5 Penalties for Setting Up Your Business Incorrectly in the UAE

Penalties for starting a Business Incorrectly in the UAE

UAE is one of the foremost investor-friendly locations within the world. With a bunch of business benefits and cost-effective company formation packages, UAE is an ideal location for starting up or relocating. As an entrepreneur setting up a business in the UAE, there are certain parameters to think about.

Why is UAE the investor’s favorite choice for Company Setup?

The ample choice of business activities, technology infrastructure, banking, logistics support, and favorable government policies are providing the desired ecosystem for companies to flourish within the UAE, especially in Sharjah. As an entrepreneur setting up a business in one of cities like Dubai or Sharjah, there are certain parameters to contemplate to make sure you’ve got a hassle-free company formation and a successful continued business operation within the region.

Here are 5 penalties you’ll incur if your company is set up incorrectly

1. Not choosing the correct Free Zone, company activity, or business license

Choosing the proper company activity and business license is a crucial step in company formation in the UAE. The future of your business lies in selecting the proper parameters for the continued company operation. All commercial activities within the UAE need a license issued by the concerned administrative body.

Solution: make sure the right endeavor and business license is chosen. UAE offers various options for business incorporation. There are specific free zones of a specific endeavor. Also, there are specific business licenses to be obtained for affecting business within the UAE. Choosing the incorrect business structure and operating without required licenses will lead to penalties and blacklisting of the corporation.

2. Violation of Employment Agreements

An individual while working for an organization isn’t legally permitted to open a business in UAE unless the employer has provided a No Objection Certificate for the same. Also, new businesses need to be compliant with the laws within the UAE. Employers aren’t allowed to use people with Visit Visa at any instance.

Solution: All the staff must have sound working papers and employment visas.

3. Improper Legal Agreements with Local Sponsor

When it involves mainland company formation, an Emirati sponsor will be required for the company’s formation. The local sponsor will be holding 51% of the corporate shares. The shareholding agreement must be recorded with proper legal structure.

Solution: Prepare a legal contract with all partnership & other management clauses to shield you from any dispute. All partnership clauses, other management, and ownership terms must be included in writing. It’ll protect you from any dispute regarding the shares and also aid in the smooth functioning of the business. Prepare a notarized legal contract with all the knowledge on shareholding, mutual responsibilities, and other business management terms.

4. Lack of Agreements or Signing Unenforceable Contracts

Businesses are often done on trust and verbal contracts. However, just in case of any future dispute, it becomes challenging to prove the statements. So, the foremost reliable and legally bound morpheme of a contract is written form. Many of the start-ups and newly formed companies select readymade contracts from the internet or their business network. It helps to save lots of legal & notarization costs in drafting new ones but prevents getting the proper legal protection through notarization of the contracts.

Solution: It is advisable to create a legal contract with help of a lawyer to ensure all critical matters are covered to protect the business, owners and employees.

5. Penalties for violations associated with VAT Registration and Financial Records

Businesses have to make sure that they’re VAT compliant. There are penalties for not registering your business for VAT or failing to stay within the specified financial records specified by the tax law.


The UAE market is hyper-connected, completive, and dynamic. Hence, no matter these challenges, the market is very rewarding. The above-indicated challenges would arise for any business that’s set up in the UAE. Going by the convenience of doing business, UAE holds a strong position to start and run a business, especially one that can be found within Sharjah Free Zone and in Dubai.

For a successful business setup in Dubai, foreign investors must have complete knowledge and awareness of the legal requirements. When you’re setting up a business in Sharjah or Dubai, you would like to satisfy all the legal requirements, failing which you’ll incur heavy penalties.

The ideal solution to avoid any penalties or difficulties in setting up a business across the UAE is to approach a business setup and company formation organization such as the SPC Free Zone. Call us at 80077239 to schedule a free consultation with one of our business setup advisors today!

Ayushi Doegar

A Content Marketer with a passion for fostering people to grow their businesses. As a dedicated business blog writer, I bring ideas to life through captivating storytelling and industry expertise, empowering businesses to connect with their audiences and thrive in the ever-changing market.

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