The formation of a limited liability corporate entity is considered to be the most prudent course of action in the event that sole proprietors, or principals of partnership agreements, seek to separate personal assets from commercial obligations. A portion of an entity’s liabilities can be distributed among dormant partners in a limited partnership, or commandite partnership (by shares) agreement, where minority stakeholders can absorb the burden of liabilities up to the extent of the value of shares in their name. In order to fully protect the personal wealth of sole proprietors or joint partners from commercial liabilities, a company would need to transition to a private Limited Corporation, defined as a With Limited Liability (WLL) company by the Kingdom of Bahrain’s Ministry of Industry, Commerce and Tourism.
A WLL company (as defined by Bahrain’s 2001 Commercial Companies Law and its relevant amendments) can be wholly owned by foreign investors, and is the legal framework most commonly adopted by commercial entities incorporating in the kingdom due to a combination of factors contributing to the relative ease of entry for WLL entities in contrast to larger closed or public Bahrain shareholding companies (BSC). Other legal structures adopted by sole proprietors, general partnerships, and joint partners in limited or commandite partnerships retain unlimited liability to the extent of the value of their personal assets.
While complete foreign ownership of BSC entities is permitted in terms of acquisition, the minimum share capital required for incorporation is the significant amount of 250,000 Bahraini Dinars (BD), with a minimum of half that amount (BD 125,000) certified by a licensed bank based in the kingdom, and the remaining portion to be paid into the company’s capital account within three years from the date of successful commercial registration. In addition to the higher minimum capital requirement, the membership required by the ministry for the incorporation of a BSC entity would be a minimum of three directors. Conversely, the incorporation of a WLL company requires only a minimum of two partners up to a maximum of 50 shareholders (Article 261).
The incorporation of a limited liability (WLL) entity within the kingdom requires a formal application for commercial registration at the Bahrain Investment Center (BIC), an agency of the Ministry of Industry, Commerce and Tourism located in the city of Manama. This registration procedure would be similarly required of all commercial entities operating within the kingdom, with the exception of associations in participation. A commercial lease for a local office would have to be approved by the municipality’s representative at the BIC, as it is a prerequisite of preliminary approval for commercial registration by the ministry.
The draft memorandum of association expected of a prospective WLL company should include parameters of the company (name, headquarters, objectives, financial term and liquidation plan), partners (names, titles, nationalities, capital, profit distribution), managers, control board members, in addition to the conditions of share assignment, retrieval, and evaluation (Article 265).
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Bahrain’s 2001 Commercial Companies Law additionally requires the appointment of at least one manager to act in the same capacity as a board of directors in the context of a joint stock company, appointed initially by the founders and subsequently by annual general assembly of shareholders (Article 275). The appointed manager would be expected to prepare and sign annual financial reports (Article 286).
As is expected of commercial entities composed of any amount of share capital, Article 286 mandates the annual preparation of balance sheets, profit and loss accounts, activity reports, in addition to the submission of these and an external auditor’s report within ten days of preparation. The WLL company registration that is successfully registered with the ministry is required to publish its incorporation notice in the local gazette as a form of public notification following the issuance of the commercial registration certificate.
The WLL legal framework presents itself as a comparatively advantageous route for incorporation, especially in consideration of the lower membership and minimum capital requirements. The ministry permits complete foreign ownership of WLL companies and Article 264 of the 2001 Commercial Companies Law defines the minimum share capital requirement for incorporation as BD 20,000, with each share’s value mandated by Article 269 to be a minimum of BD 50, drawn from initial capital divided into equal shares at incorporation, and with each share regarded as indivisible and non-tradable (Article 270) upon assignment.
Article 270 permits for shares to be sold by way of a transfer to third parties when approved by a majority (amounting to 75 percent) of stakeholders, the article also specifies that such sale or transfer of stock can only be completed after a period of two weeks has lapsed following the delivery of notifications of intent to all shareholders.
Despite the previously mentioned factors contributing to lower barriers of entry for WLL entities in terms of regulation, prospective investors should keep in consideration the fact that Bahrain’s Ministry of Industry, Commerce and Tourism applies the same mandate preventing activities in the banking, insurance, and fund investment sectors to WLL companies (Article 262) as to sole proprietorship and partnership companies, but permits such entities as closed or open BSC companies and branches, or operational offices of a parent company, to operate in these fields.
