The new Companies Law of 1443 H. (Law) in Saudi Arabia became effective in January 2023, and companies are now required to change their constitutional documents (Articles of Association, Articles of Incorporation) accordingly.
This note highlights changes in the Companies Law of 1443 H. concerning the set up and operation of professional companies (free professions) which were earlier governed under a separate Professional Companies Law of 1441 H.
Besides the general provisions of the Companies Law that are applicable to companies engaged in practicing free provisions, and provisions related to the specific company form which the professional company may opt, there are specific conditions that govern professional companies.
As the Professional Companies Law of 1441 H. was promulgated some two and half years ago, there are no significant changes in the provisions related to professional companies in the new Companies Law. Nonetheless, we have highlighted areas of the new Companies Law that affect professional companies below.
||A professional company may be set up by one or more persons licensed to practice one or more professions along with other natural or juristic persons (non-professionals).1
|Practice of Multiple Professions
||A company may practice more than one profession as long as the partner(s) is licensed to practice such professions and provided that there no restrictions in the relevant regulations for mixing of certain professions, or prohibition by the competent authorities on practicing a profession along with other profession(s).2
|Form of the Company
||The company may take any of the five forms which have been stipulated in the Companies Law (General Partnership; Limited Partnership; Limited Liability; Joint Stock; Simplified Joint Stock). 3
|Term / Duration of the Company
||No longer required – however, the partners or shareholders cannot dissolve a professional company until they have announced it and informed all people dealing with the company.4
|Partnership with Foreign Entity
A professional company may be set up by persons licensed to practice one or more professions along with a foreign partner provided that the shareholding of the Saudi licensed professional(s) is not less than 25% of the share capital.
Moreover, the foreign entity should be distinguished in the practice area and have representatives possessing license to practice the profession by the competent authorities at the origin.5
It is to be noted that there are specific exceptions and exemptions for foreign entities practicing certain professions. For example, foreign entities are allowed to set up a fully owned entity to practice engineering consultation services provided that it has presence in 4 different countries where it is licensed to provide the services and have experience of no less than 10 years.6
|Participation by a Natural or Juristic Entity Not Licensed to Practice
Besides a natural person who is not licensed to practice the profession in which the professional company is engaged in, a juristic entity too may participate in a professional company. The total shareholding of such entities should not exceed 30% of the capital which may be revised by the Minister.
However, such entities cannot participate in professional companies set up in general partnership form and in the form of a limited partnership as a general partner. Non- professional partner(s) shall not have any direct or indirect control over the management of the company nor shall they interfere or cast influence in affecting the independence of professionals and shall maintain the confidentiality of information related to the clients of the company.7
|Non-Competition by Partner / Shareholder
in the Articles of Association of the company (in the previous law, this exception was not available).8
Similarly, a partner or a shareholder shall not engage in practicing a profession on his/her own or through another company unless the rest of the partners / shareholders provide their consent in writing or through a resolution adopted by the general assembly.9
|Practice Only Through Partners
||A professional company shall not practice the profession(s) for which it is licensed except through its partners or shareholders. It may engage other licensed professionals, however, to support it under the supervision of the company.10
|Restricted from Trading
||Professional companies are prohibited from engaging in trading activities; however, they may own properties, invest money, or purchase securities subject to certain conditions.11
In the case where a professional company is managed by a single person, that person should be the one licensed to practice. In the case where it is managed by more than one person, at least half of the board of managers should be comprised of persons licensed to practice the profession.
If the company practices more than one profession, the board should have at least one person licensed to practice each such profession unless otherwise stipulated in the Articles and provided however that the percentage of licensed professionals in the board shall not be less than half of the total members.12
|Liability Due to Lapses
||While the partners licensed to practice shall be responsible towards other partners and the company, the company shall be held liable towards third parties due to any lapse by any professional.13
||The Minister of Commerce may associate carrying out of certain professional activities with the requirement of obtaining an insurance to cover lapses and omissions during the practice.14
|A Partner Losing License to Practice
||If a partner or a shareholder is denied license to practice their profession or loses or forfeits their license permanently, he would be considered to have exited the company unless the Articles of the Company provide him to continue as a non-licensed partner or a shareholder, subject to the ceiling of 30% shareholding of non-licensed persons in the company.15 In the case where such person happened to be the only person licensed in the company or the person passes away or assigns his share, the company shall suspend activities and will have a grace period of 6 months to correct the situation.16
|Penalties / Fines
||The section covering penalties and fines not exceeding SR. 500,000.00 upon partners and managers for different violations as covered in the old law has been removed from the chapter and covered with similar provisions under Article 262 of the Companies Law.