Sole Establishment vs LLC in the UAE

In Dubai, starting a business follows a simple process. However, there are many critical steps that must be followed, and one such decision is choosing the right legal structure for your business. The legal structure determines the business owner’s liability, taxation implications, and operational flexibility of a business.

Two of the most common types of business structures chosen by entrepreneurs in Dubai are the LLC and sole proprietorship. Now, the question arises: sole proprietorship vs LLC in the UAE, which is the right choice for you? A sole establishment offers ownership independence as a single-man show, whereas an LLC in the UAE offers the safety of protecting the owner’s personal assets.

This blog will examine the differences between an LLC and a sole establishment in the UAE. We will understand what they stand for, the advantages and disadvantages of each and how they differ from one another. Thereby, you will get to know what might work out best for your company setup in Dubai.

What is a sole proprietorship in the UAE?

A sole proprietorship, also called a sole establishment, is a very simple legal structure where a single person opens and runs a business. It allows the business owner to enjoy individual ownership of the business and full control over its operations.

The UAE offers many benefits to foreigners who wish to start a sole establishment, including full retention of profits, virtual office setup options, flexible visa quotas, and more. However, they may require assistance from a local service agent to start the business.

Usually, foreigners use a sole establishment for professional services like consulting, IT, engineering, creative work, and similar fields. UAE and GCC nationals can use this type of business for a wider range of commercial and professional activities.

What is an LLC in the UAE?

LLC stands for Limited Liability Company in UAE. It is a type of legal structure where the business is owned by shareholders. There must be a minimum of 2 and a maximum of 50 shareholders.

As the name suggests, “limited liability” means that each shareholder’s financial responsibility is limited to the amount they invested in the company. They are not legally required to pay off the company’s debts beyond their share, so their personal assets remain protected.

An LLC in the UAE can carry out almost any legal business activity. This includes commercial, industrial, professional, tourism, real estate, e-commerce, marketing, event management, and more.

What is the difference between sole proprietor and LLC in UAE?

Here are the key differences between sole proprietorship vs LLC in UAE:

Aspect	LLC	Sole proprietorship
Separate legal entity	An LLC is a separate legal entity which means its identity and that of its owners is different in eyes of law.	There is no separate legal entity. Business and owner are same in eyes of law.
Ownership	Can have a minimum of one shareholder and maximum of 50 shareholders.	A sole establishment is owned by a single individual.
Liability	Liability is limited to the number of shares (percent of stake) held in the company.	Owners’ liability is unlimited, he will be fully liable to pay off company’s debts.
Personal asset protection	Personal assets are safe from company’s liabilities.	Personal assets may be used to pay off company’s debt in case of need.
Permitted business activities	Nearly all legitimate activities can be conducted including commercial, industrial and professional.	For expats, only professional services may be allowed.
Foreign ownership	In most of the sectors, allows 100% foreign ownership.	100% foreign ownership allowed but LSA may be required.
Memorandum of Association (MOA)	MOA is required	MOA not required
Minimum capital requirement	No minimum capital required. A nominal capital may be stated in company’s MOA.	No minimum capital required.
Local sponsor requirement	Not required for most sectors.	Local service agent required in case of expats starting firm on mainland.
Office requirement	Required both in freezone and mainland.	Required, Ejari required for mainland business.
Cost included	Setup costs may be higher than sole proprietorship.	Lower cost and comparatively faster setup process.

Sole proprietorship vs LLC UAE – Differences explained

1. Legal entity:

• LLC: In the case of an LLC, the shareholders and the company are treated as separate legal entities under the law. For example, the company can sue or be sued in its own name, and even if the shareholders change over time, company will continue its operations.
• Sole proprietorship: On the other hand, with a sole establishment, the business owner and the business are considered the same legal entity. The owner is fully responsible for all business actions.

2. Ownership:

• LLC: An LLC can be owned by a minimum of 1 and a maximum of 50 shareholders. Single owner LLC is also referred to as one person company (OPC). Each shareholder owns a stake in the company and can participate in decision-making.
• Sole proprietorship: Sole proprietorship is owned and managed by a single individual. This person is fully in charge of ownership, profits, decision-making, and day-to-day operations. LSA, though, may be required.

3. Liability:

• LLC: The liability of each shareholder is restricted to the stake they hold in the company. Since liability is limited, shareholders are not legally bound to pay off company debts beyond that.
• Sole proprietorship: Here, the business owner takes on full liability. In case the business faces any debts or losses, the owner may have to use personal assets to cover them if necessary.

4. Permitted business activities:

• LLC: An LLC can conduct almost any type of business activity permitted by the UAE government, whether in the industrial, commercial, or professional sectors. General trading, e-commerce, import/export, marketing, and computing are just a few examples.
• Sole proprietorship: For expats starting a sole establishment, only professional services are allowed such as designing, freelancing, consulting, health services, etc. However, GCC and UAE nationals can also engage in other commercial and industrial activities.

5. Personal asset protection:

• LLC: One of the well-known advantages of an LLC is the protection it offers to shareholders’ personal assets. Personal assets are safe from the company’s debts and losses.
• Sole proprietorship: In case of need, the owner will have to bring his own personal assets to clear the debts. Personal assets can be at risk if business fails.

6. Foreign ownership & local sponsor requirement:

• LLC: For most sectors, both in the mainland and free zones, foreigners can enjoy 100% business ownership. However, in the case of strategic sectors on the mainland (such as defense), a local sponsor may still be required who will own 51% stake in the company.
• Sole proprietorship: In the case of a sole proprietorship, a local service agent (LSA) is required on mainland. Unlike a local sponsor, an LSA has no ownership rights in your business, which means you still retain full control. The LSA assists with administrative tasks such as licensing and visa applications, usually for a fixed fee. An LSA can be a UAE national or a company that is 100% owned by a UAE national.

7. Office requirement:

• LLC: The office requirements for an LLC can be more strict. For example, the use of flexi desks is generally not allowed on the mainland. A dedicated office space with a valid Ejari registration is typically required.
• Sole proprietorship: On the other hand, the office requirements for a sole establishment are often more flexible. Shared or flexi desks may be allowed for certain professional services, even in the mainland, provided they are Ejari-compliant.

8. Cost and speed of setup:

• LLC: The cost and time required to set up an LLC can be higher, as there may be additional formalities, documentation, and approvals involved.
• Sole proprietorship: On the other hand, a sole establishment is a more affordable business setup option in Dubai. It also takes less time to set up compared to an LLC.

Cost of setup: Sole prop vs LLC in UAE

Limited Liability Company (LLC)	Sole proprietorship
License cost starts from AED 12,000*.	License cost starts from AED 7,000*.

Please note that the costs are subject to changes and depend on factors such as chosen jurisdiction, license type, etc. To get more details on that, you can contact Dubiz Business Setup.

How to choose between LLC and sole proprietorship for your business?

Both LLC and sole proprietorship have their own unique features. Here are some key points you should consider to choose either LLC or sole proprietorship as business structure in UAE:

1. Liability risk:

Your choice will be impacted by your risk tolerance and willingness to take on personal liability. In high-risk businesses, an LLC may be a safer choice as it protects your personal assets from company-related debts or legal issues. In contrast, for low-risk professional services, such as freelancing, you can choose a sole establishment and enjoy more independence and control over decisions.

2. Setup cost:

If you are on a tight budget, a sole establishment involves lower registration and licensing costs. You can start as a sole establishment and later scale up or upgrade to an LLC. Alternatively, you can choose to go directly with LLC formation if your budget allows.

3. Nature of business:

To choose between sole proprietorship vs LLC, gauge your business’s needs. If your business is small-scale, needs personal involvement, and can be efficiently managed by one person, then a sole establishment might be more suitable. In case more capital is required, and is expected to grow and take more risks, then LLC will be better option.

4. Hiring employees:

LLCs usually offer greater flexibility with higher visa quotas, especially in mainland. In case of sole proprietorship, you may get limited visa quotas and remember you will be responsible for your employees’ actions as well. If you plan to hire more, LLC can be a better option.

5. Banking needs:

You must also assess your banking needs. For LLCs, opening a business bank account is easier. Sole establishments can face more challenges with banking and funding due to unlimited liability and single ownership.

Benefits and disadvantages of LLC company formation in UAE

Benefits of LLC company formation in UAE:

• Limited liability protection: Protects your personal assets from the company’s debts and losses.
• 100% foreign ownership: In most sectors, you can fully own the business without the need for a local sponsor.
• Wide range of activities: LLCs can operate in industrial, commercial, professional, tourism, e-commerce, and many other sectors.
• Business continuity: Even if shareholders change, the business continues its operations.
• Flexible visa: LLCs can apply for multiple visas for employees based on office size and needs.
• Government contracts: On the mainland, LLCs can bid for government contracts as well.

Drawbacks of LLC company formation in UAE:

• Higher setup costs: License, office, and overall setup costs can be higher than those of a sole establishment.
• Fixed office requirement: physical office space is mandatory, which adds to the cost.
• Strict compliance requirements: Accounting, record-keeping, audited financials, and corporate governance standards must be followed.
• Chances of conflict: Disagreements between shareholders can disrupt workflow and business operations.
• Restriction potential: Certain strategic sectors may still require a local sponsor.

Benefits and disadvantages of sole proprietorship in UAE

Benefits of sole proprietorship in UAE:

Full control: Own and run the business single-handedly with full authority.

• Faster setup: The registration process is quicker compared to other structures.
• 100% ownership: Get full ownership rights in almost every professional sector.
• No partner fights: Since there is only one owner, there is no risk of disagreements or conflicts.
• Lower costs: Initial setup, licensing, and administrative costs are typically low.
• Easy upgrade: Start as a sole establishment and later convert it to an LLC as the business grows.

Drawbacks of sole proprietorship in UAE:

• Unlimited liability: Personal assets used to pay off company’s debts if needed.
• Credibility issues: May be regarded as less reliable by large clients as well as banks.
• No continuity: In case business owner leaves or passes away, the business ceases to exist.
• LSA requirement: LSA is typically required for foreigners which adds up the costs.
• Restricted business activities for foreigners: Can usually operate only in professional sectors.
• Visa limitations: Visa quotas may be limited in sole proprietorship vs LLC which offers more.

Summing up!

Understanding an LLC and sole proprietorship is important as it helps you choose the most suitable business structure for your business.

Choose an LLC if you want limited liability, need significant funding, and plan to grow your business, for example, if you are running a trading company, restaurant, or retail business.

On the other hand, if you want to go solo and have a limited budget, you can go for a sole establishment.

Nonetheless, both options offer attractive benefits, including corporate tax advantages, the strategic geographic location of Emirates, foreign investment opportunities, and other incentives that the UAE provides.

How Dubiz can help?

Dubiz Business Setup has been helping entrepreneurs establish their businesses in Dubai and across the UAE for more than 8 years. We have experience with various types of licenses, business structures, and locations.

Our experts can assist you with everything from obtaining a trade license and opening a business bank account to applying for a golden visa and much more.

Whether you want to start a sole proprietorship vs LLC, we can assist with both, offering the best guidance suitable to your needs.

Get the best business setup services in the UAE with us:

• 8 years of industry experience across diverse business activities.
• One stop shop for all the essential business formation needs.
• A strong team of 50+ professionals delivering value across fields.
• Strong and reliable ties with local government authorities and agencies.
• Expert PRO and legal documentation support.
• Transparent pricing with no hidden charges.
• Faster processes that save time and money for clients.

Contact us today:

📞 Call: +971 56 369 5485
💬 WhatsApp: +971563695485
📧 Email: info@dubiz.co

Frequently Asked Question (FAQs)