By Hayden Mollard/Entrepreneur ME Image Credit: Shutterstock
Launching a new venture in the UAE can be exhilarating: the economy in the region is growing faster than ever and attracts flocks of industrious professionals. For those wishing to reap all the economic benefits of the UAE -from zero corporate and personal tax to the ability to bid for government contracts- setting up a mainland company is a slick move. But before we can hit the ground running, there is a little red tape to overcome.
UAE law requires that foreign nationals have a local sponsor, which depending on the license activity and legal structure (professional license vs. LLC), will either need to be in the form of a service agent or 51% shareholder. We will look more closely at LLC companies, for which there are two paths for entrepreneurs: an individual local sponsor or a corporate sponsor. Both take a 51% share in your company but with different implications.
Since both have their pros and cons, let’s delve into what each has to offer.
What to look for in a local individual sponsor
As a savvy entrepreneur, you’ll want to find a reliable individual sponsor- an Emirati national of reputable standing. They will be taking a majority share of your company, so you want someone you can trust. Arrangements can differ– for instance, a local sponsor may hand over power of attorney to you in return for a fixed annual fee; they may take a percentage of net profits or an agreed lump sum for their services.
The pros of individual sponsorship
So, what are some of the advantages of this type of agreement? Let’s break them down.
An affordable choice: One of the prime reasons many entrepreneurs choose this option is that it’s generally considered the most affordable. However, keep in mind that there can be costs not mentioned in initial quotes. Be sure to ask for an explicit and comprehensive breakdown that includes all the ‘little extras.’
High-profile sponsors can open doors: Many high-powered Emirati business people are sponsors of foreign companies. But not every potential local sponsor has the same connections. Those who do wield influence, however, can open doors that accelerate the setup process and facilitate opportunities.
It’s easy to find sponsors online: You won’t have a problem finding a local sponsor willing to strike a deal. Expat forums are brimming with UAE nationals offering their services. Reaching out to a potential partnercan be as easy as typing a short message on a message board. Vetting potential candidates found on digital platforms can prove more difficult. Given what’s at stake (51% of your company), it’s important to weigh credibility risks here.
Typically, there’s less paperwork: When you set up a business in the UAE, there’s a lot of paperwork. With a local sponsor, there can be less. Even if this is the case, always ensure that you cover all the bases for optimal legal protection.
The cons of individual local sponsorship
But before we jump in with both feet, let’s examine some of the disadvantages of this type of agreement.
Vetting and waiting for papers to be signed: There is no proper process in place to vet individual local sponsors in the UAE. Furthermore, once you’ve found someone that you feel you can trust, and before the company can start trading, your local sponsor must review the agreement and sign the paperwork. This doesn’t always run like clockwork. UAE tax and law experts have noted this can be challenging.
UAE locals tend to travel frequently: Since much of the setup process –and potentially, some of the ensuing business decisions– rely on the local sponsor, their availability is crucial to your success. A lot of Emiratis are always on the road (or, indeed, in the air), whether for work or pleasure. This constant travel is reflected by the stats: around 78% of business people believe there’s no substitute for face-to-face meetings. These frequent absences may become an issue and negatively impact operational efficiency.
Sponsors may interfere with the company: What if the local sponsor starts to meddle with how you run the company? A study in the Human Brain Mapping Journal recently found that business owners demonstrate an entrepreneurial love that’s similar to the love a parent experiences for their child. This evidence offers one explanation for why local majority shareholders may change their minds about how involved they wish to be as they develop stronger feelings about exercising a leadership position.
Early retirement or death of a local sponsor: In such cases, an individual sponsor’s shares are transferred to their legal heirs. This can be a troubling scenario: if the new partner does not want to continue being your company’s sponsor, you’ll have to begin the sponsorship process again. More generally, there are concerns about what will happen to the agreement you made with the original sponsor and whether the heirs will honour it.
Legal clarity: Some entrepreneurs make the mistake of believing individual sponsors cannot legally interfere. However, Article 91 of the Federal Law on Commercial Companies grants sponsors ‘all the rights associated with the description of the partners’, and they may have the right to significant control over the company. More troubling, some individual sponsors have been known to attempt to claim ownership.
These business dealings are thus largely based on trust, in contrast to corporate sponsorships where the process is more streamlined and legally stipulated. In any case, having the guidance of a company formation specialist gives peace of mind as you navigate these waters.
Should you opt for a corporate sponsor?
Corporate sponsorship is similar to having an individual sponsor in that it affords you the same rights. Yet, there are major differences. For one, the process is less risky as it is unambiguous from start to finish. It also provides you with the support of an entire corporate team, rather than just one (potentially ‘unvetted’) individual.
Pros of corporate sponsorship
So, what can you expect from a corporate sponsor? Let’s look at some of the most important aspects.
Zero interference with full financial benefits: Without a doubt, one of the greatest advantages is that your corporate sponsor will never interfere with the business. Additionally, entrepreneurs maintain 100% of the financial benefits from the business along with full control.
Better legal protection and regulations: Entering into a legal agreement with a local partner you don’t know well can be risky business, unless you have the legal protection you need. Corporate sponsorship deals provide entrepreneurs with more security. Most reputable providers of such services ensure agreements are overseen by first-tier legal counsel and each term will be as clear as day from the offset.
Fast-pass document completion: While it can be difficult to establish time-horizons when dealing with individual sponsors, especially if they travel a lot, a corporate sponsor is more structured. There’s quite a bit of documentation required by the process, from visas to bank references, and working with a corporate sponsor can keep the completion period short and painless.
No need for succession planning: As mentioned, dealing with individual sponsors can present ownership problems in the event that a partner passes away or retires early. One way that entrepreneurs opt to mitigate this risk is through ‘succession planning,’ or having a legally-binding plan in place. However, this can be costly both in terms of time and money. When working with a corporate entity, you don’t need to worry about succession planning.
Cons of corporate sponsorship
It may sound too good to be true, so let’s also acknowledge a few downsides of a corporate sponsor.
It’s considered expensive: You would not be alone in assuming that since corporate sponsorship provides such a straightforward route, it must be costly. But that’s not necessarily the case. With individual sponsors, some entrepreneurs report being beset by hidden costs and unexpected fees once they are tied into an agreement. With the corporate route, you get transparency and clarity from the start.
Too much red tape: Nobody likes paperwork– that’s a given. When it comes to corporate sponsorship, there’s just one additional document you have to deal with– and it further protects the business’ shareholder rights. The document is also drafted by top-tier legal advisors to ensure that every aspect of the agreement is sound and easy to understand.
Credibility can be an issue: Integrity should be at the heart of any corporate sponsor. After all, they will be the anchor securing your business ventures to the UAE mainland. While the vast majority of companies are reliable and trustworthy, don’t take this for granted. Due diligence is essential- research the credibility of any sponsor.
Customer service may vary: Before entering into an agreement, you need to know that you can rely on a company’s level of service. Take a look at the corporate sponsor’s client retention rate. As a rule of thumb, if 90% or more of clients renew their agreements, the sponsor should be a dependable partner.
Making your decision
Having explored the two paths to sponsorship in the UAE, it’s important to take the time to consider which option best suits your company’s needs and what makes the most strategic sense. While corporate and individual sponsorship allow entrepreneurs to set up shop, they can play out quite differently.
There’s no single ‘right path’– it varies from business to business. In cases where entrepreneurs already know a person with strong standing in the UAE, individual sponsorship may be the best move. However, if you want to avoid the uncertainties associated with the individual route, you may opt for corporate sponsorship as an easier and safer choice. Talking this through with a specialist in setting up UAE businesses is a great step towards ensuring you pick the right option.