|  | | | Business Structures in the Kingdom of Saudi Arabia
 The principal legislation governing the formation and governance of companies in the Kingdom of Saudi Arabia (KSA) is the Companies Law issued by Royal Decree No.6, 1965. While no regulations have been issued in relation to the Companies Law there have been a number of amendments made via Royal Decrees. In addition, the passing of other more specific laws supplement the regulatory framework that a company must operate under.
The Companies Law states that the following companies may be formed:
• General Partnerships (joint liability companies);
• Limited Partnerships (partnership in commendum companies);
• Partnership companies;
• Joint Stock companies;
• Partnerships limited by shares (stock commandite companies);
• Limited Liability Companies;
• Variable capital companies; and
• Cooperative companies.
With the introduction of the Foreign Investment Law in 2000 foreigners (other than KSA or GCC nationals) may now register an investment vehicle in KSA provided a license is obtained from the Saudi Arabia General Investment Authority (SAGIA).
General Partnerships (Joint Liability Companies)
A general partnership has two or more partners who are jointly liable for the partnership debts. The name of the partnership must be associated to one or more of the partners and coupled with the business activities of the partnership.
Unless otherwise provided for in the articles of association, a partner cannot transfer or relinquish their shares without the approval of the other partners. There are also restrictions on partners being involved in any other activities similar to that of the partnership. Appointed managers may be one of the partners and the articles of association should stipulate what functions are permitted beyond what is routine partnership management.
Unless stated differently in the articles of association, a general partnership is terminated if one of the partners:
• Dies;
• Is prohibited from acting as a partner;
• Is declared bankrupt or insolvent;
• Withdraws from the partnership indefinitely.
The losses, profits and shares of the partners are determined at the end of the financial year and based on the profit and loss account of the partnership.
Limited Partnerships (partnership in commendum companies)
A limited partnership is made up of two groups of partners. One group must have at least one acting partner personally liable for the partnership debts. The other group must have at least one silent partner liable for partnership debts limited, and proportional to, that partner’s share of capital in the partnership.
The name of the partnership is to be composed of one of the names of the acting partner(s) coupled with the activities of the partnership.
The silent partner cannot intervene in external management functions and participation is limited to internal management as stipulated in the articles of association. Failure to observe this would mean the silent partner’s liability is no longer limited to their share of capital and they become personally liable for partnership debts.
Partnership Companies
A partnership company is a private arrangement and does not have the body corporate personality like many other companies. It cannot issue shares and the operating requirements are similar to that of a general partnership.
The articles of association must specify its purpose, the partner’s rights and obligations and how profits and losses are distributed.
Joint Stock Companies
There are two types of joint stock companies under the Companies Law. There is the public company (sometimes called an “open” joint stock company) or the private company (sometimes called a “closed” joint stock company). The words open and closed refer to the company’s ability to offer its shares for public subscription.
The capital of a public joint stock company must not be less than Saudi Riyals (SAR) 10 million while the capital of a private joint stock company must not be less than SAR two million. The value of each share is to be not less than SAR 50.
If the founders of a public company are not entirely underwriting the share issue themselves then a public offer for subscription must be made within the timeframe and manner stipulated in the Companies Law.
The minimum number of partners in a joint stock company is five with each partner having a limited liability equal to that of their share contribution. There is no maximum number of partners. Generally the company name must not incorporate the name of a natural person.
To avoid delay in formation of the company the articles of association are required to follow the model issued by the Ministry of Commerce and Industry. Changes to the model articles may only be made for reasons acceptable to the Minister. At the time of applying for registration of the company a detailed feasibility study is required that outlines the projected viability of the company.
The company is administered by a board of directors consisting of at least three persons. Each director must own company shares of not less than SAR 10,000 and these shares must be deposited and held with an approved bank for the minimum holding period specified in the Companies Law.
Although the board of directors has very broad powers to manage the company, they will be held jointly liable for damages emanating from their mismanagement of company. Some director remuneration amounts are regulated (for example, payments are linked to a percentage of company profits).
Each year the company must set aside 10% of its annual net profits as a statutory reserve until 50% of its capital is reached. If company losses amount to 75% of the company capital the board of directors must convene an extraordinary meeting to consider future continuation or dissolution of company.
Joint Stock Companies have regulated procedural and financial reporting requirements to both shareholders and the government regulator. The measure of government supervision is greater for a public joint stock company.
The following joint stock companies cannot be established without first receiving a license issued by Royal Decree:
• A franchised company;
• A company managing a public utility;
• A company subsidised by the state;
• A company in which the state or other public corporate bodies are participating in;
• Insurance companies; and
• A company that practices banking functions.
Partnership Limited by Shares (stock commandite companies)
A partnership limited by shares is made up of two groups. One group must include an acting partner who is personally liable for the partnership debts. The other group must include at least four shareholder partners who are liable for partnership debts to the extent of their proportionate share capital.
The capital of the partnership must not be less than SAR one million in equal shares with each share having a value of not less than SAR 50. The same management provisions exist as for the general partnerships.
Following incorporation of the partnership a shareholder general assembly must appoint a control council comprising at least three shareholders. The control council must monitor partnership business and express its opinions on issues presented by the general manager.
Unless stated differently in the articles of association, a partnership limited by shares is terminated if one of the partners:
• Dies;
• Is prohibited from acting as a partner;
• Is declared bankrupt or insolvent;
• Withdraws from the partnership indefinitely.
Limited Liability Companies
A limited liability company must have between two and 50 partners who are liable for company debts to the extent of their shareholding. The shares are not publicly tradable. The minimum capital amount of SAR 500,000 is divided into shares of equal value. Where a foreign investor (other than KSA or GCC nationals) is involved there is no minimum level of capital as the amount is set by the appropriate licensing authorities.
This type of company cannot conduct business that is of an insurance, savings or banking nature. Company articles of association are required that must be signed by all the partners. The company capital must be deposited in an approved bank prior to incorporation and the bank will hold this capital until registration is complete.
A share registry must be maintained and statutory pre-emptive rights exist for any disposition of shares. The company can be managed by one or more managers or a board of directors as stipulated in the company articles of association.
Once the number of partners exceeds 20 a control council is required to be appointed. This control council is composed of at least three partners. The function of the control council is the same as that for a partnership limited by shares.
Each year the company must set aside 10% of its annual net profits as a statutory reserve until 50% of its capital is reached. If company losses amount to 75% of the company capital the managers must convene a meeting with all partners to consider future continuation or dissolution of company.
Variable Capital Companies
Each company structure mentioned above is entitled to stipulate in its articles of association that its capital may be increased by new payments from the existing, or new, partners. It may also provide for a reduction in capital should one partner recover their share value.
This type of company must have a capital amount of no more than SAR 50,000 upon incorporation. The capital may be raised on an annual basis provided each raise is no more than the stated initial capital amount.
In addition to the provisions contained in the articles of association for the company, the raising and decreasing of capital is not subject to any conditions or special procedures. Unless the articles of association provide otherwise, a company is not terminated if one of the partners:
• Is dismissed;
• Is prohibited from acting as a partner;
• Is declared bankrupt or insolvent;
• Withdraws from the company indefinitely.
Cooperative Companies
A joint stock company or a limited liability company may be incorporated as a cooperative company if the company aims, with the joint efforts of the partners, to achieve:
• A reduction in cost, purchase, or sale price of certain products or services, through the company practice of a producer or stock broker;
• Improving quality of products or services provided by the company to the partners or those provided by the partners to consumers.
With the exception of the Companies Law provisions to the contrary, and other laws that provide for this type of company, the company is subject to the above provisions relating to a joint stock company or limited liability company.
The share value must be between ten and fifty Saudi Riyals.
The company is able to benefit from all privileges prescribed for cooperative societies and the Ministry of Commerce and Industry has the same power in controlling and dissolving the company as the Ministry of Labour and Social Affairs has pursuant to the cooperative society’s law.
A license to incorporate is required from the Minister of Commerce and Industry. The company is to be managed by a board of directors of no less than three persons who are not remunerated for their work.
The partners may receive a percentage of the net profits in accordance with the constitution provided such profits are not more than 6% of the paid capital. Provided the company is able to meet its profit distribution obligation, each year 10% of its remaining profits are to be set aside as reserve until the reserve amount reaches the capital amount.
Foreign Investment Companies
A foreign investor may conduct business in KSA by establishing one of the following company structures:
• Limited Liability Company;
• Joint Stock Company;
• Branch;
• Technical Scientific Services Office;
• Temporary Commercial Registration;
• Informal arrangements may include distributorships, agencies and franchises.
Foreign investors (other than KSA or GCC nationals) can usually own up to 100% of the capital but exceptions do exist and there are restrictions on the type of business activity the company can engage in. Capital amounts and shareholding requirements differ depending on the type of company and the proposed activities it intends to undertake.
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