LLC Articles of Association in Saudi Arabia: What to Include

Fahd will invest SAR 400,000, and Sultan will run a coffee roastery every day with his experience. They filled in the articles of association template on the Ministry of Commerce platform in fifteen minutes, because “we trust each other”. Eight months later, Fahd asked about the accounts and Sultan asked for a monthly salary, and they found that the contract answers neither question. The articles of association (aqd al-ta'sis) are the reference you will both go back to when you disagree, so do not treat them as a formality to get the commercial registration.

The short answer: Article 158 of the Companies Law requires the articles to include the partners' names, the company's name, head office and purpose, the capital and how it is divided, the management method, transfer of shares, partners' resolutions, distribution of profits and losses, and dissolution. What really protects you is what you add on top of that, clearly: the manager's powers and pay, your right to see the accounts, and how a partner exits and how his share is valued.

What protects you in a limited liability company in Saudi Arabia?

Article 156 of the Companies Law defines the limited liability company (LLC) as a company formed by one or more persons, with assets separate from the assets of each partner. The company alone is liable for its debts, and a partner is liable only up to his share in the capital.

In practice, this protection has limits. If you sign a personal guarantee for a bank or a supplier, you are liable under what you signed. Article 9 makes anyone who deals in the company's name before its formation is complete personally and jointly liable for those acts if the formation procedures are not completed. The company becomes a legal person after it is entered in the commercial register.

What must the articles of association of an LLC contain?

Article 158 sets the mandatory content:

• The partners' names and details, and the company's name, head office and purpose.
• The capital and how it is divided between the partners, and their declaration that the value of the shares has been paid.
• The company's term, if any, and its management method.
• Transfer of shares, the method of notifying partners, and partners' resolutions.
• Distribution of profits and losses, the start and end of the financial year, and dissolution of the company.
• Any other terms the partners agree on that do not violate the law.

Article 7 requires the articles to be in Arabic, and a translation may be attached. Article 8 requires the articles and every amendment to be in writing, or they are void, and they cannot be relied on against third parties until entered in the commercial register. If the owner is a single person, the company has bylaws (nizam asas) instead of articles of association, and the owner's decisions are made in writing and recorded in a special register, under Article 157.

The Companies Law sets no minimum capital for a limited liability company. Article 174 leaves it to the partners to set the amount in the articles of association, divided into shares (hissas) of equal value that cannot be split or traded. Still, choose a figure that genuinely fits the size of the business, because the partners declare in the articles that they have paid the value of their shares (Article 158), so do not state capital that has not been paid.

Must profits be distributed according to shares?

Article 175 states that shares give equal rights in net profits and in any surplus on liquidation, unless the articles of association provide otherwise. So the articles can set a different arrangement; if they say nothing, profits are distributed according to shares.

In Fahd and Sultan's story, pay for management is one thing and a share of profits is another. If you agree on a salary for the manager, write it in a separate management contract or in the articles, and do not mix it with profits. Article 11 allows the partners to sign a written agreement regulating their relationship, which is binding as long as it does not violate the law or the articles. And do not write in the articles that Sultan paid a cash share that he did not pay.

If a partner contributes equipment or property as an in-kind share, Article 159 refers to Article 141: if in-kind shares exceed half of the capital, they must be valued by an accredited valuer. Article 158 requires the valuer's report, where in-kind shares exist, to be attached, with a declaration from the other founders approving the value.

The roastery's capital is SAR 500,000: 400,000 from Fahd (80%) and 100,000 from Sultan (20%). Both paid their shares in cash.

They wrote in the articles that Sultan receives SAR 12,000 per month for management under a separate contract, that net profits are distributed 60% to Fahd and 40% to Sultan, and that borrowing over SAR 100,000 or selling any equipment needs both partners' approval.

In the first year, the partners decided to distribute SAR 150,000 of net profit after the manager's pay: Fahd received 90,000 and Sultan 60,000. If the articles had said nothing about the split, the amount would have been distributed according to shares under Article 175: 120,000 to Fahd and 30,000 to Sultan.

Who signs for the company, and how do you limit the manager's powers?

Article 160 allows the company to be managed by one or more managers, partners or non-partners, appointed in the articles or in a separate contract. Article 161 leaves it to the articles or a partners' resolution to set the management method and the majority needed when there is more than one manager. Article 162 binds the company to the manager's acts that fall within its purpose, and makes his appointment, replacement or any limit on his powers effective against third parties only after it is entered in the commercial register.

So if you want the manager not to borrow or sell an important asset without the partners' approval, write it down and register it. Under Article 171, a partner who is not a manager may ask to inspect the company's business and records twice in each financial year, and the company must respond within 15 days; any clause to the contrary is void. Article 164 allows the partners to remove the manager, and partners holding at least one quarter of the capital may ask the court to remove him.

How does a partner exit an LLC in Saudi Arabia?

Article 178 allows a partner to transfer his share to another partner according to the articles. For a transfer to a non-partner, the partner informs the other partners, through the manager, of the buyer's name and the sale terms, and each partner may claim the share for himself (pre-emption right) within 30 days of being notified by the manager. If they disagree on the price, an accredited valuer sets it. The articles may set other procedures, a longer period or a different valuation method.

Amending the articles needs the approval of partners holding at least three quarters of the capital, unless the articles require a higher percentage (Article 172). Article 173 allows the articles to provide for arbitration or other alternative ways to settle disputes between partners or with managers.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are the financing partner:

• Require the partners' approval for borrowing, selling assets and giving guarantees, and register this limit in the commercial register.
• Set a date in the articles for periodic financial statements, in addition to your legal right of inspection.
• Set a cap on the manager's salary and when it is reviewed.
• Agree a clear method for valuing shares when a partner exits.

If you are the managing partner:

• Ask for your pay and powers to be written in a management contract, not left to a verbal promise.
• If your share of profits is larger than your share of capital, write it expressly in the articles under Article 175.
• Do not deal in the company's name before it is registered, and do not mix the company's account with your personal account.
• Keep minutes of partners' resolutions in the special register.

If you are about to form a company with a partner, or a disagreement has started, send us the draft or the current articles on WhatsApp, and we will review with you what is missing before the dispute grows.