A Legal and Analytical Study considering Federal Law No. (32) of 2021
1. Definition of a Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a form of capital company where the liability of each partner is limited to the value of their shares in the company’s capital. The number of partners may not exceed fifty, nor be fewer than one. An LLC may be established by a single natural or legal person.
This legal structure is particularly suitable for small and medium-sized enterprises, as it offers legal protection to partners against personal liability for the company’s debts.
2. Principle of Limited Liability
According to Article (71) of the Law, each partner’s liability in an LLC is restricted to the amount of their share in the company’s capital. Thus, a partner’s personal assets are not at risk, unless the partner has provided a personal guarantee or has committed fraud or gross negligence.
This principle is a cornerstone of partner protection from risks such as bankruptcy or liquidation. It distinguishes LLCs from partnerships, such as general partnerships, in which partners are personally and jointly liable for the company’s debts.
3. Exceptions to the Principle of Limited Liability
Although the default position is that partners are not personally liable, UAE law sets out specific exceptions in which partners may be held personally accountable. The most prominent of these include:
- Exceeding the Maximum Number of Partners
If the number of partners exceeds the legal limit of fifty and the company continues to operate for more than thirty days without rectifying the situation, the partners become jointly liable for obligations incurred during that period (Article 73/3). - Failure to Register the Company or Amendments in the Commercial Register
Article (15) states that a company or amendments to its Articles of Association are not enforceable against third parties until they are registered in the commercial register. The manager or board members shall be jointly liable for any damages caused to third parties due to non-registration. - Issuing Guarantees on Behalf of the Company without Legal Basis
According to Article (22), any person authorized to manage the company must act in good faith and within the limits of their authority. If these boundaries are exceeded or authority is misused, personal liability for resulting damages may be imposed. - Fraudulent Acts or Commercial Misrepresentation
If a partner or manager commits acts involving fraud, deceit, or abuse of the company’s legal entity for personal gain, the corporate veil may be pierced, and they may be held personally liable for the company’s obligations. This is based on the “doctrine of lifting the corporate veil.”
4. Safeguards to Maintain Limited Liability
The law has introduced several organizational and procedural safeguards to reinforce the principle of limited liability and prevent partners from bearing undue obligations. These include:
- Mandatory preparation of audited annual financial statements (Article 27).
- Binding corporate governance rules for company management (Article 6).
- The requirement to notarize and register the Memorandum of Association and any amendments thereto (Articles 14 and 15).
- A prohibition on profit distribution unless actual profits are realized and approved by competent authorities (Article 30).
5. Impact of Company Dissolution or Liquidation on Partners’ Liability
Upon the company’s dissolution and entry into liquidation, partners’ liability remains confined to the value of their shares, unless one is proven to have willfully caused losses or harm to third parties. The company’s legal personality continues to exist to the extent necessary for the liquidation process (Article 21/3).
6. Conclusion and Recommendations
The principle of limited liability for partners in an LLC is one of the most significant legislative incentives for investment, effectively reducing financial risk.
However, preserving this protection requires strict compliance by partners and managers with legal provisions—particularly those relating to registration, governance, and the exercise of authority.
In cases of serious violations or legal circumvention, the legal shield of limited liability may be revoked, and personal or joint liability rules will apply. Therefore, it is recommended that partners appoint a legal advisor to periodically review company procedures and ensure ongoing legal compliance, thereby avoiding potential liability exposure.
