Companies of all types represent one of the fundamental pillars of the economic structure of the Kingdom of Saudi Arabia, as they are the primary regulatory means for conducting commercial and investment activities. The New Companies Law issued by Royal Decree No. (M/132) dated 1/12/1443 AH aims to create a flexible and stimulating regulatory environment for the business sector, in line with the objectives of the Kingdom's Vision 2030 in supporting the national economy and diversifying income sources.

The law regulates five main types of companies, which are: Partnership Company, Simple Limited Partnership Company, Joint Stock Company, Simplified Joint Stock Company, and Limited Liability Company, in addition to provisions for Holding Companies and foreign companies. Choosing the appropriate company type is a pivotal step that determines the course and nature of the relationship between partners and the legal and accounting responsibilities arising from the activity.

First: Partnership Company

What is a Partnership Company?

A partnership company is a form of company established by two or more persons, where the partners are liable jointly and severally for all their private assets for the company's obligations and debts. Article (20) of the Companies Law stipulates that the name of a partnership company must include the names of all partners, or the name of one of them, followed by an indication that there are other partners, such as: (and Partners).

Partnership companies are often used for activities that require a high degree of mutual trust between partners, such as law firms or family businesses.

Advantages of Partnership Companies in Saudi Arabia:

1. Ease of Establishment and Legal Procedures: Partnership companies are characterized by high flexibility in establishment compared to other companies.
2. Flexible Management: Partners can make decisions directly without the need for boards of directors or general assemblies.
3. Strong Internal Trust: Due to the nature of joint and several liability, these companies are often based on personal relationships and mutual trust.
4. Low Operating Costs: They do not require a complex administrative structure or heavy accounting requirements as in joint-stock companies.

Disadvantages of Partnership Companies:

1. Unlimited Liability: Partners are personally and jointly liable for all company debts, even with their private funds.
2. Complexity in admitting new partners: New partners can only join with the approval of all partners, which limits its expansion.
3. Company affected by the actions of a partner: Any error or violation committed by a partner may directly affect the entire company.

Second: Limited Partnership

What is a Limited Partnership under the Saudi system?

Is Limited Partnership It is one of the types of companies that combines the characteristics of a general partnership and the characteristics of limited liability companies. It consists of two teams of partners:

1. General Partners: They are liable for the company's obligations with personal and joint liability using their private funds, similar to partners in a general partnership.
2. Limited Partners: They contribute to the capital but are not liable for the company's obligations except within the limits of their shares and do not participate in the management or representation of the company before third parties.

Advantages of a Limited Partnership:

1. Flexibility in organizing the relationship between partners: The existence of two types of partners allows for flexibility in administrative and financial structuring.
2. Suitable for inactive investors: As the limited partner can contribute to the capital without bearing management or full legal responsibility.
3. Limited liability of the limited partner: He is not liable for the company's debts except to the extent of his share only.

Disadvantages of a simple limited partnership:

1. Unlimited liability of general partners: These remain subject to legal accountability with their personal funds.
2. Difficulty of oversight by the limited partner: He has no right to interfere in management, which reduces his participation in decision-making.
3. Low prevalence in the Saudi market: It is considered one of the less common types compared to limited liability or joint-stock companies.

Third: Joint-Stock Company

The new Saudi Companies Law defines Joint-Stock Company that it is:

A company whose capital is divided into shares of equal value, which are transferable, and each shareholder shall be liable only to the extent of his share in the capital, without his liability extending to his private funds.

This type of company is suitable for large companies, or those intending to list on the financial market, as it enjoys a clear and transparent administrative structure, and is subject to regulatory oversight by the Capital Market Authority if listed.

A joint-stock company may be established by one or more persons, and it may be listed or unlisted on the market.

Advantages of a Joint-Stock Company under the Saudi System:

1. Limited Liability for Shareholders: A shareholder shall not bear any losses exceeding the value of his shares in the capital.
2. Ease of Ownership Transfer: The transferability of shares allows investors to enter and exit easily.
3. Attractiveness to Institutional Investment: Due to high transparency and regular financial disclosures.
4. Possibility of Capital Increase: By issuing new shares or debt instruments, which facilitates expansion and financing.
5. Legal Continuity: The company is not affected by the death or withdrawal of any shareholder.

Defects of a Joint-Stock Company:

1. Complexity of Regulatory Procedures: whether in incorporation or governance, as it requires precise and documented procedures.
2. High Operational Costs: due to the need for legal auditors, external accountants, and independent boards of directors.
3. Reduced Individual Control: Shareholders do not participate in daily management, unless they are members of the board of directors.

Fourth: Simplified Joint-Stock Company

What is a Simplified Joint-Stock Company under the Saudi System?

Is Simplified Joint-Stock Company One of the newest types of companies approved by the Saudi Companies Law for the year 1444 AH, and it was introduced to meet the needs of start-ups and medium-sized companies, and to provide a flexible alternative to the traditional joint-stock company without sacrificing the efficiency of legal structuring.

It may consist of one or more persons, and each shareholder therein shall be liable only to the extent of their share. Furthermore, a board of directors is not required, and the mechanisms for management and oversight may be determined in accordance with the company's articles of association.

Advantages of a Simplified Joint-Stock Company:

1. Flexibility in Establishment and Management: No board of directors is required, and an simplified management structure may be agreed upon in accordance with the Articles of Association.
2. Possibility of Establishment by One Person: Allowing entrepreneurs to start their legal ventures without the need for partners.
3. No Complex Governance Requirements: Compared to ordinary joint-stock companies.
4. Suitability for Innovative and Emerging Projects: Especially those that do not require significant capital or a complex management structure.

Disadvantages of the Simplified Joint-Stock Company:

1. Weak Confidence of Large Investors: As it is not subject to the same levels of disclosure and oversight as traditional joint-stock companies.
2. Unreadiness for Public Offering: Its shares cannot be listed on the financial market.

Fifth: Limited Liability Company

Definition of a Limited Liability Company:

Pursuant to the new Saudi Companies Law (1444H), it is defined as a Limited Liability Company that it is:

a company whose partners do not exceed (50) partners, and a partner is not liable for the company's debts and obligations except to the extent of their share in the capital.

This company is considered one of the suitable options for small and medium-sized business owners, and it is characterized by combining the advantages of personal companies in terms of flexibility, and the advantages of financial companies in terms of limiting liability.

Advantages of a Limited Liability Company in Saudi Arabia:

1. Limitation of Partners' Liability: Liability does not extend to their private funds, which reduces financial risks.
2. Ease of Establishment and Management: Compared to joint-stock companies, the establishment procedures are less complex.
3. Flexibility in Ownership Structure: It can be established by one or more persons, provided that the number of partners does not exceed 50.
4. Maintaining Control: It allows for restricting the transfer of shares, which preserves the privacy of the partnership structure.
5. Suitability for Various Commercial Activities: Such as real estate, contracting, technology, and distribution.

Defects of the Limited Liability Company:

1. Restrictions on Share Trading: A share may not be sold or assigned except with the approval of the other partners, which may hinder the entry of new investors.
2. Maximum Number of Partners: It cannot exceed 50 partners.
3. Difficulty in Converting to a Joint Stock Company: It requires additional procedures and restructuring.

Sixth: Holding Companies in Saudi Arabia

What are Holding Companies?

A holding company is a legal form that is allowed to own shares or stakes in other companies, with the aim of administrative, financial, or regulatory supervision over them, without the holding company necessarily engaging in direct commercial activities.

The new Saudi Companies Law of 1444 AH has regulated the provisions of holding companies within the general framework of companies, and defined them as:

A company established for the purpose of owning shares or stakes in existing or new companies, managing those companies, providing loans and guarantees to them, or owning intellectual property rights.

Advantages of Holding Companies:

1. Holding company structures allow for unified and centralized management of subsidiaries, which improves overall performance and reduces duplication.
2. Subsidiaries can operate with financial independence while legal control remains with the holding company.
3. By distributing business and investment activities among several subsidiary entities.
4. The holding company can offer its subsidiaries for public subscription independently, enhancing financing opportunities.

Disadvantages of Holding Companies:

1. Complexity of the Management Structure: Requiring highly efficient management in coordinating between the holding company and its subsidiaries.
2. Risk of Conflict of Interest: Especially if authorities are not clearly defined between subsidiaries and the holding company.
3. Burden of Regulation and Legal Review Holding companies are subject to focused oversight from regulatory bodies, especially if they are listed.
4. High Operational Costs Especially in the case of multiple subsidiaries in different sectors requiring diverse expertise.

Seventh: Foreign Companies in the Kingdom of Saudi Arabia

What is a Foreign Company?

Defined Foreign Company in the Saudi system as:

Any natural or legal person not holding Saudi nationality, conducting an investment activity within the Kingdom, whether through an existing company, a branch, or a representative office.

The Kingdom today allows the foreign investor to establish a legal entity wholly owned by them or in partnership with a Saudi, according to specific conditions, as part of the Kingdom's efforts to enhance the economy's attractiveness and diversify income sources within the framework of Vision 2030.

Requirements for Establishing Foreign Companies in Saudi Arabia:

1. Obtaining an Investment License from the Ministry of Investment (MISA).
2. Submitting a clear business plan for the commercial, industrial, or service activity..
3. Submitting a commercial registration and incorporation contracts authenticated from the country of origin,with a legal translation.
4. Determining the Capital According to the Activity (Some activities require a minimum limit).
5. Registering the Company with the Ministry of Commerce after obtaining the investment license.
6. Opening a tax and Zakat file with the Zakat, Tax and Customs Authority.
7. Compliance with annual reports and governance Depending on the nature of the entity.

With the economic transformations in the Kingdom, understanding company types has become essential for establishing a successful business entity. The new Companies Law (1444H) provides a flexible environment that meets the needs of investors of all categories.

Choosing the legal form affects protection, sustainability, and investment attractiveness. A general partnership suits small partnerships, a joint-stock company suits large corporations, and a simplified company suits startups.

Therefore, it is advisable to review the regulations regularly and refer to the official guides from the competent authorities.

Understanding company types under the new Saudi law not only gives you a correct legal start but also sets you on a path of sustainable and secure investment. Whether you are a startup entrepreneur, represent a family business, or a major investment institution, choosing the most suitable legal form for your company is a pivotal decision that requires careful study and expert consultation.

At Sarih – Lawyers & Consultants, we possess the legal and practical expertise to accompany you at every step of your company's establishment, from choosing the most suitable type, through the incorporation procedures, to full compliance with regulations and legislation.