Where to start with start-ups in the UAE

You have an idea, you have the expertise and there is a niche in the market for it, you might even have some contacts that will help you in getting started or that could be your first potential clients. It is exciting and overwhelming in equal measure.

Most start-ups are experts in their field but do not necessarily know what they need to focus on commercially or legally to start or grow a business. Founders starting a business for the first time will likely do endless research on growing a business, tips for marketing and how to get customers through the door. They will often also make it a commercial priority to pick a web designer and a social media platform for the new business.

In our experience, the legal side, the part that will protect the founders and the business falls to the bottom of the list due, mainly, to cost. Start-ups cannot afford expensive lawyers when they have no income, no clients and are often fronting the costs of set-up out of their own pocket. Unfortunately, disregarding the legalities early on can often lead to expensive legal issues further down the line, this usually culminates in one of three ways: (i) issues with the corporate structure, (ii) issues between the founders and/or (iii) customer liability issues.

Starting up in the UAE can be cost effective and with multiple jurisdictions that are income and capital gains tax free and a diverse pool of entrepreneurs, it is an attractive market for start-ups. It is key to take some legal steps early on and founders should be considering the legalities and the liabilities of a business from day one.

Do you have the correct licences and consents, how will the founders make decisions, will you re-invest your profit or take it out of the business, what happens when the founders do not agree or one does not hold their end up, what if your customers do not pay, what if a customer makes a complaint, or sues you?

In acting for start-ups, Ibrahim & Partners would always suggest the following ‘start-up’ checklist:

Unlike other jurisdictions, the UAE has a wealth of options in terms of setting up a company. Whether you go with a mainland limited liability company, pick a free zone or offshore entity, will mainly depend on what type of commercial activities you are intending to carry out.

However, location will also play a factor, as will your intended corporate structure, especially regarding foreign ownership. Picking a functional corporate structure early on will avoid costly restructuring and transfer later. No one can predict all eventualities, however, planning for the future will affect your corporate structure and should be a consideration when incorporating.

Your corporate structure will also affect your visa and office requirements. Most jurisdictions will require the leasing of an office space or a flexi-desk, although there are some options for start-ups to avoid this cost in the company’s infancy such as the instant office offered by the Dubai Department of Economic Development.

In the UAE, you cannot trade without a licence and to get a commercial trade licence, you need a corporate entity (even if you are a sole proprietor or trader).

Determining your commercial activity is important not only structurally (see below) but also to ensure that you can continue to carry out the activities you foresee as the business grows.

People go into business together every day, friends, family, colleagues, acquaintances, people with common experience. Every business relationship, like every other kind of relationship, will disagree at times. It is a common belief that founders have discussed all the key points with their co-founders and that everyone is on the same page as to how to move forward. It is also a common belief that everyone will act honourably, with good faith and for the best interests of the business at all times.

Unfortunately, what is deemed honourable, in good faith and in the best interests of the business often differ from person to person. Founders disagree, they cannot see eye-to-eye, mistakes are made, people react, the founders can end up wanting to take the business in completely different directions or with a different partner.

It is crucial to agree the legal fundamentals – how is profit dealt with, how do you want to raise capital, are there commercial decisions that should be agreed jointly, who will run the day-to-day operations and if jointly what happens when you do not agree, what happens if someone is incapacitated long term or dies, will other shareholders be brought in, are you going to have restrictions on competing with the company if one person leaves, should there be circumstances where you can force someone out.

Please note, that the articles of association of the company will likely need amending to ensure there is no conflict with the agreement between the shareholders.

Finally, do not underestimate the importance of your customer terms, having a formal contract with customers will be crucial if you need to enforce things like payment against your customers. Similarly to your shareholders’ agreement, they will also govern the obligations and expectations on both parties, so that the commercial relationship is clear and any restrictions on customers are set out contractually and expressly agreed to.

There has been an increase in consumer protections under UAE law recently, if you are providing services or goods to consumers rather than businesses, you will need to ensure that you are not breaching consumer rights and also it will be of more importance to mitigate risks of litigation. Terms and conditions can start as a simple set of basic terms that will be amended and moulded as the business develops.

Finally, get insurance, irrespective of the type of services or goods you are providing, publicor/product liability insurance and any others that are industry specific insurances are crucial so that you have a safety net, a single claim on insurance can bankrupt a young company.

Ultimately, preparing for the worst (whilst hoping for the best) will protect you and your growing business, it will also showcase your commercial sophistication thereby placing you in a better market position from kick-off.

 

Charlotte Jackson

Senior associate, Ibrahim & Partners

E: charlotte.jackson@inp.legal