Company formation has been among the most frequently asked questions in the UAE. Given the dynamic business culture the country actively fosters, it is worth examining the various options for potential business owners, as well as the recent options made available for companies experiencing difficulty to maximise their effectiveness.
The standard options facing a prospective business owner is whether to incorporate in the mainland where (for the most part, barring a few exceptions), the expatriate owner owns 49 per cent of the business, or at free zones where the expatriate owner retains complete ownership.
There are a number of free zones, each catering to a specific number — of activities that are allowed, and for the most part, each free zone has its own regulator, which governs and administers the companies that have incorporated there.
The DIFC and the ADGM are the most sophisticated and regulated among all the free zones, and have their own set of laws that are not governed otherwise by UAE laws. But it is important to note that other free zones have their own rules that have become nuanced as regulations have evolved.
Common among these regulations (whether free zone and/or mainland) is the presence of a physical office (barring a few free zones where the option of a “flexible desk” is given) is required. And also the issuance of a trade licence that clearly defines the activity the company can undertake.
The founding documents of the company (whether sole proprietorship, private or public joint stock company) then sets the stage for encapsulating not only the business activity but the liabilities that the owners are subject to. From these foundational documents, subsequent contracts — ranging from employment to trademark to the normal business contracts — then flow forth.
While the nuances of each may be different depending on the jurisdiction, the overall guiding principles essentially remain the same. It is prudent to note that in order to foster the culture of entrepreneurship, company formation is relatively a hassle-free exercise, with companies being formed far quicker than in most other jurisdictions of the world.
It is for these reasons that foreign investment has continuously been on the rise, as business start-up activity has risen consistently over time regardless of the sector that one is looking at.
Under the new Federal Bankruptcy Law which came into effect in December last, there has been some comfort given to businesses (under certain circumstances) that are facing financial difficulty, which would not compel them to flee the country. It gives both debtors some legal comfort towards restructuring of debts, as well as allows business owners to navigate through their financial difficulties without necessarily having to face criminal action.
The passage of this law provides considerable flexibility to the business sector to deal with the vagaries of market cycles, and fosters an environment of an orderly dissolution should the need arise. While this law is recent, it has already started to have positive effects on the SME sector, as it has allowed for a more orderly format of restructuring certain liabilities, a trend that will only continue to gather momentum.
It is pertinent to remember that document retention needs to be kept in mind when closing a company, or for that matter, when disputes arise. In the UAE, the Commercial Transactions Law (Federal Law Number 18 of 1993) sets out requirements for the retention of commercial records, and mandates that they should be kept for a minimum period of five years from date of receipt or issuance.
Given the complexity of the marketplace, and the need for shielding liabilities, as well as having the optimal jurisdiction for the type of business that needs to be undertaken, it is well worth it for aspiring business owners to seek and retain legal counsel as they navigate the process of setting up an entity, Or when going through the turbulence of business cycles.
In the final analysis, regardless of how flexible the regulatory architecture is, ignorance of the law can never be considered as an excuse to extinguish liability.
The writer is Senior Partner at NM Advocates.
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