A New Foundation for Corporate Law
The Companies Law of 2022, which came into effect in January 2023, replaced legislation that had governed corporate structures in Saudi Arabia since 1965. The previous law, though amended several times over the decades, had become increasingly inadequate for the demands of a modernizing economy. Its requirements were rigid, its procedures cumbersome, and its conceptual framework reflected an era long since passed.
The new Companies Law represents a fundamental modernization. Drawing on international best practices while respecting the specificities of the Saudi legal environment, the 2022 law introduces greater flexibility in corporate structuring, reduces minimum capital requirements, streamlines formation procedures, and introduces entirely new entity types. It provides the corporate law foundation that Vision 2030’s economic diversification agenda requires.
Entity Types Under the New Companies Law
The reformed law recognizes several forms of business entity, each with distinct characteristics suited to different commercial purposes.
Limited Liability Company (LLC)
The LLC remains the most commonly used entity structure for private businesses in Saudi Arabia, including foreign-invested enterprises. The 2022 law significantly liberalized the LLC framework.
Single-shareholder LLCs are now expressly permitted, eliminating the previous requirement for at least two shareholders. This change is particularly significant for foreign investors who previously needed to identify a second shareholder, even if that shareholder held only a nominal stake.
Minimum capital requirements have been effectively eliminated for most activities. The previous law set a minimum capital of SAR 500,000 for foreign-owned LLCs. Under the new framework, there is no statutory minimum capital for LLCs, though sector-specific regulators may impose capital requirements for regulated activities.
Governance flexibility has been expanded. LLCs may now be managed by one or more managers who need not be shareholders. The articles of association have greater latitude to define governance arrangements, voting rights, profit distribution mechanisms, and transfer restrictions tailored to the specific needs of the shareholders.
Shareholder limits have been increased. While the old law capped LLC membership at 50 shareholders, the new law raises this limit substantially, making the LLC structure viable for a wider range of investment arrangements.
Joint Stock Company (JSC)
The JSC structure is used for larger enterprises, particularly those that may seek public listing on the Saudi Exchange (Tadawul) or that have a broader shareholder base.
Formation requirements have been simplified. The minimum number of founders has been reduced, and the formation process has been streamlined to eliminate redundant approvals. The new law permits the formation of single-shareholder JSCs, a significant departure from the previous requirement for at least five founders.
Minimum capital for JSCs is set at SAR 500,000, reduced from the previous requirement. For publicly listed JSCs, additional capital requirements apply as determined by CMA regulations.
Board governance follows a more flexible framework under the new law, with provisions for different classes of shares, cumulative voting, and enhanced minority shareholder protections. The law also clarifies the duties and liabilities of board members, bringing Saudi corporate governance standards closer to international norms.
Simplified Joint Stock Company (SJSC)
The 2022 law introduces the simplified joint stock company as an entirely new entity type, designed specifically for startups, venture capital-backed businesses, and growth-stage enterprises.
The SJSC offers the share-based capital structure of a JSC with significantly reduced regulatory requirements. It permits multiple classes of shares with different voting and economic rights, making it well-suited for venture capital and private equity investment structures that require preferred shares, liquidation preferences, and anti-dilution protections.
The SJSC has no minimum capital requirement and allows for streamlined governance arrangements. It cannot, however, offer its shares to the public without first converting to a standard JSC, providing a natural pathway for companies that grow to the point of seeking a public listing.
Other Entity Types
General partnerships and limited partnerships continue to be available under the new law, though they are less commonly used for major commercial enterprises. The limited partnership structure may be relevant for certain investment fund arrangements.
Professional companies are available for licensed professionals such as lawyers, accountants, and engineers, subject to the specific requirements of the relevant professional licensing authority.
Non-profit companies received a distinct framework under the new law, reflecting the growing role of the non-profit sector in Saudi Arabia’s social development agenda.
Branch Offices and Representative Offices
Foreign companies may establish a presence in Saudi Arabia without forming a separate legal entity through branch office or representative office structures.
Branch Offices
A branch office operates as a legal extension of the foreign parent company and conducts commercial activities in Saudi Arabia under the parent’s name and liability. Branch offices require a MISA investment license and commercial registration.
The branch structure may be preferred when the foreign company wishes to maintain direct control over Saudi operations without the governance complexity of a separate entity. However, the branch does not provide limited liability protection; the foreign parent company is fully liable for the branch’s obligations.
Branch offices are subject to corporate income tax on their Saudi-sourced income at the standard 20 percent rate, and must maintain separate books and records for their Saudi operations.
Representative Offices
A representative office is limited to promotional and liaison activities and cannot engage in direct commercial transactions in Saudi Arabia. This structure is sometimes used by foreign companies exploring the Saudi market before committing to a full commercial presence.
Representative offices require licensing from MISA and are subject to specific restrictions on their activities. They may conduct market research, maintain client relationships, and coordinate with government authorities, but may not import goods, execute contracts, or generate revenue within the Kingdom.
The Formation Process
Step 1: MISA Investment License (Foreign Entities)
Foreign investors must first obtain an investment license from the Ministry of Investment. This requires submission of corporate documentation for the foreign parent entity, a business plan, and financial information. The license specifies the permitted activities and the corporate structure to be established.
Step 2: Drafting Constitutional Documents
The articles of association (for an LLC or SJSC) or the bylaws (for a JSC) must be drafted in compliance with the Companies Law and any applicable sector-specific requirements. These documents define the entity’s governance structure, shareholder rights, management arrangements, and operational parameters. They must be in Arabic, though bilingual versions are commonly prepared.
Step 3: Commercial Registration
The entity must be registered with the Ministry of Commerce through the commercial registration system. This process has been substantially digitized, with much of the registration process available through the Ministry’s electronic portal. The commercial registration certificate is the entity’s primary legal identity document for most commercial and regulatory purposes.
Step 4: Tax and Zakat Registration
Following commercial registration, the entity must register with ZATCA for zakat (if Saudi/GCC-owned) or corporate income tax (if foreign-owned), and for VAT if it expects to exceed the mandatory registration threshold.
Step 5: Social Insurance Registration
All entities with employees must register with the General Organization for Social Insurance (GOSI) for mandatory social insurance contributions covering Saudi employees and workplace injury insurance for all employees.
Step 6: Municipal and Sector Licenses
Depending on the business activity and location, additional licenses may be required from municipal authorities, sector regulators, or both. A restaurant, for example, requires a municipal operating license and health permits. A financial services firm requires licensing from SAMA or CMA.
Capital and Shareholder Contributions
The new Companies Law provides greater flexibility around capital contributions. While cash contributions remain the standard, in-kind contributions of assets, intellectual property, and other non-cash items are explicitly permitted, subject to independent valuation requirements.
Shareholder agreements, while not a statutory requirement, are commonly used alongside the articles of association to govern the commercial relationship between shareholders. The 2022 law provides greater certainty around the enforceability of shareholder agreement provisions, though certain matters remain governed by mandatory provisions of the law that cannot be overridden by private agreement.
Corporate Governance Requirements
The Companies Law establishes baseline governance requirements that vary by entity type. JSCs are subject to the most comprehensive governance requirements, including board composition rules, audit committee requirements, and annual general meeting obligations. Listed JSCs must also comply with CMA corporate governance regulations, which impose additional requirements around board independence, disclosure, and related-party transactions.
LLCs have more flexible governance requirements, with greater latitude to customize management structures through the articles of association. The SJSC occupies a middle ground, with governance requirements proportionate to its role as a growth-stage entity.
All entities are required to maintain proper books and records, prepare annual financial statements, and comply with applicable auditing requirements. These requirements were strengthened under the 2022 law, with clearer standards around the appointment and role of external auditors.
Practical Considerations
The reformed Companies Law has significantly improved the ease of forming and operating business entities in Saudi Arabia. However, several practical considerations merit attention.
Timeline: The end-to-end formation process, from MISA license application through to full operational readiness, typically takes between four and twelve weeks depending on the complexity of the structure and the sector involved. More complex structures or regulated activities may take longer.
Costs: Formation costs include government fees for licensing and registration, legal and advisory fees for document preparation, and notarization costs. The overall cost varies significantly based on the entity type, capital structure, and advisory requirements.
Ongoing compliance: Entities must maintain their commercial registration, file annual returns with the Ministry of Commerce, comply with tax and zakat obligations through ZATCA, and satisfy any sector-specific reporting requirements. Failure to maintain compliance can result in fines, suspension of commercial registration, or other enforcement actions.
Transition provisions: Entities formed under the previous Companies Law were given a transition period to bring their constitutional documents into compliance with the new law. This process required review and amendment of articles of association and bylaws to align with the updated requirements, and it remains an ongoing consideration for entities that have not yet completed the transition.
The 2022 Companies Law provides a modern, flexible framework for business formation that supports Saudi Arabia’s economic diversification objectives. Combined with the liberalized foreign investment regime and improved digital government services, the formation process is more accessible than at any point in the Kingdom’s history.