks (lease certificates) or any other debt instruments. Thus, the Saudi New Law allows LLCs to issue negotiable bonds and other financing instruments under the capital market laws and regulations. This provision makes LLCs flexible to pledge their shareholdings and increase their access to financing in Saudi Arabia.
3. Duty and Responsibility of Directors and Managers
The new Companies Law of Saudi Arabia clarifies that managers and directors of LLCs are not responsible or liable for losses to the company arising from their decisions. If their decisions do not show their personal interests. But the decisions are based on their reasonable judgment of the objective situation and full knowledge of the relevant matters acting in the best interests of the company. However, the old Companies Law is not clear in this regard and inconsistent court rulings exist.
4. LLCs can Buyback Shares
Under the New Companies Law, a limited liability company in Saudi Arabia may buy back its shares, which have no voting rights. The buyback shares rule authorizes LLCs in Saudi Arabia to restructure their existing share capital more quickly as per need and enable shareholders to explore new exit routes.
5. LLCs Shareholders Right of Drag-along and Tag-along
The articles of association (AOA) can have the consent of shareholders representing 90% or more of the company’s share capital allowing the majority of shareholders to require other shareholders jointly to transfer all shares of the company to a bona fide third party on the same terms and price with a guarantee of majority shareholders to minority shareholders the same terms and price for selling their shares together. This type of share transfer provision for the first time Saudi Companies laws have recognised the LLCs’ shareholders rights of drag-along and tag-along. This type of share transfer was very difficult to enforce before this law.
6. Compulsory Dissolution of LLCs Because of Losses
According to the old companies law, if a limited liability company (LLC) lost more than 50% of its capital, the manager or director must write down in the commercial register and call a meeting of shareholders within 90 days of loss information to discuss whether to continue the company’s business or dissolve the company. In other conditions in which the manager fails to call a shareholders’ meeting, or if the meeting is called but it fails to make a decision, then the LLC company will be compulsorily dissolved.
But the Saudi New Companies Law eliminates the need for the compulsory dissolution of LLCs in the conditions of company’s losses reaching more than 50% of its capital. As per new law if a limited liability company in KSA loses more than half of its capital, the manager has 60 days to call a meeting of the company’s shareholders after knowing the loss whether to continue the business with effective relevant measures, or dissolve the company.
Benefits of Limited Liability Company in Saudi Arabia
There are many advantages of establishing a limited liability company in Saudi Arabia like it has a separate identity, limited liability of shareholders, flexible existence, flexibility in management structure, free financial interest transferability, etc. Let’s know some of the important benefits of limited liability company in Saudi Arabia below.
Reasons to Establish Limited Liability Company in KSA
Here will discuss some of reasons to establish limited liability company in Saudi Arabia and for those reasons why most investors choose to establish LLC instead of any other company type in KSA, for example:
Minimum 1 and Maximum 50 Shareholders Requirements
A limited liability company in the Kingdom of Saudi Arabia can be incorporated by a minimum of 1 and maximum of 50 shareholders. But if its shareholders number becomes more than 50 then it needs to be converted to a joint stock company (JSC). A more important concern as per new law is that an LLC in KSA may be converted into a JSC if shareholders who hold more than 50% of the shares in the company request, unless the Articles of Association (AOA) specify a lower limit.
Minimum Directors (or officers) and Residency Requirements
Saudi New Company Law allows a limited liability company KSA to have either a single director (general manager) or a board of directors. In case an LLC business entity in Saudi Arabia has more than 20 shareholders or partners then there is a need for a supervisory board to be constituted consisting of at least 3 shareholders to supervise the board of directors or general manager (GM). An LLC in KSA does not require residency for directors.
Minimum Share Capital Requirements
Generally there is no minimum amount of capital requirement for the formation of an LLC in Saudi Arabia under the Companies’ Law. But the Ministry of Investment of Saudi Arabia (MISA) may impose a minimum“capital requirement for establishing an LLC through a standard license in some business activities, say SAR 500k. Once the Commercial Registration (CR) for LLC registration is issued, the business firm will have 90 days to capitalize it appropriately and take the bank’s certificate confirming the capital for the submission to MOCI.
LLC in KSA Avoid Double Taxation
A limited liability company in Saudi Arabia, established as a small startup business entity depending on how many employees or shareholders there will be, can avoid double taxation as applicable in other cases. As in KSA double taxation is usually applicable when an investor chooses a C-Corp type business structure, when the company and the owner are both taxed separately. And an LLC is out of this provision and taxed more like a sole proprietorship.
Changes in LLCs Can Be Done Easily
Another advantage of a limited liability company (LLC) in KSA as a small startup business is that once it is established it requires least continual maintenance, and can add new partners or sell its shares to someone else more easily. Thus an LLC is more simple than the C-Corp business structure, because C-Corp needs minutes for making board decisions relating to any changes. We can say that LLCs business structure in Saudi Arabia have fewer restrictions on different administrative elements in comparison to other types of business entities.
LLC’s Shareholders Can Protect Their Personal Assets
The most important benefit or reason for investors to establish a limited liability company in Saudi Arabia as a small startup business is to protect their personal assets against lawsuits against the company. In comparison a sole proprietorship can be a risky business entity and a general partnership even more risky in the same situation.
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