Companies and institutions play a pivotal role in strengthening the economic system in the Kingdom of Saudi Arabia, as they represent a fundamental pillar for achieving sustainable economic and social development. Through these entities, job opportunities are provided, investments are stimulated, and local production is enhanced. Thanks to their diverse structures, companies contribute to innovation and market development through expansion in various economic sectors.
On the other hand, institutions are an important option for individuals wishing to establish small or medium-sized businesses, as they allow them to manage their resources more flexibly. By focusing on innovation and economic diversification in Saudi Arabia's Vision 2030, companies and institutions have become key partners in achieving national goals, including reducing dependence on oil and stimulating sustainable growth in all regions of the Kingdom.
What Is a Company?
A company is a separate legal entity established under a partnership agreement between two or more persons for the purpose of generating profit. This entity enjoys a legal personality distinct from its founders, meaning the company itself bears the legal and financial responsibilities arising from its activities. Profits and losses are distributed among partners according to their contractual shares.
For example, a public joint-stock company is a form of company whose shares are traded in the financial market, enabling investors to buy and sell shares. Likewise, limited liability companies (LLCs) allow partners to protect their personal assets from any financial liabilities the company may face.
What Is an Establishment?
An establishment is a business entity owned by a single individual who is fully responsible for all rights and obligations related to the business. It does not have a legal personality separate from its owner, which means the owner bears full responsibility for all debts and financial commitments tied to the establishment.
For example, establishments can include small retail shops or specialized trades such as construction or service providers. In Saudi Arabia, establishments are a popular choice among entrepreneurs starting small businesses without extensive legal complexity, offering them operational flexibility while complying with licensing and regulatory requirements.
What Is the Difference Between a Company and an Establishment?
A company and an establishment are two different legal forms used to operate a business, each with distinct legal, financial, and administrative characteristics. The fundamental difference lies in the legal structure, ownership nature, and associated liabilities.
Definition of a Company
A company is an independent legal entity formed under a partnership contract between two or more persons for the purpose of generating and sharing profits. It is characterized by its separate legal personality, meaning it is legally distinct from its founders or partners. This separation makes the company solely responsible for its financial and legal obligations, independent of its shareholders. Companies are often suited for medium and large enterprises requiring joint investments or complex management structures.
How Is a Company Formed?
The formation process begins with a Memorandum of Association, which outlines each partner’s rights, duties, and profit/loss shares. The company must be registered in the Saudi Commercial Register, providing necessary documents such as the memorandum, company type, and trade name. Once all legal procedures are completed, the company is granted legal personality and becomes liable before the law.
Legal Forms of Companies in Saudi Arabia
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General Partnership (Sharikah Tadamun): Two or more partners share responsibilities and liabilities jointly.
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Limited Liability Company (LLC): The most common form among small and medium enterprises, with partner liability limited to their share capital.
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Joint-Stock Company: Typically for large-scale businesses, requiring a board of directors.
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Limited Partnership (Sharikah Tawsiya Basita): Includes general partners who manage the business and limited partners who contribute only capital.
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Single-Person Company: Owned by one person but treated legally as a company.
Definition of an Establishment
An establishment is a simple business entity owned entirely by one person. It does not have a separate legal personality, meaning the owner is personally liable for all the establishment’s legal and financial obligations. Establishments are generally used for small businesses that do not require large investments or complex management.
Legal Structure of an Establishment
The legal structure is directly tied to the owner. Because it is not a separate legal entity, all debts and obligations are considered part of the owner’s personal liabilities. Registration is done with relevant Saudi authorities, such as the Ministry of Commerce, requiring basic documents specifying the business activity and name.
Key Differences Between an Establishment and a Company
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Legal Personality: A company has an independent legal personality; an establishment does not.
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Liability: In companies, liability is generally limited to the partners’ shares; in an establishment, the owner bears full legal and financial liability.
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Ownership: Companies require at least two partners (except single-person companies), while establishments are owned by one individual.
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Scope: Companies suit medium to large operations; establishments are better suited for small or sole-proprietor businesses.
Legal Differences
In companies, liability depends on the type:
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In LLCs, liability is limited to capital contributions, protecting personal assets.
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In general partnerships, liability is unlimited, and partners’ personal assets may be at risk.
In establishments, the owner bears unlimited personal liability for all debts and obligations, increasing financial risk compared to LLCs.
Financial Differences
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Financial Obligations:
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Companies distribute profits/losses based on the memorandum or articles of association, ensuring transparency.
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In establishments, the owner bears all profits/losses alone—offering flexibility but higher personal financial risk.
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Taxes:
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Companies pay corporate tax on net profits. For mixed ownership, Saudi partners pay zakat, and foreign partners pay income tax.
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Establishments are subject only to zakat, calculated on capital and net profits.
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Both companies and establishments must register with the Zakat, Tax, and Customs Authority and submit regular tax filings
Converting an Establishment into a Company
What Are the Potential Benefits of Converting an Establishment into a Company?
Converting an establishment into a company offers several key benefits, foremost among them the reduction of legal and financial risks for the owner. Companies enjoy an independent legal personality, meaning financial and legal liabilities are borne by the company itself rather than the owner personally.
This transformation also enhances the chances of attracting investments and new partners, contributing to business expansion. Furthermore, it provides greater opportunities for business growth and future expansion due to the company’s flexible organizational structure.
What Are the Risks Associated with the Conversion Process?
Despite its advantages, the conversion process may involve certain risks, such as increased legal and administrative complexities. Companies are required to produce regular financial reports and comply with corporate tax and zakat obligations, which may increase administrative costs. Additionally, converting the establishment may result in changes to the management structure, potentially affecting operations if not carefully planned.
How to Convert an Establishment into a Company
Converting an establishment into a company involves several legal steps, including:
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Preparing an official resolution from the owner approving the conversion.
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Determining the new company type (e.g., Limited Liability Company – LLC).
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Amending the establishment’s articles of association to comply with corporate requirements.
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Submitting the conversion request to the Ministry of Commerce through the online platform.
What Documents Are Required for the Conversion?
Required documents include:
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The conversion resolution signed by the owner.
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The amended articles of association.
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A list of partners and their ownership shares (if new partners are added).
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The establishment’s commercial registration certificate.
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Proof of payment of the required fees.
Once the documents are submitted and requirements are met, a new commercial registration is issued for the company, enabling it to operate as an independent legal entity.
