Sole Proprietorship vs. Limited Liability Company (LLC):
Key Differences for UAE Business Owners
When starting a business in the UAE, one of the first decisions you’ll need to make is choosing the right legal structure for your company. The law classifies companies into two main categories: capital companies and personal companies. This distinction is crucial as it impacts your legal responsibilities, liabilities, and the overall operations of your business.
According to the Companies Law No. 32 of 2021, personal companies include general partnerships and limited partnerships, while capital companies encompass limited liability companies (LLCs), public joint-stock companies, and private joint-stock companies. There is also a separate entity type known as a sole establishment. In this article, we will compare sole proprietorships and LLCs to help you decide which structure suits your business needs.
1. Number of Partners Required for Formation
A Limited Liability Company (LLC) in the UAE provides flexibility when it comes to the number of partners. Under the UAE Commercial Companies Law, an LLC can have anywhere from two to fifty partners, and the company’s name must include “Limited Liability Company” (LLC).
In contrast, a sole establishment or sole proprietorship can only be formed by a single individual, with the company named after that person, followed by “Single Person Limited Liability Company” to indicate its legal structure.
2. Liability and Financial Responsibility
In a sole establishment, the business owner holds full responsibility for all financial obligations and liabilities. This means the founder’s personal assets are at risk if the business incurs debts or faces legal challenges.
On the other hand, in a Limited Liability Company, liability is restricted to the company’s assets. The partners are only liable for the company’s debts up to the value of their unpaid capital contributions, safeguarding personal assets from creditors.
Conclusion: Which Structure Is Right for You?
Choosing between a sole proprietorship and a limited liability company depends on your business goals and risk tolerance. If you prioritize personal asset protection and want to limit your liability, an LLC may be the better choice. However, if you prefer to retain full ownership without any partners, a sole proprietorship offers simplicity and control.