Limited Liability Companies (L.L.C) in Egyptian, Qatari laws and Saudi system
Introduction:
A limited liability company is a legal form of commercial companies that combines characteristics of both corporations and partnerships.
It provides partners with commercial and legal protection, limiting their liability to the extent of their shares in the company’s capital.
A partner in (L.L.C) does not independently acquire the status of a merchant but the company itself holds solely that status.
Unlike general partnerships (one of the legal forms of partnerships specified in the Royal Decree issued on 13/11/1883, which was repealed by Commercial Law No. 17 of 1999 except chapter one of the decree’s second part), where creditors can claim the personal assets of the general partner, but L.L.C partners are not personally liable beyond their capital share.
Characteristics and Conditions for Establishing an L.L.C:
- The number of partners should be neither less than two partners nor more than fifty.
- Partner’s liability is limited to their share in the capital.
- Limited liability company cannot raise capital, increase its capital, or get loans through public underwriting.
- An L.L.C cannot issue marketable stocks or bonds.
- It is prohibited from engaging in insurance, banking, savings, accepting deposits, or investing money on behalf of others.
- The transfer of shares among partners is subject to the conditions outlined in the contract, as well as conditions stipulated by law.
- Profits and loss are distributed equally according to shares, unless the contract specifies otherwise.
- A deceased partner’s share is transferred to heirs, and the legatee is treated as heir.
- Partner in L.L.C do not acquire the status of a merchant solely.
Key Features of a Limited Liability Company:
Limited liability companies are the most widespread types of commercial companies in terms of presence, for providing protection to the investor’s financial and legal position, some of the key advantages include:
- Protection of personal assets and funds of the partner.
- In case of company debts, partners are liable only to the extent of their capital share.
- Tax flexibility to reduce the financial burden on business owners.
- Preservation of privacy, as Limited liability companies are not required to issue annual reports or disclose member identities and financial data.
- Simplicity of the incorporation procedures.
Limited Liability Companies in Egyptian Law:
In Egypt, the definition of L.L.C is provided in Article 4 of Law No. 159 of 1981, amended by Law No. 4 of 2018, this law regulates joint-stock companies, limited by shares companies, limited liability companies and one person company.
This law regulates the general provisions for the companies subject to it and establishes the rules, conditions, and procedures followed by the founders, the incorporation procedures, the financial structure, management of the company, the general assembly holding, the liquidation of the company, mergers, and changes in the company’s form.
And in encouragement from the Egyptian government to investors in various fields, whether Egyptians or foreigners, with the aim of increasing the percentage of national products, raising competition to international level, and combating monopoly, the Investment Law No. 72 of 2017 was issued and amended by Law No.
141 of 2019, along with its executive regulations issued by the Prime Minister’s decision No. 2310 of 2017.
This law grants exceptional incentives for labor-intensive projects and geographical areas most in need of development, as well as for small projects specifically targeting youth and women, entrepreneurial ventures, and startups.
And to facilitate the procedures for entrepreneurs and to ensure the investment processes are advanced, meeting the needs of international market, Egypt has established the General Authority for Investment and Free Zones as stipulated in the aforementioned Investment Law, this law grants the administrative bodies within the authority the powers to make decisions, issue approvals, and set up accreditation offices to examine the documents submitted by investors, it also provides electronic services and technical support through the authority’s website to keep pace with the prevailing technological and digital transformation worldwide.
Limited Liability Companies in Qatari Law:
The definition of a limited liability company is included in Qatari law in the first chapter of the 8th section of the Commercial Companies law No. 11 of 2015, where article 228 states:
“A limited liability company is a company that consists of one or more persons and the number of partners shall not exceed fifty (50) persons. A partner will only be liable up to their share in the capital. The shares of the partners shall not be negotiable securities.”
It is noted that the Qatari legislator allowed the establishment of a limited liability company by a single person while retaining the legal form of the company, unlike the Egyptian law which requires the presence of at least two partners to form a limited liability company.
The general rule is that in L.L.C, a partner is not liable for the company’s debts except to the extent of their share in the capital, and the debts do not extend to their personal assets unless the company’s name is misleading regarding its purpose -not derived from its objective- and also if the phrase “limited liability” is not added to the company’s name, the company’s directors become jointly liable with their personal assets for the company’s obligations, in addition to compensations, Article 229 of the same law stipulates in this regard:
“A limited liability company shall have a name derived from its object or from the name of one or more of its partners. The name of the company may include in both cases a created name, provided that the name shall not be deceiving as to its object or identity. The expression “limited liability company” shall be added to the name of the company. If the managers fail to consider the said provision, they shall be responsible jointly in their own assets for the liabilities of the company in addition to compensation.”
Article 230 of the same law included another condition, prohibiting limited liability companies from resorting to public underwriting to form or increase their capital, and also prohibiting for the purpose of obtaining loans by underwriting, they are not allowed to be listed on the stock exchange or to issue stocks or bonds for trading, the article stated:
“The company may not resort to public subscription to form its capital, increase it, or to obtain the loans required for it, and it may not issue tradable shares or bonds.”
And Article 231 of the same law included the data that must be included in the establishment contract prepared by the partners -the establishment document- stating:
“A limited liability company shall be established by virtue of an establishment document signed by the partner or partners which shall include the information determined by a decision to be issued by the Minister, provided that the following information shall be included therein:
- The type, name, object and head office of the company.
- The names, nationalities, residences, and addresses of the partners.
- The amount of the capital, share of each partner, in-kind shares, their value and the names of their providers, if applicable.
- The names and nationalities of the company’s managers, whether they are partners or otherwise, and if their names were mentioned in the establishment document of the company.
5- The names of the members of the supervisory board, if applicable.
6- The term of the company.
7- The method for the distribution of profits and losses.
8- The conditions for the transfer of shares.
9- The form to be followed in the notifications of the company to be sent to the partners.
The establishment document of the company may include provisions that regulate the right of refunding the shares of the partners, the method for estimating their value when exercising this right, forming an optional reserve, organizing the financial matters and accounts of the company, and the reasons for its dissolution.”
Regarding the company’s capital, article 232 of the law has conditioned the establishment of the company on the necessity for partners to fulfill their cash and in-kind contributions to the capital and to deposit the cash contributions in one of the approved banks in the country, these contributions are not disbursed to the
company’s directors until they are registered in the commercial registry, it also included conditions for a partner to provide an in-kind contribution to the capital, stating:
“A limited liability company shall not be established, unless all the cash and in-kind shares are distributed among the partners and are paid in full. The cash shares of the company shall be deposited in one of the accredited banks in the State. The bank may not pay these shares except to the managers of the company after providing proof that the company has been registered in the commercial registry. If the partner provides an in-kind share, the establishment document must set out its type and value and the price agreed to by the remaining partners for such share as well as the name of the partner and their share in the capital against such contribution. The provider of the in-kind share shall be responsible before third parties for the difference between the real value and the estimated value in the establishment document of the company. Moreover, the rest of the partners shall be jointly responsible for such difference, unless they prove that they were not aware of this. However, the liability claim shall not be heard in such case after three (3) years from the date of registering the company in the commercial registry.”
And article 233 of the same law included the procedures followed in establishing the company and specified the date of the company’s activity commencement after registration in the commercial registry, stating:
“The manager of the company shall apply for registering the company in the commercial registry. The application shall be accompanied by the establishment document of the company, documents proving the distribution of shares among the partners, and payment in full and depositing them in one of the accredited banks in the State in addition to the documents proving that the company has received in-kind shares, if any. The application shall be considered within fifteen (15) days from the date of submission with the required documents. The company may not carry out its business until after being registered in the commercial registry.”
Limited Liability Companies in Saudi system:
The general provisions governing L.L.C in Saudi system are found in Chapter 6 of the Saudi companies’ system, Royal Decree No. (M/3), issued on 8/1/1437 AH, according to article 151:
“A limited liability company is a company in which the number of partners does not exceed fifty partners, and its liability is independent of the financial liability of each partner. The company alone shall be liable for the debts and obligations incurred by it, and its owner or partner shall not be liable for such debts and obligations.
2- If the number of partners exceeds the number specified in paragraph (1) of this article, the company must be converted into a joint stock company within a period
not exceeding one year, and if this period passes without its conversion, it shall expire by force of law, unless the increase results from inheritance or a will.”
It is clear from the previous article that the legal protection for the partner in a limited liability company is guaranteed, as they are not personally liable for the company’s debts, the company alone is responsible for its debts, within the limits of each partner’s share in the capital, except in case where the company’s managers neglect to include the phrase “limited liability” alongside the company’s name or fail to specify the amount of capital, in this case the company’s managers are jointly liable for the company’s obligations, this is what was determined by the second paragraph of article 152 of the decree, which stated:
“The limited liability company shall have a name derived from its purpose or invented. Its name may not include the name of a natural person, unless the purpose of the company is to invest a patent registered in the name of such person, or if the company owns a commercial establishment and takes its name as its name, or if this name is the name of a company that has been transformed into a limited liability company and its name includes the name of a natural person. If the company is owned by one person, the name must include what indicates that it is a limited liability company owned by one person, and failure to do so shall result in the application of Paragraph (2) of this Article.
2- The company’s managers shall be personally and jointly liable for the company’s obligations if the phrase “limited liability” is not placed or the amount of capital is not stated next to the company’s name.”
The first paragraph of the previous article stipulated that the name of the company must be derived from its purpose or be innovative, and its name should not contain the name of a natural person unless its purpose is to invest in a patent registered in the name of that person, or if the company owns a commercial establishment that has adopted its name, or if it is an existing company converted into a limited liability company and includes the name of a natural person.
Article 153 of the decree included the activities prohibited for the limited liability company, as well as the prohibition on resorting to public subscription to form or increase its capital or to obtain loans, and the prohibition of being listed on the stock exchange or issuing stocks or bonds for trading, it stated:
“1- The purpose of a limited liability company may not be to carry out banking, financing, savings, insurance or investment activities on behalf of others.
2- A limited liability company may not resort to public subscription to form or increase its capital or to obtain a loan, nor may it issue negotiable instruments.”
And article 154 of the decree included an exception to the general rule by allowing the formation of a single-member limited liability company through establishment or transfer of shares to that person, provided that they do not own more than one single-member limited liability company, in that case, their liability would be limited to the company’s capital only, the article stated:
“1- As an exception to the provisions of Article (Two) of the System, a limited liability company may be established by one person, or all of its shares may be transferred to one person. In this case, the liability of this person shall be limited to the money he has allocated as capital for the company, and this person shall have the powers and authorities of the manager, the board of directors of the company, and the general assembly of partners stipulated in this chapter, and he may appoint one manager (or more) to represent it before the judiciary, arbitration bodies, and others, and be responsible for its management before the partner who owns the company’s shares.
2- In all cases, a natural person may not establish or own more than one limited liability company from one person, and a limited liability company owned by one person (of natural or legal character) may not establish or own another limited liability company from one person.”
And another exception to the rule of the partner’s non-liability for the company’s debts, except to the extent of their share in the capital, is that they will be liable with their personal assets if they, in bad faith, liquidate the company or cease its activities before achieving the purpose for which it was established, and if they mix the company’s activities with their separated private activities, and if they conduct business in the name of the company and on its behalf before it acquires legal personality, in this regard article 155 states:
“The owner of a limited liability company shall be liable in his own funds for the company’s obligations towards third parties with whom he has dealt in the name of the company, in the following cases:
A – If he – in bad faith – liquidates his company, or ceases its activity before the end of its term or before achieving the purpose for which it was established.
B – If he does not separate the company’s business from his other private business.
C – If he carries out business on behalf of the company before it acquires legal personality.”