An Overview Of The Different Types Of Legal Structures In The UAE

The United Arab Emirates (UAE) has rapidly grown into a global hub for business and investment, attracting entrepreneurs and corporations from around the world. This appeal is largely due to its strategic location, business-friendly environment, and diverse economy. Understanding the various legal structures available in the UAE is crucial for anyone looking to establish a commercial presence in the country. This guide provides a detailed overview of the primary business structures in the UAE, highlighting their key features, benefits, and considerations.

The UAE’s Business Ecosystem

The UAE’s business ecosystem is characterized by its dynamic nature and a wide array of corporate structures, each designed to cater to different business needs and objectives. These structures vary significantly in terms of legal frameworks, ownership regulations, and operational scope.   

For those seeking to establish a business in the UAE, the initial step involves navigating among the primary jurisdictions: Mainland and Free Zones. Each jurisdiction offers distinct advantages and regulatory environments, influencing factors such as market access, ownership policies, and tax incentives.

I. BUSINESS STRUCTURES IN THE UAE MAINLAND

Mainland companies are licensed to conduct business directly with the UAE market and are permitted to operate within the country and have the flexibility to conduct business across all emirates subject to specific rules and regulations applicable in each emirate. This broad scope of operation provides access to the local economy and allows for greater business flexibility.

The most common business structures that can be constituted in the UAE Mainland are:

1. Sole Proprietorship

A sole proprietorship is one of the simplest forms of business structure, owned and operated by a single individual. The owner has complete control over the business and directly receives all profits. Some of its key features include:

• Establishment: Setting up a sole proprietorship is relatively straightforward, requiring the owner to obtain a business license from the relevant Department of Economic Development and Tourism (DET) in the specific emirate. Compared to the other structures, a sole proprietorship can be easily set up with minimal bureaucratic intricacies. These structures can be an ideal option for small business owners, freelancers and consultants with limited initial capital to start a business.
• Absolute Control: Theownerenjoys absolute and complete control over operations, business decisions, and profits.
• Unlimited Liability: The owner has unlimited personal liability, meaning their personal assets are not protected from business debts or legal obligations.
• Taxation:Since the sole proprietorship is not a separate legal entity from its owner, the income derived from the business shall be subject to the applicable corporate tax regulations.

Advantages:

• Simplicity in setup and management.   
• Direct control and profit retention for the owner.   

Disadvantages:

• Unlimited personal liability.   
• Limited access to capital compared to other structures.

2. Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a popular structure in the UAE, formed by a one or more shareholders with a maximum of 50 shareholders. The liability of each shareholder is limited to their investment in the company, protecting their personal assets from business debts. The key features include:

• Limited liability:Unlike a sole proprietorship, the Shareholder’s personal assets are shielded from the business’s debts and liabilities.
• 100% Foreign Ownership: An LLC has become one of the most common forms of business structure for foreign investors, providing them with 100% full foreign ownership in specific sectors, including technology, health, and renewable energy. This obviates the need for a local sponsor to establish a business.
• Operational Flexibility: LLCs enjoy greater flexibility in terms of management and distribution of profits. It also offers access to the UAE markets, facilitating global networks.
• Taxation: An LLC is liable to pay the applicable corporate tax. The prevalent corporate tax rates curate a tax-friendly environment for the establishment of these structures.

Advantages:

• Protection of personal assets.   
• Potential for full foreign ownership.   
• Operational flexibility and market access.   

Disadvantages:

• More complex setup and regulatory requirements compared to sole proprietorships.

3. Civil Company

Civil companies are legal partnership structures in the UAE specialized for professionals in the fields of law, medicine, accounting and engineering, wherein two or more partners join to offer their professional services.

• Professional Focus: Civil companies can only be constituted by people in professional fields, thereby requiring each owner to hold a valid professional license.

Advantages:

• Suitable for professionals seeking to collaborate.   
• Enables sharing of expertise and resources.

Disadvantages:

• Limited to specific professional fields.   
• Requirement for a local agent for foreign investors. 

4. Public Joint Stock Company (PJSC)

In the UAE, a Public Joint Stock Company (PJSC) is a corporate structure governed by the UAE Federal Law No. 32 of 2021 (on Commercial Companies), which allows its shares to be offered to the public and traded on a licensed stock exchange such as the Abu Dhabi Securities Exchange (ADX) or the Dubai Financial Market (DFM). This structure is suitable for large-scale enterprises aiming to raise capital through public offerings, with the company’s capital divided into equal shares available for public subscription. The founders are required to appoint from among themselves a ‘Founders Committee’ comprising at least three members. This committee shall be responsible for overseeing the incorporation process and ensuring the accuracy, validity, and completeness of all documents, studies, and reports submitted to the relevant authorities.

The Founders Committee may delegate one of its members, or a third party, to handle and complete the incorporation procedures with the Securities and Commodities Authority (SCA) and the Competent Authority, in accordance with the regulations prescribed by the SCA.

The management of a Public Joint Stock Company shall be vested in a Board of Directors. The Company’s Articles of Association (AOA) shall determine the composition, number, and term of the directors. The Board must consist of an odd number of members, not fewer than three and not more than eleven. Each director’s term may not exceed three calendar years from the date of election or appointment, and directors may be re-elected for successive terms.

The minimum issued capital of a public joint stock company shall be at least thirty million dirhams AED [30,000,000].

Advantages:

• Ability to raise significant capital through public offerings.   
• Enhanced public visibility and credibility.

Disadvantages:

• Complex regulatory requirements and compliance obligations.   
• Higher setup and operational costs.

5. Private Joint Stock Company

• Minimum Shareholders: A Private Joint Stock Company must have at least two shareholders.
• Capital Structure: The company’s capital is divided into shares of equal nominal value, and the capital must be fully paid up. Public offerings of shares are not permitted in a private joint stock company.
• Formation and Incorporation: Incorporation is completed through the execution of the Memorandum of Association (MOA) and compliance with the relevant provisions of the UAE Commercial Companies Law (Federal Decree Law No. 32 of 2021) regarding registration and licensing.
• Shareholder Liability: Shareholders are liable only to the extent of their ownership in the company’s capital. There is no personal liability beyond their subscribed shares.
• Minimum Capital Requirement: The issued capital must be no less than AED 5,000,000, fully paid upon incorporation. This minimum capital requirement may be amended by Cabinet Resolution based on a proposal by the Minister of Economy.
• Founders Committee: The founders must appoint a committee of at least two members from among themselves to manage the incorporation and registration process with the relevant authorities.
• Incorporation Documents: The Founders Committee is responsible for submitting the incorporation application along with:
• The Memorandum of Association (MOA)
• The Articles of Association (AOA)
• An economic feasibility study of the proposed business
• A proposed execution timeline for the company’s business activities

Advantages:

• Greater control over ownership and management compared to a PJSC.
• Less stringent regulatory requirements than PJSCs.

Disadvantages:

• Limited ability to raise capital from the public.
• Ownership restrictions for foreign investors.

II. BUSINESS STRUCTURES IN FREE ZONES

UAE Free Zones are specially designated economic areas that offer a business-friendly environment tailored to attract foreign investment and international companies. These zones operate under their own regulatory frameworks and typically provide benefits such as 100% foreign ownership, full repatriation of profits and capital, corporate and personal tax exemptions, and streamlined licensing and setup procedures. They are strategically located across the UAE, often near ports, airports, or logistics hubs, making them ideal for trade, manufacturing, and service-based businesses.

1. Free Zone Establishment (FZE) and Free Zone Company

A Free Zone Establishment (FZE) is a business entity with a single shareholder. Free zone establishments are different from sole proprietorships, as an FZE is a separate legal entity that operates independently of the shareholder’s personal assets.

FZE facilitates its establishment without the need for a UAE local agent, thus fostering 100% foreign ownership. Simple to set up, these structures grant the shareholder absolute control over the business.

A Free Zone Company (FZCO) is similar to an FZE but is made up of two or more shareholders, each with limited liability. This type of business structure attracts multiple investors to benefit from the Free Zone incentives.

2. Branch of a Foreign Company

A branch of a foreign company operates as an extension of the parent company and is wholly owned by it. The parent company controls the UAE-based operational activities of such a company. A branch office does not enjoy the status of a separate legal entity from its parent entity. Mostly, branch offices do not engage in manufacturing processes but are a direct representation of their parent company.

Establishing branch offices can offer companies several advantages including, but not limited to facilitating expansion into the UAE market and leveraging the parent company’s resources and reputation

3. Representative Office

A Representative Office is established by a foreign company to promote its products or services and conduct market research. It is not permitted to engage in commercial activities that generate revenue. These structures can be beneficial in facilitating business contracts, market research and business development.

Choosing the Best Corporate Structure for Your Business

From the wide range of legal structures, with each structure entailing distinctive features, selecting the appropriate business structure is a critical decision that significantly impacts the operations, legal obligations, and growth potential of a business. It is essential to align the chosen structure with the specific goals and nature of the business.

Therefore, businesses must consider several factors including:

• Business Size and Scale: The size and scale of the business operations influence the choice of structure.   
• Business Objectives: The long-term objectives of the business, such as expansion plans or public offerings, play a crucial role in determining the right structure.   
• Industry Sector: Certain sectors may have specific regulatory requirements or preferred business structures.   
• Regulatory and Tax Compliance: Understanding the legal and tax implications of each structure is essential for ensuring compliance and optimizing tax efficiency.   
• Capital Requirements: The ability to raise capital varies between different structures. PJSCs, for example, can raise capital through public offerings, while sole proprietorships rely on the shareholder’s personal funds.   
• Liability Considerations: The level of personal liability that owners are willing to assume is a critical factor. LLCs and joint stock companies offer limited liability, protecting personal assets, whereas sole proprietorships expose owners to unlimited liability.

Conclusion

The UAE offers a diverse and dynamic business environment with a wide range of business structures to suit various needs and objectives. Choosing the right structure is a critical decision that requires careful consideration of several factors, including the nature of the business, its goals, and the legal and financial implications. Seeking professional advice can be invaluable in tackling this complex landscape and ensuring the selection of the most appropriate structure for your business.