Transfer a Sole Proprietorship in Saudi Arabia: Debts and Workers

Abdullah handed over a small contracting establishment (mu'assasa fardiya) to his cousin after running it for three years. They signed a paper saying that “the new owner takes on everything the establishment owes”. Six months later, a steel supplier sued Abdullah for SAR 60,000 for old deliveries. Is Abdullah still liable?

Yes. The direct answer: a sole proprietorship has no legal personality separate from its owner. Debts that arose while you were the owner stay on you, and you are released from them only if the creditor accepts their transfer. If the trade name passes with the establishment, the new owner also becomes liable for them, jointly with you, towards the creditors. The workers' contracts continue, and moving their earlier rights to the new owner needs their written consent.

What does transferring a sole proprietorship mean?

A sole proprietorship is simply its owner doing business under a trade name. So a transfer is really moving the business and its elements from one person to another: the trade name, equipment, stock, contracts and customers. There is no separate entity that moves with its debts and rights, as happens when company shares are sold. So do not use a share sale template. Write clearly in the agreement whether the transfer is for payment or free, what it includes, and what stays with the person giving up the business.

Your agreement alone is not enough. The transfer of ownership is done with the Ministry of Commerce, and every licence or contract has an authority or party that must agree. Successfully moving the commercial registration does not mean that the lease, municipal licences and supplier contracts have moved automatically.

Are you released from the establishment's debts after the transfer?

No, unless the creditor accepts. Your agreement with the new owner that he will pay the establishment's debts is an assignment of debt (hawalat dayn) between the two of you, but it binds the creditor only if he accepts it (Article 249 of the Civil Transactions Law). If the creditor refuses, or is never asked, you remain his debtor, and the new owner is bound towards you to pay according to your agreement.

If the trade name passes with the establishment, Article 11 of the Trade Names Law transfers to the new owner the earlier rights and obligations under the name, unless you agreed otherwise. Even so, both of you remain jointly liable to creditors, any different agreement binds them only with their consent, and a claim against the new owner for the old owner's debts will not be heard after five years from the transfer of ownership.

What happens to the workers when the establishment is transferred?

Article 18 of the Labor Law settles two points. The employment contracts remain in force and service is treated as continuous. And the workers' rights for the earlier period, such as wages and end-of-service award, are owed by the old and new owners jointly. There is a special rule for sole proprietorships: the old and new owners may agree to move all the workers' earlier rights to the new owner, on condition that each worker gives written consent. If a worker does not consent, he may ask to end his contract and receive his dues from the old owner.

A maintenance establishment has 4 workers, with accumulated end-of-service awards of about SAR 48,000.

If all four workers sign written consent to move their rights, the SAR 48,000 becomes the new owner's responsibility, and normally it is deducted from the transfer price.

If two of them refuse, each may end his contract and take his dues from the old owner. The old owner cannot refuse on the ground that the establishment is no longer in his name.

What about the lease and contracts with suppliers and customers?

Every contract the establishment is party to needs the other party's consent to be transferred. Article 255 of the Civil Transactions Law requires the other party's consent to transfer your position in a contract, and the consent may be given in advance in the contract itself. If he does not consent, you remain bound to perform the contract jointly with the new owner (Article 256). So check the assignment clause in the lease, the supply contracts, and any contract with a customer who paid in advance for work not yet done.

Is converting to a company better than a transfer?

Sometimes. If the owner wants to bring in a partner or separate his personal liability from the business in the future, Article 220(3) of the Companies Law allows the assets of a sole proprietorship to be moved into a company. But setting up the company does not release the owner from the establishment's earlier debts unless the creditors expressly accept this. So conversion protects against debts that arise after the company exists, and does not erase the past.

What should the transfer agreement include?

1. The identity and capacity of both parties, the commercial registration number and the trade name.
2. A list of the assets included and excluded, and a stocktake record on handover day.
3. A list of every known debt and who pays it, and the old owner's declaration that there are no other debts.
4. A list of the workers and their dues, and each worker's position on moving his rights.
5. What happens to the trade name: does it pass to the new owner or stay with the old one?
6. The transfer price and how it is paid, and an amount held back to cover claims that appear later.
7. A cut-off date separating each party's income and expenses.

This is general information based on the official Arabic texts of Saudi laws, which prevail over any translation. It is not legal advice for your specific case.

Practical solutions for both sides

If you are giving up the establishment:

• Pay the supplier debts before the transfer, or get each creditor's written acceptance of the transfer of his debt.
• Do not rely on a clause saying “the new owner takes on everything”. It does not bind the creditors.
• Settle the dues of workers who do not consent to moving their rights.
• Keep copies of bank statements and invoices up to the handover date. You may need them in your defence later.

If you are taking over the establishment:

• Ask for a list of existing debts and claims before you accept the transfer. Do not rely on verbal promises.
• Read the declarations shown on the ownership transfer platform before you approve them.
• Deduct from the price an amount equal to the workers' dues that will pass to you.
• Get the landlord's consent before you start operating from the same premises.

If you are thinking of giving up your establishment or taking one over from someone else, send us the registration, the draft agreement and the list of debts and workers on WhatsApp, and we will review them with you before you sign.