What is a limited liability company
Limited Liability Company or LLC is the most prevalent structure for company formation in Dubai and the wider UAE. As a hybrid entity combining the legal characteristics of a corporation, partnership or sole proprietorship (depending on the number of owners) LLCs are widely preferred by entrepreneurs and corporations that want to penetrate the UAE market and establish a solid footing in the Middle East region.
The following sections detail the basic features of LLCs, the main benefits and drawbacks and the UAE formation structure for LLC entities.
LLC basic features
As a business entity, an LLC is often more flexible than a corporation and may be well-suited for companies with a single owner for company formation in Dubai. Although LLCs and corporations both possess some analogous features, an LLC is not a corporation under the law, rather its legal form is a company that provides limited liability in many jurisdictions.
The structure of an LLC overlaps with that of a corporation in terms of limited liability and shares the ‘pass-through income tax’ feature with partnership structures.
Terminologically, LLC formation is referred to as ‘organization’ instead of ‘incorporation’. Hence, LLC foundational document is termed ‘articles of organization’ instead of ‘articles of incorporation’ or ‘corporate charter’. Articles of organization establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC.
In an LLC, internal operations are organized by ‘operating agreements’ rather than ‘bylaws’.
Owners of beneficial rights are known as members instead of shareholders. Consequently, ownership is represented by membership interest or LLC interest instead of represented by shares of stock.
In the UAE, there are no limitations on LLC size meaning anyone can be a member including individuals, corporations, foreigners and foreign entities, and even other LLCs.
Limited liability companies are taxed differently from corporations. In the case of a corporation, profits are first taxed at the corporate level and are then taxed a second time once those profits are distributed to the individual shareholders. This is what is referred to as double taxation. LLCs, on the other hand, allow profits to pass through directly to the investors, so they are only taxed once as part of their income.
Advantages of Limited Liability Companies
Business owners opt for an LLC to avail themselves of the benefits of such structure including:
- Personal asset protection
Business owners take the LLC route to limit the principal’s liability. Members are not liable for any debt incurred by the LLC business or other lawsuits. Consequently, personal assets, like back counts and houses, of the members are protected from creditors.
- Pass-through taxation
As mentioned above, LLC provides owners with pass-through taxation. As the profits (or losses) the business incurs (or gains) are passed through to the owner’s tax return. Such profits are taxed at the owner’s tax rates.
LLCs tend to have fewer administrative burdens as it is not necessary to have directors, officers, board and shareholder meetings. Additionally, LLCs have less paperwork and record-keeping than corporations.
The central attractive feature of an LLC structure is the enormous flexibility in membership, management and taxation. An LLC can be managed by a single to hundred members. Members can be individuals, partnerships, trusts, estates, organizations, or other business entities. Limited liability companies can be taxed as a sole proprietorship, partnership, or corporation.
Drawbacks of Limited Liability Companies
Despite its many attractive features, LLC structures have some limitations. For instance, it might be more difficult to raise capital when seeking outside investors. This is very evident when it comes to venture capitalists. A corporation structure works best for outside investments because stock can be issued in exchange for investors’ money.
LLC formation and company formation in Dubai
The law on commercial entities in UAE requires Limited liability companies to have at least one or more local sponsors or Emirati partners. This means the local partner/sponsor(s) must own a minimum of 51% of the shares in the LLC.
In Abu Dhabi in particular no specific minimum share capital amount is imposed on LLCs, and commercial law stipulates only that the capital should be adequate for the company’s needs. Exceptions to this rule include activities such as real estate and recruitment since these can only be completed by 100% locally owned entities.
From a company formation in Dubai perspective incorporating an LLC has the added benefits of zero local corporate tax.Furthermore, LLCs are required to have a physical office to obtain a commercial licence.
The following are the standard steps to set up an LLC in the UAE:
- Applying for your chosen corporate name under the Licensing Department
- Drafting a Memorandum of Association (MOA) for the new company
- Attesting the MOA by the Notary Public
- Applying with the Economic Department
- Filing an entry with the Commercial Register
- Collection of the licence from the Economic Department
- Notarisation, legalisation and attestation of legal documents
- Visa applications
- Family visas