Things to consider when setting up a legal entity in the UAE

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Hind Al Soulia - Riyadh - Michael Kortbawi is a partner and Taronish Mistry is a paralegal at law firm BSA Ahmad Bin Hezeem & Associates LLP

The early stages of an entrepreneur’s work can be stressful and confusing. Setting up a business can be quite exciting, but one should consider putting in place the necessary protections. Entrepreneurs should think about setting up a company to safeguard their interests, secure investments, convert the concept into a reality, and grow the business.

We have found that two key factors/questions should be considered when starting your business, and some timely consideration can help immensely in the long run. Those key questions are as follows:

  1. At what stage of the project life cycle should the legal entity be established?

  2. What elements to consider when deciding on setup options?

Below we provide some insight into these questions to help guide entrepreneurs thinking about starting their business and establishing a legal entity in the UAE.

At what stage of the project life cycle should the legal entity be established?

To answer this, we must first set out the stages in a project life cycle to provide context. The five generally recognised stages are: (1) initiating, (2) planning, (3) executing, (4) monitoring and controlling and (5) closing. Stages (3) and (4) sometimes may be combined into a single ‘implementation’ stage.

Although there is not a universally ‘correct’ or specific time to establish a legal entity, ‘closing’ would generally not be the appropriate stage in which to establish a legal entity. Additionally, starting a company, and progressing through the documentation required and other administrative tasks including starting a bank account can take a considerable amount of time. This is especially true for startups and SMEs, as compliance requirements can be burdensome. So, it is recommended that an entrepreneur commence a dialogue with advisors at an early stage. This will enable the entrepreneur and the advisor to be on the same page in terms of what type of entity needs to be established and where. These two factors can greatly impact the timing.

Referring back to the project life cycle, legal advisors can provide input and help plan as early as the initiating and planning stages. This allows the advisor and the entrepreneur to discuss the options available, the documentation required and the expected timeframes. Depending on the business/project requirements, we recommend that the legal entity be established at the initiation, planning or execution stage. Generally, to make use of the limited liability concept and avoid personal liability, the legal entity should be established by the time business contracts are entered into and operations commence. 

So rather than saying ‘at’ what stage the legal entity should be established, the more appropriate answer is that it should be established and fully operational ‘by’ the time trading/services begin. Therefore, depending on the time that it takes to establish the legal entity, secure visas, start bank accounts, the applications and registrations should be commenced accordingly. 

What elements to consider when deciding the setup options?

This fits squarely into your initiating and planning stages. Although there are a multitude of factors that can impact this decision, some of the key considerations usually include: 

The entity could be a limited liability company, a partnership, etc. It is useful to discuss with your business partner(s) how you plan to operate and extract possible profits from the business, as this will impact the choice of entity. You may have noticed that consultancy firms tend to use the limited liability partnership (LLP) structure, or a limited liability company (LLC) structure. One form of entity to avoid is the sole establishment because it does not provide protection for owners. The liabilities of a sole establishment can extend to the owner’s personal assets. The sole establishment is something that people are misinformed about and should be avoided.

Identifying one or more appropriate business activities is a key consideration in starting a company. Which activity you intend to pursue can have a significant impact on the steps that follow, including the incorporation procedure as well as location. Depending on the nature of the business, you may need external approvals and be subject to additional regulations, which will likely result in a longer setup time and increased costs. 

The consideration here can vary from one jurisdiction to another. For example, in the UAE, there is the option of free zones versus mainland, each with its own benefits and drawbacks, but each with a specific purpose. 

Free zones tend to be tailored toward certain sectors or industries. For example, Design District, Dubai Internet City, Dubai Multi Commodities Centre, among others, are tailored to their namesake sectors. This helps establish proximity to and encourages synergies with similar businesses but may also limit the business activities available. It is important to note that free zone businesses are not allowed to conduct business outside of the relevant free zone. Depending on the free zone, set up costs tend to vary significantly, as will rent and office availability. 

On the other hand, mainland companies will have a much greater variety of office options in terms of potential clients and office rental prices. Mainland businesses are licensed by the respective Emirate’s department for economic development. The most popular option for mainland businesses tends to be the LLC, which provides a well-established operating structure, separate corporate and personal liability, and scalability in terms of number of shareholders and directors.

  • Holding company?

Entrepreneurs are sometimes surprised to learn that in setting up their business, they need more than one legal entity i.e., an operating entity and a holding company. This is usually desirable when the entrepreneur is looking to set up and grow the business through external investors. These investors tend to prefer a corporate structure involving a holding company, to shield from potential liability and to improve security of business assets.

The above is a high-level categorisation of the elements to consider. Finer details such as preparing the entity’s corporate documents, setting up a bank account etc. are necessary considerations and your advisor can assist with these.

Ultimately, establishing a legal entity is a major step in any business/project. It should be given due thought to avoid additional stress and unwanted surprises at the time of setting up. As seen from the above, there is no precise time at which the entity should be set up, so long as it is set up in time to serve your best interests. There is an abundance of information available on this topic but narrowing the focus onto your own business idea and needs can often be daunting. Business partners should have a plan and speak to their advisors to understand if they have missed any important elements in their decision-making process. 

 

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