How to convert a Sole Establishment to an LLC in Abu Dhabi or Dubai?
Businesses change and evolve as organisations grow from small and simple to large and complex. This change can mandate a transition in the legal structure as well. Business owners may wish to change the legal form of an entity from a Sole Establishment (Sole Trader) to a Limited Liability Company (LLC) as they take on investors or additional partners or seek investments and financing from prospective lenders.
Limited Liability Companies (LLCs) offer legal protection not offered by sole establishment and branch structures as they combine aspects of corporations and partnership. An LLC is a separate personality in law and is distinct from the owners, partners and managers. A Sole Establishment is essential 100% owned by one person and that person is unlimitedly liable for the activities of the Establishment. Similarly, a Foreign Branch is an extension of the parent company and is not distinct - the parent company has unlimitedly liability for its branch office.
Within an LLC business and personal liabilities are separate, so assets are protected and owners are not liable for business debts over and above their investment capital - the shareholders of the LLC are liable up to the maximum of the share capital only.
In addition, the LLC structure in the UAE allows access to a wider range of activities, particularly, in the UAE an LLC can undertake trading activities and a mainland LLC company in Abu Dhabi or Dubai can import and export goods to and from the UAE. A Sole Establishment or Foreign Branch is restricted and not able to undertake these, and other activities.
Before initiating any legal change to your business structure it is important to consider the following:
- Plan the change and involve key employees, shareholders and managers
- Communicate the planning progress to the entire organisation
- Seek the assistance of business set up and restructuring experts to plan the documentation and process
In the following sections, we will outline the required steps needed to convert your business from a sole establishment to an LLC.
Convert a Sole Establishment to an LLC
Sole establishments or sole proprietorships are ideal options for setting up small businesses in the UAE, this is the swiftest and lowest cost set up option. However, an LLC structure becomes a viable option when owners intend to expand and formalise their business, take on investment, limit risk and expand their location and activities. There a number of changes needed when converting to an LLC. Here’s what you need to consider:
Check your business name, this will need to change
Your current business name might already be registered to another LLC. If that is the case, you cannot operate as an LLC under that name, even if you have been using it as a sole proprietorship. “Limited Liability Company” or an abbreviation like “LLC,” “Ltd.,” or “Liability Co.” must be included in the business name. Check that the name you want to continue to use is available as an LLC.
Updating corporate documents
The transformation from a sole establishment to an LLC is not an established concept under a specific regulation in the UAE, but rather a procedure introduced for practical purposes by the concerned licensing authorities in the various Emirates. The main purpose is to keep the same trade licence number for the business entity, and to be able to novate all contracts, bank accounts are other licences. The licence number constitutes the principal means by which businesses are identified as it ensures the practical continuity of the business in its relationships with third parties, and in particular with governmental authorities. Amended documents will include; amended memorandum (MOA), share certificate or certificates and business trade licence.
Opening a new bank account
Opening a new bank account under the name of the LLC helps to separate business and personal funds. A separate business bank account ensures the protection of personal assets, record keeping, and tax reports.
The time-frame for changing the legal structure will depend on the Emirate and the relevant registration authority. The government and licencing fees will vary from AED 5,550 to AED 10,000 depending on the jurisdiction and activities and any other government departments other than the DED that may be involved.
All shareholders will need to appear in front a notary public to notarise the Memorandum of Association (MOA) and conversion documentation. The changes will then need to be propagated with the relevant registration authority – e.g. the DED. Once all the documents are amended, all clients will be notified and owners will be ready to resume their business.
Reconstruction of new legal documents
To change the organisation's legal structure the business owners are required to submit several documents to the Department of Economic Development (DED). One of the most important documents is the Memorandum of Association (MOA). MOA plays a role in the regulation of external activities of a company. It contains the following information:
- Company name
- Company’s office location
- Organisation objectives / activities
- Liability of the shareholders
- Company’s share capital
- First subscribers to the company
- Detailed powers of the Managers of the Company
- Duration of the company
Engagement with a local UAE partner
UAE mainland companies, under the current UAE Commercial Companies Law, requires a UAE national sponsor holding not less than 51% of the company’s shares. Therefore the Establishment will have to take on a local partner as part of the conversion to an LLC.
The company can select a UAE Corporate Nominee shareholder to hold the 51% shares in the LLC. Using a Corporate Nominee provider like PRO Partner Group will allow the foreign party to retain greater management control and effective ownership of the LLC.
Advantages of an LLC over a Foreign Branch
Foreign branches are mandated by the Ministry of Economy to deposit AED 50,000 as a bank guarantee. This guarantee needs to remain with the Ministry of Economy during the whole lifetime of the branch and is returned only upon deregistration. This sets foreign branch fees marginally higher than LLC fees.
The Foreign Branch has restricted access to some activities, particularly the Foreign Branch cannot import or trade in goods within the UAE.
Full liability of the Foreign Branch rests with the parent company, and liability is not limited. In addition income from the Foreign Branch will normally be taxed through the parent company, therefore no benefitting from the zero tax rates within the UAE.
How can PRO Partner Group help to convert your Establishment to an LLC?
Changing the legal structure of your business entity requires significant knowledge of the regulatory environment and the various steps and government processes within the UAE. PRO Partner Group provides the needed assistance and consultancy to business owners intending to convert the legal structure of their organisation from a sole proprietorship or foreign branch to an LLC. Our team of company formation and legal experts will guide you through all aspects of the legal transformation, including the licence elements and any regulatory approvals for the company. Please get in touch with us on +971 (0)4 456 1761 for Dubai or +971 (0)2 448 5120 for Abu Dhabi, email us at email@example.com or complete the contact form below and we will be delighted to assist you.