When may the partners of a Saudi LLC distribute profit, and what must the distribution resolution state?

When the distribution decision is taken

The practical rule is simple: no distribution before the profit is known. The Companies Law provides that the profit and loss and each partner's share in them are determined at the end of the financial year from financial statements prepared under the accounting standards approved in the Kingdom, unless the articles of association contain special provisions. The annual distribution resolution therefore follows a clear sequence that starts with the financial statements and ends with payment.

1. The company's manager prepares the financial statements for the financial year just ended and a report on the company's activity and financial position, together with the manager's proposal on distributing profit, if any.
2. The statements go to the auditor, if there is one, and are then provided to the partners ahead of the annual general assembly as the Law and the articles of association require.
3. The partners' general assembly meets at least once a year within the six months following the end of the financial year, and its annual agenda includes discussing the financial statements and deciding on the manager's proposal on distributing profit.
4. The distribution decision is taken after the financial statements are discussed and approved, not before, and it sets the amount or percentage distributed out of net profit after deducting reserves, if any.
5. The resolution is entered in the partners' resolutions register, and payment is then made on the date and by the method the resolution sets.

What the resolution states, item by item

A good resolution can be read on its own without any oral explanation. Anyone who reads it years later, whether a new partner, an auditor, a bank or a judicial body, should understand from it how much was distributed, out of which profit, to whom, when, and on what authority. These are the items we recommend every distribution resolution covers.

• Company and financial year details: the company's name and commercial register number, the financial year the profit relates to, and a reference to the financial statements that were approved.
• The net profit figure: as shown in the approved financial statements, with a statement of the distributable profit on which the resolution rests.
• The reserve: a statutory or contractual reserve is set aside only to the extent the articles of association require, or as the partners decide at the annual assembly in the company's interest. This guide states no specific reserve percentage, so refer to your company's articles.
• The amount or percentage distributed: a total amount in riyals, or a percentage of the distributable net profit, with a statement of any part carried forward.
• The allocation per partner: each partner's name, number of shares, percentage and the amount due, based on each partner's share in the capital unless the articles of association provide for different ratios.
• The entitlement date, the distribution date and the payment method: the Law requires the resolution to state the entitlement date and the distribution date, and it is good practice to state the payment method and the account the amount goes to.
• The type of distribution: annual, out of an approved financial year's profit, or interim during the year on the basis of an authorisation and specific conditions.
• Who issues and signs it: whether it was passed at a general assembly meeting or by written circulation, the percentage of shares approving it, and the names and capacities of the signatories.

Annual versus interim distribution

The Companies Law allows annual or interim distributions out of distributable profit to the partners of an LLC. The annual distribution is the default and follows the approval of the financial statements at the annual assembly. An interim distribution during the year has additional controls set by the Implementing Regulations of the Companies Law, which according to the text available to us are:

• The articles of association must allow interim distributions.
• The partners must authorise the manager to distribute interim profit by a resolution issued annually.
• The company must have reasonable liquidity and be able to forecast its level of profit.
• There must be distributable profit under the latest financial statements sufficient to cover the proposed amount, after deducting what has been distributed or capitalised from it since the date of those statements.

In practice an interim distribution needs two documents, not one: the partners' annual authorisation resolution, then the distribution resolution the manager issues under it, referring to the financial statements it relied on. Template F-03, the Resolutions Set, carries the authorisation resolution, while F-08 covers the distribution resolution itself.

Who issues the resolution, who signs it, and how it is recorded

Partners' resolutions are passed at the general assembly, and they may also be passed by circulation without a meeting: the manager sends each partner the proposed resolution and its documents to vote on in writing. A resolution is valid only if approved by one or more partners representing more than half of the capital, unless the articles of association require a larger majority. The assembly's deliberations and resolutions, and resolutions passed by circulation, are recorded in minutes entered in a special register the company keeps, and modern technology may be used for this.

1. Choose the method: an annual general assembly meeting with the distribution resolution attached to its minutes, or a resolution by circulation signed by the approving partners.
2. State in the resolution the percentage of shares approving it, and check that it reaches the majority required by the Law or the articles of association, whichever is higher.
3. Have the resolution or minutes signed by the partners or by whoever the articles of association designate, stating each signatory's capacity.
4. Number the resolution and enter it in the partners' resolutions register, keeping with it a copy of the approved financial statements it relied on.
5. Link every bank transfer to the resolution number in the transfer reference and in the accounting entry, so every payment has a written basis.

Common mistakes in distributing profit

Most problems do not appear on the day of the transfer but a year or more later: when a new partner joins, when partners disagree, when a bank reviews the file, or when the company runs into difficulty. The Companies Law provides that if profit is distributed in breach of its provisions, the company's creditors may claim against it, and the company may claim from each partner the return of what they received, even in good faith, while a partner is not required to return profit distributed in line with the Law even if the company later suffers losses. These are the most frequent mistakes:

• Distributing before the financial statements are approved: transferring money to the partners based on the account balance or the accountant's estimate before the statements are discussed and approved, so no one knows whether there is enough distributable profit.
• Paying amounts out of proportion to the shares without the articles allowing it: shares carry equal rights in net profit by default, unequal ratios are allowed only if the articles of association provide for them, and an agreement depriving a partner of profit is treated as void.
• A bank transfer with no written resolution: a payment that reaches a partner's account without a resolution stating its basis may later be hard to prove as distributed profit rather than a loan, an advance or a withdrawal.
• Overlooking a reserve the articles of association require, or, conversely, assuming a reserve percentage the articles do not mention.
• An interim distribution without a provision in the articles of association or without an annual authorisation resolution from the partners.
• A resolution that omits the entitlement date and the distribution date, so the partners later disagree on when each of them became entitled.

Where this resolution sits among the governance documents

The dividend distribution resolution is one link in a chain of documents. The shareholders agreement sets the profit policy agreed in advance, the partners' resolutions and general assembly minutes are the framework in which the resolution is passed, and the board of managers runs day-to-day management and prepares proposals where the company has a board. This guide is limited to the resolution that moves profit from the financial statements to the partner's account. For those other aspects in detail, see our published guides on partners' resolutions and general assembly minutes, board of managers resolutions, and the LLC shareholders agreement.

A distribution also has zakat and accounting effects that vary with the position of the company and its partners. This guide states no zakat or tax figure or rate, so consult the company's accountant or the Zakat, Tax and Customs Authority before distributing. Template F-08 is a certified draft and a strong starting point, not a substitute for advice on an existing dispute between partners.

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