Legal forms of business and ownership rules in the UAE

By Naveed Kashif, Director, Corporate Services, Biznet

In my previous article “Guide To Business Setup in Dubai Mainland”, I discussed how one needs to match their business activity with the legal form of business. In this two-series article, you will find all the Legal Forms of Business and Ownership Rules in the United Arab Emirates.

 

What are the legal forms of business and ownership rules in the UAE?

SOLE ESTABLISHMENT
A Sole establishment is a business owned by an individual, not a company. This person will own 100% of the business, control all of its operations and keep 100% of any profits. He or she will also be 100% responsible for business debts and any other financial obligations.

A business owned by a natural person to practice economic activity in the emirate of Dubai, inseparable of its owner personality and financial standing, being fully responsible for all financial liabilities against others.

General Rules
• A sole proprietorship can only be owned by an individual, not a company. This person will own 100% of the business control all of its operations and keep 100% of any profits. He or she will also be 100% responsible for business debts and any other financial obligations.
• A professional-type sole proprietorship can be owned by an individual of any nationality.
• A sole proprietorship that is industrial or commercial can be owned only by UAE Nationals or GCC Nationals.
• A sole proprietorship that is a commercial or industrial business must be owned 100% by a UAE National.
• A sole proprietorship requires a Local Service Agent (LSA) if the owner is not a UAE-National.

Ownership Rule
A professional-type Sole Proprietorship can be owned by an individual of any nationality. If the owner is a National of a country other than the UAE or GCC, they require a Local Service Agent.

A Local Service Agent (LSA) is a UAE National who manages licensing requirements and other government-related matters for your business, in exchange for an annual fee. The LSA has no responsibility and financial obligations to the business; they also have no legal interest in the management, business, profits or assets of the branch.

A Local Service Agent Agreement explains the relationship and the obligations of the owner and the LSA. This agreement must be authenticated by a Notary Public/Court within the UAE.

A Local Service Agent Agreement explains the relationship and the obligations of the owner and the LSA. This agreement must be authenticated by a Notary Public/Court within the UAE.

 

CIVIL COMPANY
A Civil Company is a business partnership for professionals in recognized fields such as doctors, lawyers, engineers and accountants. A Civil Company can only practice professional business and is 100% owned by professional partners.

An activity practiced by a natural person or more, involving the use of the individual’s physical or intellectual powers and effort and/or using tools/instruments with a limited capital.

General Rules
• A civil company can only practice professional business and is 100% owned by the professional partners, whatever their nationalities.
• A civil company for engineering must have one partner who is a UAE National, who owns no less than 51% of the business and must be an engineer of the same type as the business’s activity.
• A foreign company can be a partner in a civil company, as long as the foreign company is in the same profession as the civil company.
• Most civil companies require a Local Service Agent (LSA) if there is no UAE-National partner in the business. The local service agent is a UAE National who manages licensing requirements and other government-related matters for your business, in exchange for an annual fee. The LSA has no responsibility for your business and no financial commitment to the business or its activities in Dubai or elsewhere.

Ownership Rule
A Civil Company can be owned by professional partners of any nationality. If the owner is a National of a country other than the UAE or GCC, they require a Local Service Agent (LSA).

A foreign company can be a partner in a Civil Company, as long as the foreign company is in the same profession as the civil company.

Activity-based Exceptions:
An engineering Civil Company must have one partner who is a UAE National, who owns no less than 51% of the business and who must be an engineer of the same business activity. A Civil Company that offers legal services does not require a local service agent.

 

LIMITED LIABILITY COMPANY
A Limited Liability Company (LLC) is a flexible form of enterprise that blends elements of partnership and corporate structures. An LLC must have between 2 – 50 shareholders, each of whom is liable only to the extent of his or her share in the capital of the company.

LLCs can conduct any industrial or commercial business, but not professional – except banking, insurance or investment. LLCs cannot practice law, auditing, accountancy or any other type of consulting service.

The business name should be the same as the trade name or contain the names of one or more of its partners. The phrase “Limited Liability Company” must also be added to the business name. LLCs must appoint between 1 – 5 managers for the business. The managers may be selected from the partners. Unless the Memorandum of Association states otherwise, the manager has full powers of administration. Within the scope of his or her powers, the manager’s actions and commitments are binding to the business.

LLCs must appoint a UAE-accredited auditor. In case of the death of any partner, his or her shares are transferred to the heirs mentioned in the will.

A limited liability company is an association of a maximum number of fifty and minimum of two partners. Each of them shall be liable only to the extent of his share in the capital, and the partners shares are not made in the form of negotiable instruments.

General Rules
• A limited liability company shall have a name derived from its objectives or from the name of one or more partners.
• The term “with limited liability” shall be annexed to the company’s name and so shall the amount of its capital.
• With the exception of insurance, banking and investment of funds for the account of others, a limited-liability company may practice any legal activity.
• The Limited-Liability company will have sufficient capital to achieve its objects. The shareholders will also have the right to determine the par value of the shares. A share shall be indivisible.
• Profit and loss shall be divided equally between shareholders.
• The management of the limited liability shall be assumed by one or more manager(s). They shall be selected either from the partners or from other provided that their number does not exceed five.
• The managers shall be appointed under the company Memorandum of Association or a separate contract for a limited or an unlimited period. They shall be appointed by the Partner’s General Assembly.
• Unless the powers of the manger are fixed in the company Memorandum of Association, the company manager shall have full powers to carry out management affairs of the company, and his actions shall be binding on the company, provided that they are substantiated by the capacity under which he acts.
• In the event of more than one manager, the Memorandum of Association may provide for the formation of a penal of managers.
• Should there be more than seven partners there; supervision shall be vested in a board comprising at least three partners.
• A company with limited liability shall have a general meeting comprised of all the partners.
• Unless otherwise stipulated in the Memorandum of Association, the General Meeting resolutions shall be valid only if adopted by a number of votes representing at least one half of the capital.
• It is not permissible to amend the company Memorandum nor to increase or decrease its capital, save by the approval of a number of partners representing three quarters of the capital.

Ownership Rule
At least 51% of LLCs must be owned by UAE Nationals, and can be owed by GCC nationals by up to 100%. The Memorandum of Association can distribute profits in a different ratio.

Shares of an LLC cannot be offered to the public. The company may not resort to public subscription to establish or increase its capital or secure loans, and it may not issue any negotiable stocks or shares.

 

PRIVATE SHAREHOLDING COMPANY
A Private Shareholding Company (Private Joint-Stock Company) is a partnership of at least three individuals. The partners must invest a minimum capital of AED 2,000,000 in the business. A Private Joint-Stock Company can be created for any commercial or industrial type of business. Professional activities are not allowed under this legal form. The company must have an appointed manager.

A number of founders, not less than three, may, among themselves, establish a private joint-stock company whose shares are not offered for public subscription and they may subscribe to the full amount of the capital which not be less than two million dirhams.

All provisions contained herein with regard to public joint-stock shall apply to private joint-stock shall apply to private joint stock companies.

Ownership Rule
At least 51% of a Private Shareholding Company (Private Joint-Stock Company) must be owned by UAE Nationals, and can be owed by GCC nationals by up to 100%.
While the shares of a Private Shareholding Company (Private Joint-Stock Company) cannot be offered to the public, the business can be converted to a public company two years or more after its creation, given certain conditions.

1. The nominal value of the issued shares is fully paid up
2. A period of not less than two financial years has expired
3. During the two years preceding the application for conversion, the company achieved net profits distributable to the shareholders, the average value of which is not less than 10% of the capital
4. A resolution of the extraordinary assembly for the conversion of the company is adopted by a majority of shareholders representing at least three quarters of the company’s capital.

 

PUBLIC SHAREHOLDING COMPANY
A Public Share Holding Company is a company whose capital is divided into transferable shares of equal value. It must have a minimum capital of AED 10,000,000.

The business name cannot include the name of any of the shareholders, with the exception of patents registered in the name of a shareholder or if the business uses a store that has the name of a shareholder. The phrase “Public Shareholding Company” must be included in the business name.

Any company whose capital is divided into negotiable shares of equal value shall be considered a public joint-stock company and a partner therein shall be liable only to the extent of his capital share.

General Rules
• A public joint-stock company shall derive its firm-name from its company is intended for the investment of a patent of invention registered in the name of the said person, or it has, upon incorporation or thereafter, acquired a premises and has adopted that premises; name as its own.
• In all cases, the term “Public Joint Stock” should be appended to the name of the company. It is not permissible, however, for a public joint-stock to adopt the name of another company or a name similar thereto. The latter company may otherwise plead to the administration name to change it.
• The company capital must adequately achieve the objectives of its incorporation, and in all cases may not be less than ten million dirhams.
• He shall be deemed a founder anyone who signs the initial Memorandum and Articles of the Association with the intent to assume the liability arising therefrom. Incorporation of the company may be permitted only if the number of founders is not less than ten.
• However, the Federal Government or the Governments of the respective member-Emirate may independently establish a company, and may involve a number of capital subscribers less than that reserved in the preceding sub-clause.
• The founders shall elect a panel inter se comprising a minimum of three and a maximum of five members to finalize establishment formalities with the concerned authorities.
• Founders shall subscribe to a minimum of 20% and a maximum of 40% of Association’s Capital.
• The management of a company shall be vested in a board of directors comprised in accordance with the Articles of Association which shall also state the number of the Directors and their term of office, provided that their number is not less than three, and not more than twelve directors and their term of office does not exceed three years. A Director may be elected for more than one term.
• The chairman of the board of directors as well as the majority of the directors must be UAE nationals.
• The Board of Directors shall assume all the powers necessary to execute the businesses required in satisfaction of the company objectives, save such powers as may be vested by the law or the company Articles of Association in the General Assembly.
• The General Assembly may, even if it is otherwise stipulated in the company Articles of Association, discharge all or part of the Board members.
• Stocks issued by the company are shares and debentures.
• It is not permissible to create founders’ shares or to grant the founders or others any particular preferences. It is further not permissible for the company to issue preference shares of any kind.
• The company capital shall comprise equal shares. The nominal value of each share shall be not less than one dirham and not more than one hundred dirhams. Upon incorporation of the company it is not permitted to issue shares at a lower or higher price than the nominal value plus issue charges.
• All company shares shall maintain equal rights and obligations.
• Shares issued shall be nominative and negotiable. It is not permitted to cause their issue to bearer. A share is indivisible.
• No increase in the company capital may be effected except after the principal capital was fully paid-up.
Capital increase shall be affected by either of the following methods:
• Issue of new shares,
• Merger of reserves into the capital, or
• Conversion of debentures into shares.
Subject to the Ministry’s approval, capital shall not be decreased except under a resolution adopted during an Extra-ordinary General Meeting and after the Auditor’s report is heard, such decrease may be made in either of the following two cases: (1) If the capital exceeds the company’s needs; (2) If the company sustains loss which may not likely be recovered from future profits.

Ownership Rule
A Public Share Holding Company must have at least ten founding members who are UAE Nationals, owning between 20% and 40% of the capital shares.

 

About the author

Naveed Kashif is Director, Corporate Services at Biznet Consulting advising clients on corporate services and Government affairs.

His expertise in building relationships with government officials and giving advices on all legal forms of businesses includes; structuring and re-structuring of legal entities, holding companies, branches, and local establishments, and helping companies to incorporate in the UAE by assisting them to get license from the relevant regulatory authorities.

Naveed is specialized in Free Zone, Offshore, and Mainland company formation and has developed a detailed knowledge of the Federal Commercial, Free Zone, Offshore and, Labor laws related to establishing and managing companies, visas, labor disputes and work permits, the in UAE.

Naveed can be contacted at: n.kashif@biznetconsulting.ae