CHOOSING THE CORRECT LEGAL STRUCTURE FOR YOUR ORGANISATION’S PARENT COMPANY BEFORE ENTERING INTO THE KSA MARKET AS A FOREIGN-OWNED ENTITY

This article has been researched and written by the Business Development Team at Creation Business Consultants. AI has not been used in generating this article.

Choosing the right legal structure for your parent entity in Saudi Arabia is important to ensure compliance, manage liability, and support long-term growth. A parent entity—typically a holding company—controls its subsidiaries and requires a legal structure aligned with its operational and strategic goals. The type of entity you choose may also impact your licensing requirements, so understanding the different types of business licenses in Saudi Arabia is equally important when planning your entry into the market. This guide simplifies the most relevant legal structures—Limited Liability Companies (LLCs), Joint-Stock Companies (JSCs), and Simplified Joint-Stock Companies (SJSCs)—to help you make the right decision.

AVAILABLE STRUCTURES WITHIN THE KINGDOM OF SAUDI ARABIA

• LLCs are flexible, with 1-50 partners, no minimum capital, and 100% foreign ownership, ideal for smaller parent entities.
• Companies that have higher capital, larger operations, require at least two shareholders, and can list on the stock market are suggested to opt for JSCs.
• Companies looking to balance flexibility and growth with a medium-sized parent entity having potential for public listing should opt for SJSCs, which is a relatively newer option.

Factors Required to Consider:

• Size and Scale: It is preferable for small entities to go for LLCs and large entities to go for JSCs.
• Capital Needs: JSCs are good for public capital raising; LLCs for private funding.
• Foreign Ownership: LLCs allow full ownership without high capital, while JSCs have stricter rules.

SURVEY NOTE: ANALYSIS OF LEGAL STRUCTURES FOR PARENT ENTITIES (HOLDING COMPANY) IN SAUDI ARABIA

A holding company, also referred to as the parent company, involves selecting a legal structure that should align with the objectives of the business, its regulatory requirements, and long-term growth for establishment in KSA. Under Vision 2030, the landscape of Saudi Arabia’s business is evolving, and it aims to diversify the economy and attract foreign investments. In such a situation, the choice of legal structure becomes crucial. This survey note inspects the important legal structures available, Limited Liability Companies (LLCs), Joint-Stock Companies (JSCs), and Simplified Joint-Stock Companies (SJSCs) fetching from multiple sources to provide a comprehensive guide for entrepreneurs and investors. For a more detailed overview of how holding companies work and how to structure them in Saudi Arabia, this guide can serve as an in-depth resource.

Legal Framework and Available Structures

The legal system of Saudi Arabia is partly based on the Sharia Law and partly on Civil laws, giving us a variety of structures to choose from, but when it comes to parent entities, the focus remains on LLCs, JSCs, and SJSCs. The Ministry of Commerce, the Ministry of Investment (MISA), and the Saudi Arabian General Authority (SAGIA) are the regulating bodies behind these structures for foreign investments.

The following table compares the legal structures for parent entities in Saudi Arabia:

COMPARISON OF LEGAL STRUCTURES FOR PARENT ENTITIES IN SAUDI ARABIA

COMPARISON OF BUSINESS STRUCTURES IN SAUDI ARABIA

The information on these structures were gathered through research in the side business entities in Saudi Arabia and insights from SJSCs Vs LLCs Under New Saudi Companies Law, which focuses on the introduction of SJSCs under the current legal reforms.

Detailed Comparison of LLCs and JSCs

When we talk about holding or parent entities, the choice is between LLCs, JSCs, and SJSCs, with SJSCs being a recent addition to the list, based on A Comparison between Limited Liability Company and Closed Joint-Stock Company in KSA.

Below is a comparison between Limited Liability Company and Closed Joint-Stock Company in KSA:

• Number of Shareholders: LLCs are limited to 1-50 partners, while JSCs have no upper limit, requiring at least 2 shareholders (single shareholder possible for specific cases with capital >SAR 5M).
• Capital Requirements: As per MISA guidelines set by Saudi there is no minimum requirement of capital for an LLC company; it is based and determined on their type of activity. For a foreign-owned JSC entity, the investment is SAR 200M commitment over 5 years based on Types of Business Licenses in Saudi Arabia.
• Liability: LLCs and CJSCs both offer limited liability to safeguard the shareholders’ personal assets to their investments.
• Management: LLCs are managed by a single manager or board making it flexible and easier, and JSCs need a formal board of directors (3-11 members).
• Share Transferability: LLC shares are not publicly traded, while JSC shares can be traded, especially for public JSCs that are listed on Tadawul.
• Regulatory Compliance: LLCS have a simpler set of requirements to be followed, which is mentioned in Types of Companies in Saudi Arabia – 2024, however, JSCs are required to follow a stricter set of requirements.
• Public Listing: If an LLC company wants to be listed publicly, it needs to be converted to JSC and JSCs can be listed without any further requirements, making capital market accessible to them.

ROLE OF SIMPLIFIED JOINT-STOCK COMPANIES (SJSCS)

SJSCs, introduced under recent legal reforms, offer a middle ground. Research from How to establish a simplified joint stock company in Saudi Arabia states that they are meant for Small to medium enterprises, with no requirement for minimum capital, flexible share issuance, and possibility of listing. While not explicitly stated as holding companies, their features—such as ease of share transfer and suitability for venture capital—suggest they could be used for medium-sized parent entities, as per SJSCs Vs LLCs Under the New Saudi Companies Law.

Factors Influencing Choice

The choice of structure depends on many factors, please look at your organisational group and consider the following:

• Size and Scale: Parent entities that are small in size would want to go with LLCs for simplicity, and the larger parent entities would want to stick with JSCs reason being they have multiple subsidiaries.
• Capital Needs: LLCs prefer going for private funding, and JSCs require public funding because of their potential for being listed.
• Foreign Ownership: LLCs allow 100% foreign ownership without high capital, as per Establishing a Saudi company by foreigners, while JSCs have stricter rules.
• Regulatory Compliance: LLCs offer fewer burdens, making them easier to manage, while JSCs require more formal governance.
• Long-term Plans: If public listing is anticipated, starting as a JSC or SJSC is strategic; otherwise, LLCs provide initial flexibility.

Practical Considerations and Examples

For instance, a foreign investor establishing a small holding company to manage regional subsidiaries might choose an LLC for its flexibility and 100% ownership, avoiding the high capital requirements of JSCs. Conversely, a large conglomerate aiming to raise capital through Tadawul might opt for a JSC, leveraging its ability to list and attract public investment. SJSCs could appeal to medium-sized entities, such as family businesses expanding into new sectors, seeking growth without the complexity of traditional JSCs.

CONCLUSION AND RECOMMENDATIONS

Selecting the right legal structure for your parent entity in Saudi Arabia requires balancing flexibility, compliance, and growth potential. LLCs are ideal for smaller, private holding companies, JSCs for larger, capital-intensive entities, and SJSCs for medium-sized businesses with growth ambitions. Given the complexity of Saudi regulations, please get in contact with the team at Creation Business Consultants to ensure compliance and optimize your structure.

By understanding these nuances, you can lay a solid foundation for your parent entity, setting it up for success in Saudi Arabia’s dynamic business environment, and leave potential openings and opportunities for potential future capital raising efforts.

Contact Creation Business Consultants at [email protected], Saudi Arabia +966 56 865 2329, or UAE +971 4 878 6240 to set up your KSA parent company with confidence.