Different Forms Of Business Organizations And Legal Obligations In UAE

You are a solicitor specialising in small business start ups and expansion.

Homer has a small business - V-Engines. He designs and builds engines for other companies and, due to increases in his order book, has recently leased a large warehouse with offices. He is not sure whether to continue to run his business as a sole trader or to obtain limited liability. He has two people working with him on a self-employed basis in the workshop and has identified that he needs two more, plus someone to work in the office full-time.

Highlight to Homer the different types of business he may operate, including coverage of legal responsibilities and the advantages and disadvantages of each type. You should also state any regulations that Homer must adhere to if he decides to change his business formation to that of a company. You also need to ensure that he is aware of his legal obligations with regards to those who currently work with him and those he intends to recruit.

If Homer does choose to set up a company highlight what his responsibilities would be as a Director and in what circumstances he may be disqualified.

United Arab Emirates has been attracting several kinds of businesses, both locally and internationally. Investors have resorted to establishing businesses due to the large influx of people in Dubai and Abu Dhabi for shopping and tourism. The emergence of the businesses which form the backbone of the economy has made the government respond and to regulate formation and registration of business ventures.

Quite notable is the new law that has brought several changes to Limited Liability Companies.

The research has been conducted through qualitative method. It involved thorough analysis of business laws, the formation of different forms of businesses and their regulation in UAE. Reliance has been on publications, books, journals, government policy statements and all materials found to be of relevance.

Apart from conducting business as a sole trader, there are numerous forms of business organizations which Homer can operate. The first form of business is sole proprietorship which he currently engages in. Homer can elect to continue trading as a sole trader.

1. Sole proprietorship businesses are easier to register
2. Their regulations are not tedious
3. A sole proprietor retains control of the day to day decision making
4. It requires little capital to set up
5. The business enjoys a form of tax waiver especially when it is not making profits
6. The sole proprietor receive profits directly.

1. The sole trades has unlimited liability. He can even apply his assets to settle the debts of the business
2. Since income tax payable is taxed at personal rate, a business that makes huge profits would be subjected to payment of higher taxes.
3. There is loss of business anytime the sole proprietor is unavailable
4. Raising capital to run the business solely can be very tedious

Other forms of businesses Homer could operate include;

A partnership is where two or more persons desirous of making profits pool their resources together to start a business. Homer would therefore have to look for at least one person with interest in engines for them to start a partnership. The partnership is governed by an agreement called a partnership deed which spells out the agreement between the partners including their responsibilities, the amount of capital each has put into the business, the period for which they will do business as partners, dissolution of the partnership and any other information required by the law.

1. A partnership is easier and cheap to start
2. The partners share the startup cost hence less burden
3. The partners enjoy equal rights on the management, on profits, losses and assets of the partnership

1. The partners have unlimited liability
2. Finding a suitable partner can be very difficult
3. The partners are likely to develop conflict between themselves with time
4. A partner is personally and financially liable for any decision he or she makes

This refers to a business organization between two partners who shares the profits and losses in more than one commercial business. This form of business is tedious and risky as the businesses are more than one making accountability difficult to achieve.

This form of business arrangement is started by general partners with a joint liability and participating partners liable to the extent of the shares they contributed in the business.

The law requires general partners to be citizens of United Arab Emirates. The law also sets the minimum amount of share capital for participating partners at AED 500000.

Participating partners should not get involved in the day to day running and or management of the partnership but are free to participate in the internal management of the business.

Is formed by a minimum of three founding members. The founding members are required to have a working capital of AED 2Million between them. Shares of this form of company are not open to subscription by members of the public.

Homer could also form a limited liability company. Unlike the past where limited liability companies could only be formed by a minimum of two natural persons, Federal Law No. 2 2015 did away with the requirement of between two and fifty individuals. Now, a single natural person can incorporate a limited liability company.

The main advantage of operating a limited liability company is that of limited liability. The assets of a director or promoter cannot be attached to settle company debts. The two are separate legal entities. Upon corporation a limited liability company becomes a separate legal entity.

Forms of Business Organizations

Since the law in force now removed the requirement of two to fifty persons as a requirement for forming a limited liability company, entrepreneurs like Homer are now free to form limited liability companies without the involvement of a third party.

The name of a limited liability company can be derived from its objective of from the name of the partner and such name has to be accompanied by the words ‘’limited liability company’’

The company shall draw a Memorandum of association containing the following information;

1. Full name of the promoter, the nationality, date of birth and place of residence,
2. Name of company, its address and trade name and the objective for which it was incorporated
3. The company’s head office and any branches
4. The amount of the company’s capital
5. The date which the company commenced business and the date it intends to wind up
6. The proposed method of managing the company
7. The company’s proposed financial year, its commencement and end
8. The rationale of sharing profits and losses

The company has to undergo registration for it to undertake business. The registration procedure is as follows;

1. The authority verifies the information and all the required documents and then issues a form for registration to be filled.
2. The form is the submitted to the authority with all the accompanying documents for registration
3. The decision to incorporate is issued not later than five days from the date on which application for incorporation was made and giving reasons for rejection of an application if any
4. Where the competent authority accepts the application, a competent court enters the company in the commercial register and a trade license issued.

After all the requirements as to incorporation have been met, the company is licensed to carry on its business as contained in the memorandum of association.

Homer has two employees working on a self-employed basis. Though the law does not expressly recognize these type of employees, employers are obligated to treat all their employees humanely. Employment relationships especially in the private entities are governed by Federal Law 8 of 1980.

All employees are entitled to written contracts. Employment should not be at will.

The wages are supposed to be paid through wages protection system.

Homes has the following obligations towards the employees;

1. The duty to pay the agreed amount
2. Duty to provide work
3. Duty to observe health and safety regulations at the work place
4. Obligation to inform employees about their rights under the contract of employment
5. Set a complaints mechanism and an efficient conflict resolution method
6. Both the employer and the employee owe each other a duty of mutual trust and confidence.

Obligations and Disqualification of Directors

If homer decides to incorporate a company, his obligations as a director of the company shall be numerous. They include but not limited to;

To manage the company and at the same time preserve all the rights and works of such company with a lot of care of a reasonable and precise individual. In doing so, the director should act in accordance with the objects for which the company was formed.

The director has the responsibility to act for and on behalf of the company in all contracts, negotiations, litigations and any other incidental duty if the Memorandum and Articles of association requires him or her to do so.

The director has the duty to exercise care, skills and be diligent like a reasonably competent person in the circumstances would do.

A duty not to act ultra vires – a director should only exercise those powers conferred on him or her by the Articles and Memorandum of Association.

A director is mandated to act in conformity with any regulation, articles of the company and the terms of any contract entered into between the company and any third party.

A director has the obligation to avoid conflict of interest when dealing with the affairs of the company.

A director is under van obligation not to compete with the company. He or she is prohibited from establishing a business to compete with the company.

A director should keep company secrets to himself and not to divulge them to third parties.

Where a director of a company breaches any or all his or her obligations, he or she can be disqualified and removed as a director. A director is also removed in the following circumstances;

1. Where a director breaches his or her duties
2. He or she is declared bankrupt
3. He or she is convicted of an offence of dishonesty
4. If he or she fails without any satisfactory explanation to attend three consecutive board meetings.

Conclusion

In summary, UAE has made positive steps in easening the conduct of business in the country. This it has done through amendment of the federal law to make it easier to start and register a Limited Liability Company. Non-nationals are also encouraged through the conducive environment to engage in investment in UAE.

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