Establishing a company anywhere in the world requires capital and investments. The same applies to a Dubai business setup, as the city offers multiple business zones for startups to grow and establish a presence in the global marketplace. The Share capital system is a key component of a company's financial structure, representing the funds raised by a company through the issuance of shares.
The stakeholders invest these amounts into the business in exchange for ownership shares. Your share capital, which outlines each founder's interest and creates the company's financial basis, is a component of your legal structure when you incorporate in a Dubai free zone.
Share capital types
There are several types of share capital; each share plays a distinct role in the business's financial affairs.
Authorised Capital: Maximum share capital that a company may raise as specified in its Articles of Incorporation.
Issued Capital: The nominal value of shares that have been sold to public investors.
Unissued Capital: A company may withhold part of its authorised capital for future funding requirements.
Called-up Capital, Paid-up Capital, and Subscribed Capital: These terms describe the process of issuing shares and the purchase of shares by investors. Subscribed capital is the amount that investors have agreed to purchase; called-up capital is the amount that the company requests investors to pay; and paid-up capital is the amount that investors actually pay.
Reserve and Circulating Capital: These capitals are used for regular expenses or key projects.
Corporate Structure in Dubai
In Dubai's free zones. There are two prominent structures for the startups- Free Zone Establishment and the Free Zone Limited Liability Company.
Free Zone Establishment (FZE): This zone is considered best for the sole founders. Here, the entrepreneurs can retain 100% business ownership and have the freedom to make decisions.
Free Zone Limited Liability Company (FZ-LLC): In this entity, entrepreneurs can have multiple shareholders, and if they plan to onboard investors, it allows for multiple shareholders.
Regulations for Shareholder Structure
If a company is registered under the law, it becomes a legal entity and is permitted to trade across Dubai. A company's constitutional papers define the stakeholder structure and are often regulated by a shareholder's agreement. This process outlines how business directors are appointed and sets out the rights, obligations, and contains all governance matters.
Usually, the shareholder agreements will cover, in their way, minority shareholder protection, rights of first refusal, or director elections. For operations to run smoothly and to prevent conflicts promptly, a clean structure must be in place.
Considerations for Foreign Ownership
Dubai has simplified its foreign ownership regulations over the past few years to attract global investors.
The Commercial Companies Law is refined to permit full foreign ownership in certain sectors, thereby giving founders greater autonomy to make decisions. Due to the varying regulations from sector to industry, the intricacies of full foreign ownership of businesses can be clarified through obtaining legal advice.
Structuring Share Capital in Dubai
Determination of Optimal Capital Amount
Setting up the right capital fund is a crucial step in establishing a company in Dubai. As we previously discussed, two free zone business structures offer distinctive advantages. For an LLC, the minimum share capital needed is AED 300,00. However, this varies depending on the business activity and locations. Offshore companies, in contrast, may not be subject to a minimum capital requirement. On the other hand, some free zones impose capital requirements while others do not.
Distributing Stock to the Founders
In any organisation, the key factor that decides decision-making and performance is often dependent on the split of the founders' equity shares. Most of the time, founders keep majority ownership to maintain control. Transferring shares from founders to investors, employees, and advisers requires one formal record, widely known as a capitalisation table or simply a cap sheet.
Holding Shares for Potential Investors
A new and promising business attracts more capital by holding shares for potential investors, without upsetting existing ownership arrangements. By anticipating this possibility of investment beforehand, the company retains its flexibility to attract further investors, partners, or strategic alliances. It assures that there will be a sufficient number of authorised but unissued shares to support any additional investment required at any given point.
Cliff Periods and Vesting Schedules
Founders and key personnel typically face cliff periods and vesting schedules to ensure that these groups remain engaged over the long term. Some shares may vest after the first year, while the balance of the shares vest in instalments. Usually, the schedule is four years with a cliff lasting for one year.
Structuring share capital for your startup in a Dubai free zone is as important as any other aspect of the business. Maintaining clarity of funds and investors helps organisations grow more and attract global investors.
At Markai Corporate Services, we support startups in selecting their corporate structure based on their business activities and ensure the proper flow of communication between founders and shareholders. Reach out to us to structure your business to thrive in the global business world.
