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The limited liability company (LLC) is the most common choice for entrepreneurs and investors in the Kingdom, because it separates the company’s assets and liabilities from those of its partners and offers flexible management without the complexity of a joint stock company. The new Companies Law, issued by Royal Decree No. M/132 dated 1/12/1443 AH, has reorganized the LLC under more flexible rules.
In this guide, we explain the practical steps of LLC formation in Saudi Arabia, the particulars the articles of association must contain, and the clauses many partners overlook until the first dispute arises.
What Is a Limited Liability Company Under the New Companies Law?
Under Article 156, an LLC is formed by one or more natural or legal persons, and its financial liability is independent of that of each of its partners or its owner. The company alone is liable for its debts and obligations, and a partner is liable for them only to the extent of their share in the capital.
The partners set the capital in the articles of association, and it is divided into shares of equal value that are indivisible and may not be traded in the form of securities (Article 174). We found no general minimum capital requirement in the law, but certain activities or licensing authorities may require a specific amount, so this should be checked before incorporation.
The Single-Person Company
The law allows an LLC to be formed by a single person, or for all of its shares to end up owned by a single person. In that case, the owner holds the powers of the manager, the board of managers and the partners’ general assembly; the owner’s decisions are recorded in writing in a special register kept by the company, and the owner may appoint one or more managers to represent it (Article 157). A single-person company is formed under bylaws rather than articles of association (Article 7).
Steps to Form a Limited Liability Company
- Choose and reserve the trade name: the Ministry of Commerce allows trade names to be reserved online through the Saudi Business Center platform, without requiring the entity type or activity to be specified at this stage.
- Define the activities and confirm the licenses each activity will require after registration.
- If there is a foreign partner: the partner must be registered with the Ministry of Investment before investing, in accordance with the Investment Law.
- Draft the articles of association (or the bylaws for a single-person company) and approve them through the platform. The law requires them to be in writing, failing which they are void, and to be entered in the commercial register (Article 8).
- Register in the commercial register and obtain the documents, then complete post-registration steps such as zakat and tax, social insurance (GOSI) and opening a bank account.
Incorporation fees and service charges are shown when you apply on the Saudi Business Center platform. We recommend checking them there directly, as they are subject to change.
LLC Articles of Association: Mandatory Particulars
Article 158 provides that the articles of association must, in particular, include certain particulars, the most important of which are:
| Clause | Why it matters |
|---|---|
| Partners’ details, company name, head office and objects | Defines the company’s identity and scope of activity; acting beyond the objects may expose management to liability |
| Capital and each partner’s share | The basis for profit distribution, voting and liability |
| Method of management and appointment of managers | Prevents a management vacuum and determines who represents the company |
| Share transfer provisions | Protects partners against the entry of an unwanted partner |
| Notification and decision-making procedures | Reduces challenges to the validity of resolutions |
| Distribution of profits and losses, and the financial year | Unequal ratios may be agreed under Article 23 |
| Grounds for the company’s dissolution | Regulates exit before it turns into a dispute |
The founders also attach an undertaking to comply with the requirements of the law, and where there are in-kind contributions, a valuation report from one or more accredited valuers.
Management and the Partners’ Assembly
- The company is managed by one or more managers, who may be partners or non-partners, appointed in the articles of association or in a separate contract for a fixed or indefinite term; a board of managers may also be formed (Article 160).
- The manager represents the company before the courts, arbitral tribunals and third parties, and a change of manager cannot be relied on against third parties until it has been registered (Article 162).
- If the position of sole manager becomes vacant, the partners must appoint a replacement within fifteen days (Article 163).
- The partners may remove the managers, and partners holding at least one quarter of the capital may ask the competent court to remove them (Article 164).
- The partners’ general assembly meets at least once a year within the six months following the end of the financial year, and partners holding 10% of the capital may request that it be convened (Article 165).
- Resolutions are valid only if approved by partners representing more than half of the capital; if this majority is not reached, a second meeting is called at which resolutions are passed by a majority of the shares represented, unless the articles of association provide otherwise (Article 166). Each partner has a number of votes equal to the number of their shares (Article 171).
Transfer of Shares and the Right of Pre-emption
Ownership of shares is transferred by entry in the commercial register (Article 25). If a partner wishes to sell their shares to a non-partner, they must notify the other partners, through the manager, of the terms of the sale and the buyer’s name. Within thirty days of the notice, the other partners may request to buy back the shares, or the company itself may purchase them. The pre-emption right does not apply to transfers by inheritance, by will or under a court judgment, and the articles of association may amend these provisions (Article 178).
Illustrative Example
A partner in a three-partner company wants to sell their shares to an outside investor. They must notify the other partners, through the manager, of the terms of the sale and the buyer’s name, and the other partners then have thirty days to request to buy back the shares on the same terms, unless the articles of association set different procedures or time limits. This is why it is wise to agree on a clear valuation mechanism in the articles in advance.
Serious Losses
If the company’s losses reach half of its capital, the manager must call the partners’ general assembly within sixty days of becoming aware of this, to decide whether the company should continue, with the measures needed to address the losses, or be dissolved (Article 182). Failure to meet this obligation is one of the most common grounds on which managers are held accountable.
Common Mistakes When Forming an LLC
- Relying on the standard template articles of association without tailoring the clauses on management, share transfers and exit.
- Failing to support in-kind contributions with an accredited valuation.
- Overlooking a shareholders’ agreement to cover matters that are better kept out of the publicly registered articles.
- Postponing sector-specific licenses until after registration, even though the new Commercial Register Law links carrying on a registered activity to obtaining its license within a specified period.
Frequently Asked Questions
Can one person form a limited liability company?
Yes. The law permits this; the company is then formed under bylaws, and the owner exercises the powers of the general assembly.
Does the manager have to be a partner?
No. The manager may be one of the partners or a non-partner.
Can profit ratios differ from shareholding ratios?
As a rule, profits and losses follow the shareholding, but the articles of association may provide otherwise, subject to the conditions of Article 23.
Form Your Company with Alburhan Law Firm
Our commercial and corporate team drafts articles of association and shareholders’ agreements tailored to the nature of the partnership and its funding plans, and supports you through the registration process. Entrepreneurs can also review the available packages, or contact us to discuss their situation.
Official sources: text of the Companies Law on the Bureau of Experts website and Ministry of Commerce announcement on trade name reservation.
This article provides general information and is not a substitute for legal advice tailored to your situation.
Need advice in this area? Commercial & Corporate – Alburhan Law Firm
