Over time, we have come across many entrepreneurs that have told us that they wished, in hindsight, that they had asked some critical questions when they were about to incorporate a local company in Dubai, writes Henri Hazougi, Managing Director of Business Setup Consultants.
By the term local company, we mean a company where a local partner or entity which acts as 51 percent shareholder. We have compiled some of the most essential items for future entrepreneurs to keep in mind.
Meet your future local sponsor
Would you give away a majority share of your company to someone that you have never even met? Shockingly, many entrepreneurs do so, every day! If you are going through a consultant, ask them to introduce you to your future partner so you can meet him or her and exchange contact details.
Ask for the local partner’s list of incorporated companies
Many expats are surprised to discover that the status of other companies under the sponsorship of their local partner has an impact on their company. If your local partner has a number of expired licenses, or non-WPS compliant entities, getting your company registered and functioning will become quite a cumbersome exercise, often resulting in prolonged delays. Therefore, it is important to ask for the official list of companies under the sponsor to verify that they are all valid and compliant. A proper sponsor will make sure he has all his companies in order.
Corporate sponsorship vs Individual Sponsorship Service
Many expat investors never ask the question what would happen if the local partner were to pass away or become unreachable for extended periods. The solution is to go with a corporate sponsor where a local company comprising two or more UAE nationals acts as a partner, as opposed to an individual.
With a corporate entity as a sponsor, it gives more security to the arrangement than having an individual Emirati as a local partner. The downside is that, even though corporate sponsorship is a preferable option, the fees are often much higher than individual sponsorship. Therefore, if you are an SME with a limited budget, individual sponsorship is a more practical choice.
Choose your business activities wisely
It is important to have an understanding of which business activity (as maintained by the DED, the Dubai Department of Economic Development) your particular business would fall under. Selecting the wrong activity can lead to your goods being stuck in customs, and fines from the regulatory authorities. We know that businesses evolve; if you are trading in furniture today, for example, do not naturally assume that you can start importing appliances under the same license without having the activity for it. If you feel that you will be trading in a variety of items, choose a General Trading license from the start to avoid having hassles in the future.
The right location for the right activity
Finding the right location is critical to your business as it is anywhere in the world. However, please keep in mind that not every location is zoned properly for your business activity. If you are working through a consultant, ask them to check with the Municipality if your activity is allowed in the property that you plan to select. In addition, it is important to ask the real estate agent whether the property is zoned as industrial, commercial or residential. If you sign up a lease agreement without verifying that the property is suitable to your business activity, you will not be issued the license and you will have to request the property owner to apply for zoning change, which most are not willing to do.
Authority to sign for residence visas and labor cards
Ask your future sponsor if they are willing to grant you the authority to sign for residence visas and labor card requests. If they are willing to do so, this will greatly simplify the process, as you will not have to go to them each time you need to apply for a new employee. Some sponsors refuse to grant this authority to expat shareholders, to limit their liability. It’s important to know what your sponsors view is on the subject to avoid any misunderstandings in the future.
It is common for expat and Emirati shareholders to execute ‘side agreements’ to mirror their understanding of the ownership, structure and management of the company and its operations. Law firms draft the agreements with the most weight and you should consider this as a worthy investment for peace of mind. Inquire from your sponsor whether they would be willing to enter in such agreements.
Henri Hazougi is the Managing Director of Business Setup Consultants, a firm specializing in free zone, local and offshore company formation. He was also a founding member of Cobone.com. He has more than one decade of business experience in the Middle East.