The hypothetical situation for this assignment is that I, along with three of my friends, want to open a computer repair service in Abu Dhabi along with a home delivery service. For these purposes, we have accumulated a sum of 300,000 AED, but additional expenses are estimated at 2,000,000 AED. Taking a personal banking loan in order to pay for the expenses is too risky; therefore taking such loans will be avoided. The purpose of this paper is to investigate possible forms of business entity establishment and organization in order to determine the fastest, cheapest, and most reliable solution for our future company. This would enable us to obtain the necessary loans without endangering any of the individual proprietors of the establishment with personal debt and the personal responsibility to repay it.
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Possible Business Structures Eligible in Abu Dhabi
There are seven common legal forms of business in the UAE, which are as follows (“Doing Business in the UAE”):
- Sole establishment
- Limited Liability Company (LLC)
- Civil Company
- Public and private shareholding companies (open or closed corporations)
- Branch companies
- Representative offices
Since we are opening a small business that involves the repair and transportation of computers to homes, some of these legal forms of business are useless to us. Since we are building our business from the ground up, we will not be able to present ourselves as a branch company or a representative office. Thus, the only valid business entity options remaining would be the sole establishment, limited liability company, partnership, civil company, and corporation. Let us explore these options in depth.
The sole establishment is the most basic and simplest kind of business ownership. Many businesses owned by a single person are registered as sole establishments. The advantages of this kind of establishment include 100% ownership retention, the ability to practice business anywhere within the UAE including the free trade zones, as well as government waivers for any paid-up capital requirements. However, this type of business is not acceptable for our project for several reasons. First, there would be more than one owner to the business, meaning that registering the business to one person would put other de-facto owners at risk if the unspoken partnership should go sour. In addition, sole establishments are obligated to make any loans they take personal, as the company is considered inseparable from the owner’s personal identity and financial well-being. In addition, sole establishments take a significant amount of time to register, taking up to 8-10 weeks on average (“UAE Establishment”).
A partnership is a business entity owned by two or more people. It allows several owners to pool together skills, resources, and money in order to establish and run a business (Martinuzzi). One of the greatest benefits of a partnership is that it allows pass-through taxes. It means a partnership may not pay income taxes, and instead it passes through any profits or losses directly to the owners. While this sort of business organization would be valid for our company, as it would allow the members to divide all loans between each other equally, it also has numerous liabilities associated with equal responsibility for debts and for the business decisions made by other partners.
Similar to a partnership, a civil company is typically organized by several professionals in the same field who act both as owners and employees within the organization. As such, it is typically implemented by engineers, doctors, and similar specialists. While this form of a company would fit our business if we were the ones performing the computer repairs, it is unavailable to us, as this form of partnership is at the moment allowed only in Dubai and Sharjah (“Doing Business in the UAE”).
A corporation is a form of business entity where all members possess a certain amount of shares in the business and receive compensation according to the percentage of those shares (“What are the Advantages and Disadvantages?”). Many large businesses take on this form as it shields individual shareholders from debts, and the only risks posed to them are the risks of losing equity. Corporations are exempt from certain taxes, such as the income tax. Lastly, having a corporation allows shares to be sold to third parties in order to increase the company’s capital. However, this business entity is not recommended for small businesses for several reasons. Namely, setting up a corporation is a long and expensive process, much longer in comparison to other options. In addition, the amount of government regulation and related paperwork would significantly hamper the company’s functionality. Lastly, corporations face increased tax rates for other taxes that they have to pay.
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Limited Liability Company
A limited liability company (LLC) is considered to be something of a hybrid between a partnership and a corporation. It enjoys the advantages of tax flexibility like a corporation, while at the same time requiring less paperwork. Many small businesses with three owners or more operate as LLCs, and even some of the privately owned businesses are converting to one-man LLCs in order to benefit from tax reduction and limited liability in regards to debts and other credit obligations. The disadvantages of an LLC include self-employment taxes and limited durability – if a member of the LLC departed from the ownership, the LLC would have to be disbanded (“Limited Liability Company”).
Choosing the Best Legal Entity
Since sole proprietorship would involve significant personal risks to any one of us who was undertaking the role and the responsibility for debt and credit, it is not an optimal solution for our company. This leaves the decision between a partnership, a corporation, and an LLC.
I believe that the best option for our computer repair service would be the LLC. It takes approximately the same amount of time and paperwork to create as partnerships do, while at the same time offering the liability protection and tax benefits of S-corporations. A partnership would not be the best choice because it imparts liability on all partners equally and makes everyone share debt and credit obligations. Making our enterprise a corporation, on the other hand, is too expensive and would take too much time to be considered viable.
In other words, an LLC offers what many small businesses need in order to begin operation. These necessities include tax exemptions, liability protection for taking loans and debts, and the relative quickness and inexpensiveness of establishing the legal entity. As it stands, we have raised 300,000 AED between ourselves, which is enough starting capital to open an enterprise anywhere in the UAE. In Abu Dhabi, where we are planning to start our operations, this minimum standard is lowered to 150,000 AED.
Legal Entities Unavailable in Abu Dhabi
Although the UAE allows most entities that are widely accepted around the world, some business forms would not be available to us due to the nature and the location of the business. As we are a for-profit private company, we would not be allowed to participate in the market by presenting ourselves as a non-profit organization. In addition, we will not be allowed to form a legal entity of a unitary governmental corporation due to having no ties with the government and no government sponsorship to support us. Lastly, we will not be able to register as a civil company due to that kind of legal entity being accepted only in Dubai and Sharjah (“Doing Business in the UAE”).
Legal and Government Procedures for Opening an LLC
The process of opening an LLC for an inland business usually consists of five steps. Additional steps and fees may be imposed depending on the nature of the business. The steps required for us to start our LLC are as follows (“Setting up a UAE Limited Liability Company”):
- Reserving the trade name and getting initial approval for it. The Department of Economic Development (DED) is in charge of this operation. In order to reserve and approve a trade name, we would be required to fill out the trade name application form and license application form, and provide copies of the passport of any individual shareholders as well as of the proposed directors and general managers who would be operating the LLC.
- Establishing the LLC. In order to complete this step, it is required to sign an LLC establishing contract. The contract should be drafted and verified by an accredited attorney, with the expenses for notarial services being paid for by the shareholders of the LLC. All shareholders are expected to sign the contract.
- Administrative formalities. LLCs authorized in Abu Dhabi must adhere to several standards, such as possessing or leasing an office under the name of the LLC that is located within the UAE, having initial capital of 150,000 AED or more, as well as maintaining a bank account. Other documents required for permission to operate involve a bank certificate confirming the deposit of the shared initial capital, a letter of appointment from an auditor with a copy of the auditor’s license, and publication of the contract of establishment in the Companies Gazette. This is an official publication issued by the Ministry of Economy.
- Obtaining the commercial license. In order to obtain the commercial license for an LLC, we would require the initial approval from the DED, a notarized contract of establishment, a bank certificate confirming the deposit, a copy of office ownership or a lease agreement, a banking certificate that confirms the deposit of the initial shared capital, an auditor’s certificate, and a receipt from the Ministry of Economy. Upon all of these being gathered and presented to the DED, it will then issue the commercial license for our LLC, which would specify the business activities that our company is allowed to undertake. This license lasts for a year and must be renewed before the expiration date. Additional certifications from other ministries would not be required in our case, as our business will not have any shareholders who are also corporate entities. Its activities revolve around repairing and transporting computers and digital technology, which fall under the standard business services and activities defined by the DED and do not require any additional approvals.
- Abu Dhabi-specific requirements. Since our LLC will be registered in Abu Dhabi, it will also be required to register with the Abu Dhabi Chamber of Commerce and Industry. In order to register with the ADCCI, the completion of an initial membership application is required. In addition, we will need to present the following documents to the ADCCI:
- A copy of the commercial license for our LLC.
- Passport copies for all the shareholders, directors, and general managers of the LLC.
- A copy of the office ownership document or an office lease agreement.
Participation as a member of the ADCCI revolves around paid annual membership to be renewed at the end of each year by paying the corresponding fees.
Additional Steps to Undertake after the Establishment of the LLC
After the LLC is established, our priority should be getting the necessary loans in order to purchase the required hardware and begin operations. We estimate that a loan of 2,000,000 AED would be needed, with the majority of that being spent on purchasing a fleet of 10 cars in order to transport products to our customers. However, since we will be a small company at first, purchasing so many vehicles might not be necessary. Instead, we could opt for contracting with a third-party transportation company to do it for us. This would help us estimate the exact number of vehicles we would need in the future, which could be more or less than ten, meaning that our estimations would be much more accurate if we decide to purchase a fleet of our own cars. In order to acquire a loan, we would need to present a business plan that would illustrate how we are going to return the money to the bank (“Doing Business in the UAE”). Doing so would increase the chances of receiving a loan under favorable terms.
Doing Business in the UAE: A Tax and Legal Guide. Web.
“Limited Liability Company in UAE On-Shore.” MimoLegal, Web.
Martinuzzi, Bruna. “What are the Advantages and Disadvantages of a Partnership?” American Express, Web.
“Setting up a UAE Limited Liability Company.” Norton Rose Fulbright. 2012, Web.
“UAE Establishment or Sole Proprietorship.” Sovereign, Web.