DIFFERENCES BETWEEN JOINT VENTURES VS. WHOLLY OWNED SUBSIDIARIES IN SAUDI ARABIA
Let us compare these two popular means of market entry, providing light on their characteristics, benefits, and potential problems in the quest of successful company initiatives. When comparing Joint Ventures and Wholly Owned Subsidiaries, a number of aspects should be taken into account that may have an impact on the business operations, management, and risk for the companies involved. Let’s discuss a few of the major key considerations in detail:
Control and ownership – In a Joint Venture, two or more businesses join to form a new firm while splitting ownership and control. Typically, all parties concerned participate equally in decision-making and split profits and losses. Whereas the activities and decision-making of the Wholly Owned Subsidiary remain entirely under the control of the parent firm.
Risk and liability – The risks and obligations inherent in a Joint Venture are divided among the partners. By doing this, the cost to each participant may be lessened. However, this is not the case for Wholly Owned Subsidiaries as the foreign investor holds complete ownership and control over the entity. This arrangement allows for more direct oversight of operations and strategic decision-making.
Capital and Profit – In a Joint Venture, businesses can combine their resources and split the initial financial commitment and prospective returns. Wholly owned subsidiaries on the other hand require the whole financial commitment from the parent company. The parent entity can keep all of the profits collected.
Intellectual Property (IP) – Due to the possibility of both parties having access to confidential information, there may be concerns about the protection of Intellectual Property in a Joint Venture. However, in a Wholly Owned Subsidiary the parent entity retains complete control over intellectual property asset management and protection. This empowers the parent firm to impose IP procedures such as trademarks, copyrights, and patents, assuring consistency with its worldwide strategy.
HOW TO SET UP JOINT VENTURES & SUBSIDIARIES IN SAUDI ARABIA?
The process of registering a Joint Venture and a Wholly Owned Subsidiary in Saudi Arabia is quite similar except few additional legal requirements required by Joint ventures. These include drafting and ratifying a Memorandum of Understanding (MoU) and a partnership agreement with the selected partner. The MoU defines the parties’ intentions to create a Joint Venture and establishes the parameters for future discussions, while the partnership agreement outlines the ownership structure, management responsibilities, profit-sharing arrangements, decision-making process, dispute resolution mechanisms, and exit strategies.
Complying with KSA Commercial Companies Law (CCL), either of Joint Venture or Wholly Owned Subsidiary shall take one of the following forms:
a) General partnership.
b) Limited partnership.
c) Joint-Stock Company (JSC).
d) Simplified Joint-Stock Company (SJSC).
e) Limited Liability Company (LLC).
LAWS OF JOINT VENTURES VS. WHOLLY OWNED SUBSIDIARIES IN SAUDI ARABIA
Saudi Commercial Companies Law (CCL) regulates the incorporation of legal entities in the Kingdom including subsidiaries and Joint Ventures. Article 217 of CCL stipulates that a company shall be deemed a subsidiary of a holding company in any of the following cases:
- If the holding company is a partner or shareholder in the subsidiary company and owns interests or shares in its capital that grants it the majority of voting rights therein.
- If the holding company is a partner or shareholder solely controlling the appointment of the manager or the majority of board members, or if it has the power to remove the manager or the majority of board members.
- If the holding company is a partner or shareholder solely controlling the majority of voting rights pursuant to an agreement with the other partners or shareholders.
- If the subsidiary company is affiliated with a subsidiary of the holding company.
BENEFITS OF JOINT VENTURES VS. WHOLLY OWNED SUBSIDIARIES IN SAUDI ARABIA
Wholly Owned Subsidiaries and Joint Ventures each have their own benefits, and the decision between the two depends on a number of variables, including corporate goals, market entry strategy, industry specific objectives, local market’s dynamics etc.
Through a Joint Venture, a company can gain access to crucial local information, including market details and insights into Saudi Arabia’s culture and business processes. Furthermore, combining resources might enhance the amount of funds available for bigger and more ambitious projects. By utilising the local partner’s established network, reputation, and distribution channels, foreign company can gain an advantage. Finally, government interactions and administrative procedures in Saudi Arabia can be negotiated better with the aid of a local partner in a joint venture.
On the other hand, Wholly Owned Subsidiary enables the parent firm to make all decisions on corporate operations, strategic direction, and decision-making without consulting with Joint Ventures partners. Since the control remains centric, the decision-making procedures are typically quicker and more streamlined, allowing for flexibility in the rapidly changing market dynamics and cease opportunities.
Finally, Joint Ventures provide advantages such as local experience and risk sharing, making them suitable to corporations seeking a more gradual market entry strategy. For corporates wanting a firmer presence in the Saudi Arabian market, Wholly Owned Subsidiaries provide better control, brand identification, and long-term commitment. Companies planning to scale their business in Saudi Arabia should carefully consider their objectives, resources, and risk tolerance before deciding between these business strategies and always seek professional advice before making a move.
TAKEAWAY
There are various procedures and requirements that you need to prepare and take into consideration for your Saudi Arabia commercial registration. From selecting the right structure for your company, to drafting the correct documentation, to office registration, visa services, banking support, accounting, bookkeeping, payroll, and tax services, Creation Business Consultants will help you throughout the entire process. Our team of experts will leverage your experience to help simplify the process while simultaneously providing you with all the details needed to set up your company in Saudi Arabia and the GCC.
Contact a member of our team for your free expert consultation on your Saudi Arabia entity, email [email protected] or call Saudi Arabia +971 50 536 1923 UAE +971 4 878 6240 today.
