The Law Firm of Hazim Al Madani Attorneys and Legal Consultants
The Sole Proprietorship Company
Written By/Legal Consultant/ Abdulhaleem Ammar
When the new Companies Act was issued under the Royal Decree No. (3/م), dated in 28/01/1437H, including new issues and rules, it came as a continuance for the new Saudi policies that aim to facilitate commercial regulations and related procedures, and to remove all regular and legal hinders to cope with the industrial and commercial progress in order to contribute improving the investment climate of Saudi Arabia, as well as diversifying economic activities in all fields and sectors, aiming to achieve significant economic development.
Among the regulations stipulated by the new corporate law to improve the investment climate in the Kingdom is to allow the establishment and formation of a one-person company, where a limited liability company and a joint-stock company can be established by one person to whom all of its shares will revert, and the person’s responsibility for the company’s debts would be within the limits of the company’s capital, and as such, The person has the powers and the authorities of the director, the company’s board of directors and the general assembly of partners.
A one-person company is defined as: “A company consisting of one person, whether natural or legal, and this company has a financial liability independent of the financial liability of the partner.”
Accordingly, a one-person company may be established starting with one partner, and it can also devolve into a company of one partner as a result of a sole partner remaining in it. The one-person company is based on personal consideration, and the one-person company is established by direct incorporation, and the second: by indirect incorporation.
The first method (direct incorporation) in which a person establishes a company under their sole discretion; for the purpose of practicing a commercial activity. In this case, a new legal entity is constituted, and thus the one-person company here is subject to the general provisions of the sole will.
The second method (Indirect Establishing), is when the Sole Proprietorship Company is formed through the collective limited liability company’s shares to be placed in the hands of one shareholder for any reason, which means that all company shares become in the possession of only one person, and thus, such company transforms into a Sole Proprietorship Company, unless the company is terminated or liquidated.
The new Companies Law laid down the steps and procedures for establishing a Sole Proprietorship Company by following several methods, as Article (154/1) of the New Companies Law stipulates that: (A limited liability company may be established by one person, or all of its shares may be transferred to one person).
Article (149) of the new Companies Law stipulates that: (If all the shares of a joint stock company are transferred to one shareholder who does not meet the conditions set forth in Article 55 of the law, the company shall remain solely responsible for its debts and obligations. Nevertheless, the shareholder must reconcile the company’s situation with the provisions contained in this section, or transform it into a limited liability company of sole proprietorship within a period not exceeding one year, otherwise the company shall be terminated by the force of the statute.
In this regard, it must be noted that the new Companies Law prohibits the establishment of more than a single Sole Proprietorship Company, as Article (154/2) of the New Companies Law stipulates that (in all cases, a natural person may not establish or own more than one limited liability company of sole proprietorship, and a limited liability company owned of sole proprietorship (natural or corporate) may not establish or own another limited liability company of Sole Proprietorship.
The sole proprietorship company, like other companies, enjoys a legal personality, as the company is considered a legal person from the time of its establishment after completing the publicity procedures prescribed by law. The acquisition of a legal personality by a sole proprietorship company entails having an address that distinguishes it from other companies, and it signs its undertakings on behalf of its own account.
The acquisition of a legal personality by a sole proprietorship company also entails that it has an independent financial liability. However, the financial liability of a sole proprietorship company is not similar in its form with the financial receivables of other companies, and the reason for this is that the capital of this company is just one share that is provided by the sole partner in said company. Hence, the financial liability of a sole proprietorship company consists of the company’s capital and its assets. Therefore, the partner’s liability is determined by the amount he provides from the share in the company’s capital, and this means that the partner’s liability in a one-person company is limited to the partner within the limits and the amount of his share in the company’s capital, away from his personal funds to which the responsibility does not extend.
However, an exception was made to this, as Article (154/1) of the new Companies Law promulgated by Royal Decree No. (M/3) dated 28/1/1437 AH states that: “Except for the provisions of Article Two of the Law, the company may be established with The limited liability of one person, or that all of its shares devolve to one person. In this case, the responsibility of this person is limited to the money he has allocated to be the capital of the company, and this person shall have the powers and authorities of the manager, the company’s board of directors and the general assembly of partners stipulated in this chapter.
Another exception was made, by which the Saudi legislator permitted the liability to extend to the personal funds of the partner in certain cases included in Article 155 of the new Companies Law, which stipulates that: “The person who owns the limited liability company shall be responsible in his own money for the company’s obligations in the face of A third party with whom he dealt in the name of the company, in the following cases: 1- If they – in bad faith – liquidate the company, or stops its activity before the end of its term or before achieving the purpose for which it was established. 2- If they do not separate the company’s business from their other private business. 3- If they carry on business for the account of the company before it acquires legal personality.
The sole proprietorship company expires for the same general reasons prescribed for the expiration of companies, such as the expiration of the company’s term, the loss of its funds, bankruptcy or the expiry of the purpose for which this company was established, and the death of the owner of the company is one of the reasons for the termination of the sole proprietorship company unless the heirs agree otherwise. There are several heirs and they agree among themselves that the company will continue. In this case, the company will be transformed into another type of company. But if the heir is a single individual and he maintains this company, then in this case the company shall continue to carry out its activities and business.