The “company under formation” stage represents a transitional and sensitive legal status in the process of company establishment in the Kingdom of Saudi Arabia. This phase precedes the official registration in the Commercial Register, yet it is governed by precise regulations as stipulated in the Saudi Companies Law issued in 1443H.
First: Concept of a Company Under Formation
A company under formation is an entity created by the founders with the aim of conducting a specific commercial activity. However, it has not yet acquired full legal personality, which only occurs upon registration in the Commercial Register. Nonetheless, Saudi law acknowledges this entity with limited legal personality during the formation phase.
Second: Legal Status of a Company Under Formation
According to Article 9 of the Companies Law:
“The company acquires legal personality after its registration with the Commercial Register. However, during the formation period, the company shall have legal personality to the extent necessary for its formation, provided that the formation procedures are completed…”
Thus, a company under formation is not treated as a fully established legal entity with complete legal capacity, but is granted a limited degree of legal personality sufficient to complete formation-related tasks—such as negotiating lease contracts, opening a preliminary bank account, or signing conditional agreements that depend on official registration.
Third: Legal Effects of Acting in the Name of a Company Under Formation
If the founders enter into contracts in the company’s name before registration, the law distinguishes between two scenarios:
- If registration is completed later:
All contracts and obligations entered into are transferred to the company’s liability, and it becomes legally responsible for them. The company also has the right to reclaim taxes paid for the purpose of its establishment. - If registration is not completed:
The individuals who acted in the company’s name become personally and jointly liable towards third parties.
This is affirmed by the article’s wording:
“If the company’s formation procedures are not completed as set forth in the law, the persons who acted or contracted in the name of the company shall be personally and jointly liable with all their assets towards third parties…”
Fourth: Limits of Legal Capacity During Formation
The company under formation is not permitted to conduct actual business operations, generate profits, or enter into binding commercial contracts unrelated to the formation process before its official registration. Doing so constitutes a legal violation that exposes the founders to personal liability.
Fifth: Legal Recommendations for Founders
• Include the phrase “Company Under Formation” in all correspondence and contracts.
• Maintain full documentation of all steps taken to prove that actions were within the scope of the formation process.
The formation stage has significant implications for owners and founders. The law strikes a balance between empowering founders to complete initial formalities and imposing legal safeguards to protect third parties. Therefore, founders and practitioners must carefully adhere to these provisions to avoid personal and joint liability in case of failed or improperly executed formation.