Choosing the Right Form of Business

Choosing the Right Form of Business

In the Kingdom of Bahrain, any business established within the territory must be registered with the Ministry of Industry and Commerce (“MOIC”). The types of business vehicles chosen by a company determine (i) the set of regulations applicable, (ii) the business activities permissible and (iii) its freedoms or restrictions. Therefore, picking the right kind of business vehicle is critical to the future of any company.
There are 6 types of business vehicles in Bahrain, which are (i) General Partnership Company, (ii) Limited Partnership Company, (iii) Joint Venture Company (iv) Shareholding Company (v) Limited Liability Company, and (vi) Partnership Limited By Shares.
This article will briefly summarize the business vehicles in Bahrain, where certain limitations and restrictions of each vehicle will be outlined.

1. GENERAL PARTNERSHIP COMPANY

A General Partnership Company (“GPC”) has a minimum of two partners who share joint liability to the extent of their personal assets. Therefore, if a GPC files for bankruptcy, undergoes liquidation or is winding down, the court may order the repayment of debts from the partner’s personal funds.

GPCs are limited by the law in terms of naming the company, where it must consist of the names of all the partners or the name of one partner with the addition of ‘& Co.’. This restriction is mandatory and holds great significance under the law to ensure that the names of the partners are disclosed to the public and hence the extent of their liability. In the circumstance that a non-partner’s name is added to the name of a GPC with their knowledge, the non-partner is also jointly liable with the partners of the GPC.

The constitutional documents of a GPC consist of a Memorandum of Association (mandatory to all GPCs) and the Articles of Association (may be drawn up by the GPC and subsequently notarized by a Public or Private Notary). The Memorandum of Association must consist of (but is not limited to) the following:

1. The company’s name, objective, head office and branches, if any.
2. The partners’ names, domiciles, occupations and nationalities.
3. The company’s capital, a sufficient indication of the share each partner has undertaken to provide the company and their respective dates.
4. The names of the managers and authorized signatories.
5. The date of the company’s incorporation and its duration.
6. The beginning and end of its financial year.

2. LIMITED PARTNERSHIP COMPANY

A Limited Partnership Company (“LPC”), also known as Simple Commandite Company, is comparable to a GPC in terms of the provisions under the Commercial Companies Law (“CCL”). There are various provisions under the CCL applicable to GPCs and LPCs alike.

However, a significant difference between LPCs and GPCs is the limited liability to a certain type of partner. ‘Sleeping partners’ that do not undertake the management of the company and investment capital in the company are not liable for the company’s obligations to the extent of their assets; sleeping partners are only liable to the extent of their invested capital (similar to companies with limited liability as outlined below). Conversely, partners that manage the company are jointly and severally liable for the company’s obligations where their personal assets may be affected by the company’s debts, liquidation etc.

The names of all partners of an LPC, including sleeping partners, must be included in the Memorandum of Association.

3. JOINT VENTURES

A Joint Venture Company (“JVC”), also known as an Association in Participation, is a type of business vehicle that is different from other companies as it is not considered a legal person or juristic entity and is not subject to the usual publication procedures.

In general, JVCs are established when two or more entities are joined into a new entity to accomplish a specific task, where the entities agree to pool their resources to achieve their agreed upon aims.

Since a JVC is not considered an independent legal person, third parties cannot have a legal relationship with a JVC, therefore contracts and transactions cannot be concluded in the name of a JVC. The partner entities in a JVC share profits, losses, risks and liabilities with third parties in accordance with the agreement made between the partner entities. Regardless, a Memorandum of Association may be established by the partner entities.

4. SHAREHOLDING COMPANY

A Bahrain Shareholding Company (“BSC”) has negotiable shares whereby a number of legal or natural persons may be subscribed. Similar to WLLs, the shareholders are only liable for the company’s debts to the extent of the value of their shares. There are two types of BSCs; public and closed.

Public BSCs are companies that are listed on Bahrain Bourse, the capital market of Bahrain, and whose published shares are traded openly. Any legal or natural person may purchase or sell publicly listed shares through brokers licensed by the Central Bank of Bahrain and Bahrain Bourse (also known as trading members). On the other hand, closed BSCs are not open to the public for subscription, and shares of closed BSCs may be transferred via share purchase agreements.

Restrictions regarding BSC commercial names include the prohibition of deriving the name from a natural person unless (i) the company’s objective is patented and legally registered under the name of that person or (ii) the company acquired a business and adopts its name. Similar to a WLL, a BSC must include the phrase ‘Bahrain Shareholding Company’ following its name.

The Memorandum of Association, a preliminary constitutional document of BSCs, must be drawn with the following details:

1. The company’s name.
2. The company’s head office.
3. The objectives for which it has been incorporated.
4. The names of the promoters, provided that their number shall not be less than two, except for companies incorporated exclusively by the government.
5. The authorized and issued capital, the paid capital on incorporation and the number of shares into which the capital is divided.
6. The company’s term, if any.
7. Details about each in-kind share, and all conditions related to the contribution of such share, the name of the person contributing it and the real rights attached to such share.
8.  An approximate estimate of the expenses, wages and costs the company has paid or undertakes to pay in the course of its incorporation.

5. LIMITED LIABILITY COMPANY

A Limited Liability Company (“WLL”) is established with one or more legal or natural persons (i.e., companies or individuals). In contrast to a GPC, a WLL limits the liability to the company’s assets and each partner is liable only to the extent of his/her share in the capital. Companies previously known as ‘Single Person Company’ (“SPC”) have changed to WLL companies since the provisions governing SPCs were repealed through Resolution No. 28 of 2020 amending certain provisions of the CCL.

The restriction regarding the name of WLL companies is the addition of the phrase ‘with limited liability’ following its name. Similarly to the rationale of GPCs, this restriction ensures that the public is aware of the type of company prior to entering into transactions or agreements. In the circumstance that the phrase is not included in WLL’s contracts, invoices, notices, documents or publications, the company’s managers will be jointly liable towards third parties.

The Memorandum of Association must include (but is not limited to) the following:

1. Names, surnames and nationalities of the partners.
2. The company’s head office.
3. The company’s name and address, with the phrase ‘limited liability company’ added to it.
4. The objects for which the company was established.
5. The company’s capital and the cash or in-kind shares provided by each partner, with an accurate description of the in-kind shares and the value thereof.
6.  Conditions pertaining to assignment of shares.
7. The company’s term, if any.
8. The names of those with which the company’s administration has been entrusted, from amongst partners or non-partners, if any, and the names of the supervisory council members in the cases where such council is required by the CCL.
9. The method of distribution of profits and losses.

6. PARTNERSHIP LIMITED BY SHARES

A Partnership Limited by Shares (“PLS”), also known as Commandite By Shares Company, is similar to an LPC and BSC where it consists of two categories of partners; joint partners (liable to the extent of their personal assets) and shareholding partners (liable to the extent of their equity in the capital).
The capital of a PLS is divided into negotiable and indivisible shares, both of equal value, where shareholding partners and their shares in a PLS are subject to the same provisions of a BSC under the CCL (unless there are conflicting provisions). A PLS must assemble its joint and shareholding partners in annual and extraordinary general meetings, of which the provisions of closed BSCs apply.
The name of PLS companies must consist of one or more of the joint partners or can be derived from the company’s objectives. Similar to LPCs, if a shareholding partner’s name is added to the official name of a PLS (with his/her knowledge), then the shareholding partner will be considered a joint partner.
The form of business vehicles is a significant determinant of a company’s future. The decision to choose a type of vehicle depends greatly on the company’s objectives, business activity, and its financial capability. Moreover, the publicly available database, Sijilat, created by the Ministry of Industry and Commerce lists registered businesses in Bahrain and all business activities available