Sole Proprietorship and Conversion to a Limited Liability Company

General Overview of Sole Proprietorship

A sole proprietorship is a form of business available only to Omani or GCC nationals.  The minimum capital requirement for a sole proprietorship is relatively low, being OMR 3,000.  A sole proprietorship does not require the participation of other partners or stakeholders and the sole proprietor can undertake the business in his own name.

One of the main drawbacks of establishing a sole proprietorship is that the sole proprietor is considered to be the legal holder of the license.  Consequently, the sole proprietorship concern will not act as a separate legal entity whereby the partners or stakeholders are protected under its corporate veil.  The proprietor is therefore, personally liable for debts incurred by the sole proprietorship entity.

In Oman, it is common for Omani individuals to initially establish a sole proprietorship and later convert the business into a limited liability company (“LLC”), as the incorporation process of the sole proprietorship is swift and easy when compared to that of an LLC.  A sole proprietorship requires only one individual and the capital contribution is relatively less when compared to a limited liability company, which requires a minimum capital of OMR 20,000.

For the registration purposes, the individual would require to liaise with the Ministry of Commerce and Industry (“MOCI”).  The applicant is required to submit the MOCI standard form for registration of sole proprietorship, along with the individual’s identity card and the ROP good standing certificate. The name of the establishment will be the same as that of the sole proprietor (i.e., the owner).

The Conversion of Sole Proprietorship to a Limited Liability Company 

According to Article 13 Bis 1 of the Sultani Decree 4 of 1974 Commercial Companies Law (“CCL”) it is permissible to convert a company from one status to another by a decision issued in accordance with the rules made for amending the memorandum of incorporation of an existing company or its articles of association, in compliance with the procedures and conditions of the company of which conversion takes place.

Article 13 Bis 2 further sets out certain limitation to conversion. According to Article 13 Bis 2 conversion of the company shall not result in the creation of a new juristic person, and the company, after conversion, shall retain all its previous rights and liabilities that preceded such conversion.  The conversion shall not release members from their joint liability with respect to the company preceding the conversion unless the creditors agree to such release.  Therefore, according to CCL, it is permissible for a sole proprietorship to convert to a limited liability company, provided that the applicant complies with the provisions of the CCL.

The procedures for conversion of a sole proprietorship company into a limited liability company are as follows:

1. The applicant is required to liaise with the MOCI and submit a contract of sale of percentage.  The contract for the sale of percentage is basically a share transfer process whereby the current owner sells a portion of his stake in the sole proprietorship concern to another Omani or a foreign partner. The contract for the sale of percentage will be executed and signed at the MOCI. All parties (sellers and buyers) are required to be present at the MOCI. If any of the parties are not able to attend the signing at the MOCI, such party will need to issue a power of attorney authorizing the power of attorney holder to sign on his behalf.

2. Once the sale of percentage is executed, the applicant is required to submit the following documents to the MOCI:

Name reservation: As an initial step, the applicant is required to reserve a name of the company. The proposed name of the company has to be reserved to reflect the words “LLC”;

a) Constitutive contract: The constitutive contract of the LLC will set out the Company’s activities, amount of capital, number of shares, the members’ nationalities, their respective shareholdings, their voting rights, partners’ meetings, etc.  This document is required to be prepared in Arabic and signed by the all the shareholders, including the sole proprietor;

b) Certificate of good standing: If the incoming partner is an individual, the new incoming partner(s) will also require to produce a certificate of good standing from their country of origin;

c) Constitutional documents and resolution of partner: in the event the partner is a corporate entity, it will need to provide its constitutional documents, i.e. certificate of incorporation, memorandum and articles of association, etc.  and a resolution approving its participation in the LLC;

d) Original copies of the commercial registration certificate, computer printout, and a Oman Chamber of Commerce certificate/card of the existing sole proprietorship; and

e) Copies of the ID card(s) for the local Omani partner and passport copy for the foreign partner.

Once all the above documents are submitted to the MOCI for conversion of the sole proprietorship to an LLC, the MOCI will review and assess the application and after approval, issue the new commercial registration documents in the name of the LLC.  The MOCI will also issue a letter confirming the conversion, based on which the LLC will be permitted to amend its name at the relevant ministries, banks and any other government bodies.