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Before Establishing Your Company in Saudi Arabia: 10 Legal Mistakes That Could Cost You Dearly

Introduction

Establishing companies in the Kingdom of Saudi Arabia has become more flexible than before, with the New Companies Law offering multiple options and greater flexibility in regulating relationships between partners. This includes allowing certain types of companies to be established by a single person, introducing the Simplified Joint Stock Company, and streamlining a number of incorporation procedures.

The New Companies Law and its Implementing Regulations came into force on January 19, 2023.

However, the ease of electronic procedures does not mean that establishing a company is simply a matter of filling out forms and obtaining a commercial registration.

The decisions founders make at the outset — from selecting the legal structure to drafting the Articles of Incorporation, defining management powers, and regulating relationships between partners — may affect the company for years to come.

Therefore, a legal mistake at the incorporation stage may be far more costly than correcting it before the company begins operating.

In this article, we highlight 10 common legal mistakes that should be considered when establishing a company in Saudi Arabia, and explain why early legal review can be an important step in protecting the company and its partners.

1. Choosing the Legal Structure Based Solely on Ease of Incorporation

One of the first decisions a founder faces is choosing the appropriate legal structure for the company.

The choice should not be based solely on the speed of incorporation or the simplicity of the procedures. Instead, it should take into account:

The nature of the business.
The number of partners.
Growth plans.
Management structure.
Liabilities and responsibilities.
Future requirements.

The Ministry of Commerce provides several types of companies, each with different characteristics and legal requirements. The New Companies Law also introduced the Simplified Joint Stock Company, which may be established by one or more persons and offers greater flexibility in organizing its management.

The Mistake

Choosing a legal structure today, only to discover later that the company’s structure does not suit the nature of the business or its investment plans.

The Solution

Before incorporation, consider:

The nature of the business.
The number of partners.
The investment size.
The management structure.
The possibility of bringing in investors.
Expansion plans.
The nature of liabilities.
The possibility of future exit or sale of shares or interests.

2. Using a Standard Articles of Incorporation Without Reviewing It

Some may assume that having a template for the Articles of Incorporation means that using it as-is is sufficient to protect the company.

However, the Articles of Incorporation are not merely a document required to complete registration procedures.

They are a key document governing the relationship between the company and its partners and the way the company is managed.

The New Companies Law provides greater flexibility to include specific provisions and conditions in the Articles of Incorporation and bylaws according to the nature of the company.

Therefore, relying on a generic template without considering the partners’ specific needs may represent a missed opportunity to properly regulate important matters from the outset.

Provisions Worth Reviewing

Managerial powers.
Decision-making mechanisms.
Profit distribution.
Transfer of shares or ownership interests.
Admission of new partners.
Withdrawal of a partner.
Dispute resolution.
Exit mechanisms.

3. Failing to Clearly Regulate the Relationship Between Partners

A partnership may begin with an excellent relationship and mutual trust, but problems can arise once the company starts generating profits or when the partners’ views begin to differ.

One of the common mistakes is leaving important matters to verbal agreements.

Who owns what percentage?

Who manages the company?

Who has signing authority?

What happens if one partner wants to leave?

Can a partner sell their ownership interest to a third party?

What happens if the partners disagree?

These questions should not be left unanswered until a dispute arises.

The New Companies Law also recognizes the possibility of using a Shareholders’ Agreement or Family Charter to regulate various matters among stakeholders.

A successful partnership does not rely on trust alone; it requires clear legal arrangements.

4. Failing to Define Management Powers

One mistake that can later develop into a dispute is leaving the powers of the manager or person responsible for management unclear.

Who has the authority to:

Sign contracts?
Obtain financing or borrow money?
Open bank accounts?
Enter into transactions?
Purchase assets?
Sell assets?
Represent the company before third parties?
Hire employees?
Make financial decisions?

A lack of clarity regarding these matters may lead to management conflicts or disputes between partners.

Compliance with the Companies Law and relevant regulations is also essential, and the competent authorities have identified various violations that may be committed by managers and board members.

5. Mixing Company Funds With Personal Funds

Establishing a company does not mean that its owner can treat company funds as personal funds.

Mistakes to avoid include:

Using the company’s bank account for personal expenses.
Paying personal obligations with company funds.
Recording unclear or undocumented transactions.
Failing to separate revenues and expenses.
Treating company assets as personal property.

Proper financial and administrative separation helps protect the company and organize its operations, while also reducing the likelihood of disputes between partners or with third parties.

6. Failing to Think About the Exit Before Entering the Partnership

Everyone talks about how to establish a company, but few discuss the more important question:

What happens if one of the partners wants to leave?

This is a very important question.

A partner may eventually wish to:

Sell their ownership interest.
Exit the company.
Transfer their interest.
Bring in an investor.
End the partnership.
Restructure the company.

If the mechanism is not clearly established, the departure of one partner can turn into a lengthy dispute involving all parties.

For this reason, it is important to consider the company’s exit mechanisms from the incorporation stage, rather than after a problem occurs.

7. Neglecting the Company’s Intellectual Property Rights

A company may spend significant amounts building a trade name, trademark, visual identity, product, content, or software, only to discover that important rights have not been properly regulated or protected.

From the outset, companies should consider:

Trademarks.
Trade names.
Content.
Designs.
Software and applications.
Trade secrets.
Rights relating to employees, developers, and designers.
Agreements governing the transfer of intellectual property rights.

Intellectual property can become one of the company’s most valuable assets as the business grows, and therefore it should not be treated as a secondary issue.

8. Signing Important Contracts Without Legal Review

A company may begin operations quickly and enter into contracts with customers, suppliers, and business partners without conducting a proper legal review.

Problems may later arise regarding provisions such as:

Payment.
Delays.
Liability.
Warranties.
Termination.
Confidentiality.
Intellectual property.
Dispute resolution.
Jurisdiction.
Indemnification and compensation.

A good contract is not drafted only after a problem occurs; it is drafted in advance to reduce the likelihood of problems occurring.

Legal review of contracts before signing can therefore identify issues that may not be obvious to non-specialists.

9. Ignoring Regulatory Obligations After Incorporation

One common mistake is assuming that completing the incorporation procedures and obtaining a commercial registration means that the company’s legal obligations are over.

In reality, the post-incorporation stage is equally important.

Depending on its legal form and business activity, a company may be required to comply with various obligations relating to:

Financial statements.
Corporate governance.
Records.
Relevant regulatory authorities.
General meetings.
Rights of partners and shareholders.

There are also violations relating to the misuse of company funds and powers, among other regulatory obligations.

Therefore, legal compliance should be viewed as an ongoing process, rather than a one-time procedure completed during incorporation.

10. Delaying Legal Advice Until a Problem Occurs

This may be the most costly mistake.

Some business owners do not consider consulting a lawyer until after:

A dispute arises between partners.
An unsuitable contract has been signed.
A financial claim is made.
An ownership issue arises.
A dispute occurs with an employee or supplier.
One partner wants to exit.
A problem with the company’s legal structure is discovered.

In many cases, risks can be reduced through legal review before making key decisions.

The purpose of legal advice during the incorporation stage is not to complicate the process, but to ensure that fundamental decisions are made in a well-considered manner.

Why Does Establishing a Company Require Legal Review?

Company incorporation procedures have become electronic and more streamlined. The company can be incorporated through the Saudi Business Center platform by selecting the company type, entering the required information, and submitting the application, followed by authentication of the document and issuance of the Articles of Incorporation and commercial registration upon completion of the procedures.

However:

Ease of procedure does not mean ease of decision-making.

This is where a lawyer can play an important role before incorporation by reviewing:

1. Legal Structure

Does the selected legal structure suit the nature of the business?

2. Articles of Incorporation

Do they actually reflect the agreement between the partners?

3. Relationship Between Partners

Are the rights and obligations clearly defined?

4. Management

Are the powers and authorities clearly established?

5. Contracts

Do they protect the company from contractual risks?

6. Exit

Is there a clear mechanism for a partner’s exit?

7. Disputes

Is there an appropriate mechanism for resolving disputes?

Can a Company Be Amended After Incorporation?

Yes. There are regulatory services available for amending company Articles of Incorporation, changing the company’s status, converting the legal entity, and carrying out other corporate procedures.

The Ministry of Commerce provides various services, including:

Amending company Articles of Incorporation.
Changing the company’s status.
Legal-form conversion.
Liquidation.
Cancellation of the commercial registration.

But the better question is not:

Can I fix the mistake later?

It is:

Can I avoid the mistake from the beginning?

Amending a company after it has started operating may be more complicated once the company has entered into contracts and obligations and has employees, customers, partners, and investors.

Checklist Before Establishing Your Company

Before getting started, ask yourself:

If the answer to some of these questions is “No,” it may be advisable to address these matters before commencing business activities.

Conclusion

Establishing a company is not merely about obtaining a commercial registration.

It is a legal and business decision that lays the foundation for a long-term relationship between partners, management, customers, investors, and various authorities.

The cost of some mistakes may not become apparent at the time of incorporation. Instead, they may emerge years later when a dispute arises, the company expands, a new investor joins, or one of the partners decides to exit.

Therefore, taking the time to review the company’s legal structure, Articles of Incorporation, partners’ agreements, authorities, contracts, and ongoing obligations before starting operations may be one of the most valuable investments in protecting the company’s future.

Suleiman Al-Omari Law Firm for Legal Services and Consultations

Suleiman Al-Omari Law Firm for Legal Services and Consultations provides legal and advisory services to individuals and companies, including:

Company incorporation.
Contract drafting and review.
Regulation of relationships between partners.
Legal consultations relating to corporate structuring and governance.
Commercial disputes.

Our services are provided in accordance with the applicable laws and regulations of the Kingdom of Saudi Arabia.

If you are planning to establish a company or enter into a new partnership, reviewing the legal structure, contracts, and obligations before commencing business activities may help reduce risks and avoid future disputes.

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Suleiman Al-Omari Law Firm for Legal Services and Consultations