Untitled Document

General:

The formation and operations of business entities in Saudi Arabia are regulated by the Companies Law promulgated by a Royal Decree in 1965, as amended in 1967 and 1982 by subsequent Royal Decrees. The provisions of the Companies Law are extensive and cover all types of commercial activities in the Kingdom.

Business entities:

The companies Law recognizes mainly eight types of business entities which are :

General partnership;

Limited partnership;

Partnership limited by shares;

Limited liability company;

Variable capital company;

Joint stock company (corporation);

Cooperative company;

Joint venture.

As mentioned below increasing encouragement is being given for foreign investment to take the form of joint stock companies or limited liability companies, as many of the other forms require a degree of unlimited liability and are thus less appealing.

Other forms of foreign investment however include representative offices and agencies and these are discussed more fully in 'Establishing a Business Presence' section of this profile. A foreign investor is also allowed to set up a branch in the Kingdom.

TOP

The above different forms of enterprises may broadly be explained however as follows:

General partnership

A general partnership, also known as "joint liability partnership", consists of two or more partners who are jointly and severally liable for the debts of the partnership to the full extent of their assets.

Limited partnership

A limited partnership, also known as "mixed liability partnership" consists of at least one general partner who is liable for the debts of the partnership to the full extent of his assets and at least one partner who is liable only to the extent of his capital contribution. A limited partner may not take part in external acts of management.

Partnership limited by shares

In this form of limited partnership, which must have at least one general partner and four limited partners, the interests of the limited partners consist of negotiable shares of equal value, the value of each share being Saudi Riyal SR 50 or more. The minimum share capital must not be less than SR 1,000,000, 50% or more of which is required to be paid in upon formation.

Limited liability company

A limited liability company, also referred to as "limited liability partnership or a Saudi limited liability company" is a private entity formed of two or more partners who are liable for company debts to the extent of their contributed capital. A maximum of 50 partners are allowed in such a company. The total share capital must be SR 500,000 or more, divided into non-negotiable shares of equal value.

The company may not include in its objects the conduct of banking, insurance or savings. Inter alia, requirements are placed on the company in respect of audits, annual general meetings and filing of accounts. The company is required to transfer 10% of net profits each year to a legal reserve until such reserve reaches a level of 50 percent of the share paid-up capital, and an extra ordinary general meeting must be called if accumulated losses have eroded the share capital by 75% or more, to consider whether the company shall continue to exist or be dissolved.

TOP

Variable capital company

As the term implies, the capital of such a company may be varied in accordance with company's Memorandum and Articles of Association. The capital may be increased either by further contributions from the existing partners or by the admission of new partners, and it may be reduced either by the withdrawal of partners or by reduction of their capital.

Joint stock company

A joint stock company or corporation consists of five or more shareholders who are liable for the debts of the company to the extent of their capital contribution. The company may be incorporated only upon the approval of the Minister of Commerce or upon the issuance of a Royal Decree. The share capital must not be less than SR 2,000,000, or SR 10,000,000 if the public is invited to subscribe, and it must be divided into shares of equal value with a par value of SR 50 or more. At least 50% of the capital is required to be paid in upon incorporation. Similar requirements to those in respect of a limited liability company apply in respect of audits, annual general meetings, legal reserves, filing of accounts and erosion of the capital base.

Cooperative company

A limited liability company or a joint stock company may be incorporated as a cooperative for the purposes of achieving specific objects such as reductions in the cost, the selling price of certain products and services or improvements in their quality. Capital is variable and it must be divided into shares of equal value with the par value of each share ranging from SR 10 to SR 50.

Joint venture

A joint venture in Saudi Arabia is not considered as a juristic entity. It is an association of two or more persons which is not made known to third parties. Third parties, therefore, have recourse only against the joint venturer with whom they had business dealings. A joint venture is not subject to the publication requirements applicable to other forms of business entities. This form of business structure is different from the term "Joint Venture" used as common business practice within the Saudi community which is more often than not really a limited liability partnership with foreign participation.

TOP

Legal structures:

For foreign investors wishing to engage in business in Saudi Arabia there is, therefore, a wide range of legal structures available, although it is necessary to obtain permission for each type from the relevant government bodies. If the business involves commercial activities in Saudi Arabia, it is necessary to have a company or branch in the Kingdom although there are special rules for public sector contractors.

As mentioned above foreign businesses are increasingly being encouraged to opt for the joint stock company (corporation) or the limited liability company form in cooperation with Saudi partners.

The rationale behind this is the Government's wish to see foreign businesses making a more permanent commitment to the Kingdom in situations likely to lead to the transfer of expertise and technology.

The joint stock company is generally only available when it is envisaged that shares will be issued to the general public in the future. This applies mainly to banking and ventures involving the exploitation of natural resources. In such cases the joint stock company is the required form. For most investors, however, the limited liability company is the only available form of local incorporation.

TOP

To see the example of Article of Association click here

As stated above foreign companies wishing to do business in the Kingdom may also set up a branch which as with most other forms of foreign investment falls within the scope of the Foreign Investment Regulations. The branch is also subject to the regulatory authority of the Ministry of Commerce.

Other formalities:

Newly formed business entities should notify their existence to the Department of Zakat and Income Tax and the General Organization for Social Insurance. Additionally, registration with the local Chamber of Commerce is mandatory in the Kingdom.

TOP