How to Establish a Limited Liability Company in the Kingdom of Saudi Arabia

Amidst the prevailing economic developments worldwide, countries endeavor to introduce the necessary innovations to keep pace with the economic and investment renaissance aimed at increasing the volume of investment and enhancing the rate of economic growth. This is achieved through engaging in commercial activities under a legal entity, with one of the most attractive legal entities being the Limited Liability Company. This form of legal entity appeals to investors as it allows them to engage in various commercial activities, with the partners therein having independent liability where they are only held accountable for the company's debts according to their respective shares. The Royal Commission for Saudi Arabia, by Royal Decree No. (M/132) dated 1-12-1443 AH, established regulations and procedures for Limited Liability Companies and the authorities of management when all shares of the company are transferred to one person. This will be discussed in detail as follows:

• The nature of the Limited Liability Company in accordance with the Saudi system.
• Owner's rights when all partners' shares are transferred to one person.
• Required documents and data for establishing the company.
• How to evaluate the in-kind shares of the Limited Liability Company.
• Financial statements and activity report of the Limited Liability Company.
• Distribution of profits among partners in the Limited Liability Company.

The nature of the Limited Liability Company according to the Saudi system is as follows: It is a company established by one or more individuals with legal or natural personality, and its liability is independent of the financial liability of each partner or owner. The company itself is responsible for the debts and obligations arising from its activities, and neither the owner nor the partners are personally responsible for these debts and obligations except to the extent of their share in the capital.

The owner's rights when all partners' shares are transferred to one person are as follows:

1- When establishing a Limited Liability Company by one person, or if all shares are transferred to one person, the following implications arise:

This individual, as the owner, possesses all the powers and authorities of the manager, board of directors, and general assembly of partners. Their decisions are issued in writing and recorded in the company's register.

 2- The owner has the right to appoint one or more directors to represent the company before the judiciary, arbitration bodies, and others. They are responsible for the management in front of the partner owning shares in the company.

 3- Each Limited Liability Company owned by one person must have an Articles of Association.

The required documents and data for establishing a Limited Liability Company are as follows:

1- The incorporation contract includes the following information: Names and details of the partners, company name, registered office of the company, company's purpose, capital of the company and ways of its distribution among partners, partners' commitment to fulfill the value of their shares, company's duration if applicable, company management, share transfer agreements, method of communication to partners, partners' resolutions, profit and loss distribution among partners, financial year start and end dates, company dissolution, any additional provisions, requirements, or data agreed upon by partners to be included in the incorporation contract that do not contradict legal provisions.

2- The following documents must be attached to the incorporation contract when applying to establish the company:

• Declaration of founders committing to all relevant legal requirements for company incorporation.
• Statement or report prepared by one or more accredited evaluators showing the fair value of in-kind shares if applicable, along with consent from other founders on the specified consideration value.

The evaluation of in-kind shares for a Limited Liability Company is outlined in Article 141 of the Saudi Companies Law as follows:

1- If in-kind shares are provided during the establishment of a Limited Liability Company or an increase in its capital, and their value does not exceed half of the company's capital, they are not required to be evaluated by an accredited appraiser unless the founders or shareholders agree otherwise.

2- If the value of in-kind shares upon establishment of the Limited Liability Company or an increase in its capital exceeds half of the company's capital, they must be evaluated by one or more accredited appraisers. The appraisal report must clearly state the fair value of these shares, which should be presented to the founders or shareholders for deliberation. The providers of the in-kind shares do not have the right to vote on the resolution regarding the report prepared for them. If the founders or shareholders decide to reduce the specified consideration value of the in-kind shares, consent must be obtained from the providers of those shares for such reduction.

3- It is a requirement that the period between issuing the appraisal report by the accredited appraiser estimating the fair value of the in-kind shares and issuing shares in exchange for those shares should not exceed 15 days.

4- If the in-kind shares are not evaluated by an accredited appraiser, or if they are valued differently from the appointed accredited appraiser's estimation, shareholders or founders will be personally liable for all their funds in case of unfairness in the appraisal report and for making up the cash difference for the company. Any claims in this regard cannot be heard after five years from the date of the company's registration in the commercial registry or the increase in its capital, depending on the circumstances.

The financial statements and activity report of a Limited Liability Company are managed as follows:

1- The company's director prepares a report on its activities and financial position for each financial year, including proposals for profit distribution if applicable. These documents must be made available to the company's auditors at least 45 days before the scheduled date of the annual meeting.

2- It is the director's responsibility to provide the partners with the financial statements of the company, the company's activity report, and the audit report through modern technological means or any other method specified in the company's founding contract. This should be done at least 45 days before the scheduled date of the annual meeting.

3- The director is obligated to provide the Saudi Ministry of Commerce with a report on the company's activities at least 21 days before the scheduled date of the annual general meeting.

The distribution of profits among partners in a Limited Liability Company is structured as follows:

1- Net profits and liquidation surplus are distributed equally as rights, unless the company's founding contract specifies otherwise. The general assembly determines the percentage to be distributed to partners from the net profits after deducting cash reserves, if any.

2- Each partner is entitled to their share of profits according to a resolution from the general assembly or partners concerning this matter. The resolution should indicate the due date and distribution date.

In conclusion, a Limited Liability Company possesses numerous advantages that make it an attractive legal entity for investors to establish. Its limited liability regarding debts and obligations, even if all shares are transferred to one person, positions it as one of the most established types of companies that contribute to economic growth in Saudi Arabia, aligning with the Kingdom's Vision 2030. As a legal institution with expertise in Saudi law and its regulations, we are dedicated to facilitating the establishment of Limited Liability Companies within the Kingdom for both Arab and foreign investors. Saadani and Khalifa Legal Consultancy is delighted to be your partner in success and continuous growth. We welcome your inquiries at any time.