Partnership Agreement Between Two People in Saudi Arabia: Key Clauses to Avoid Disputes

A partnership agreement between two people is the document that sets out each partner's share and contribution, how the business is managed, how profits and losses are divided, and what happens if one partner leaves or a dispute arises. The most effective way to prevent disagreement is to put these matters clearly in writing before the business starts, not after a problem appears.

Is trust between partners enough without a written agreement?

Many partnerships begin between friends or relatives on a verbal understanding. Then circumstances change: one partner ends up doing more, the other needs to withdraw, or the business runs into difficulty. At that point each partner holds on to their own understanding of what was agreed. A written agreement is not a sign of mistrust; it protects that trust by answering the sensitive questions in advance.

Which legal form suits the partnership?

Before drafting the agreement, you need to decide which entity the partnership will operate through. The Companies Law, in force since 2023, provides for several forms, including:

• Limited liability company (LLC): the most common form for small and medium-sized businesses; each partner's liability is limited to their share of the capital.
• General partnership: the partners are personally and jointly liable for the company's debts.
• Limited partnership: combines a general partner and a limited partner.
• Simplified joint stock company: a flexible option suited to start-ups seeking investment.

The company is registered and its commercial registration (CR) obtained with the Ministry of Commerce, with the articles of association or bylaws attached depending on the form chosen.

What are the key clauses in a two-person partnership agreement?

1. Capital and shares: the amount of capital, each partner's percentage, whether contributions are in cash, in kind or in work and expertise, and how in-kind contributions are valued.
2. Management and authority: who manages the company, and which decisions require both partners' approval, such as borrowing, selling assets or major appointments.
3. Distribution of profits and losses: the percentage and timing of distributions, and whether part of the profits is retained for expansion.
4. Each partner's obligations: the time and effort required, and a commitment not to engage in a competing activity.
5. Admission of a new partner or sale of shares: a right of first refusal for the existing partner to buy the share of a partner who wishes to sell.
6. Withdrawal, death and incapacity: how the share is valued and how its value is paid.
7. Dispute resolution: negotiation first, then mediation, then arbitration or the courts.
8. Liquidation: when the company is dissolved and how its assets are distributed.

How do you deal with deadlock between two equal partners?

When each partner holds 50%, the two may reach an impasse on a critical decision. It is therefore advisable to include a deadlock-breaking mechanism, such as referring the matter to an independent expert, giving one partner a casting vote in defined areas, or a buy-sell mechanism under which one partner offers a price for the other's share. Having this mechanism in writing saves considerable time and cost.

Which mistakes spark disputes between partners?

Given the nature of these disputes, certain causes come up again and again, and good drafting can avoid them:

• Mixing personal and company funds, for example one partner withdrawing money without an accounting entry or approval.
• No agreed salary for the full-time partner, who then feels they are working more than their partner for the same share of the profit.
• Unclear ownership of intangible assets such as the business name, trademark, digital accounts and customer base. This is why it is advisable to register the trademark in the company's name rather than in the name of one partner.
• No regular reporting to allow the non-managing partner to see the financial position.

Dealing with these points in the agreement from the outset is far easier than negotiating them once the relationship has become strained.

What is the difference between the articles of association and a shareholders' agreement?

The articles of association contain the information required by law and are filed with the competent authority. A partners' (shareholders') agreement is a supplementary internal document that sets out the relationship between the partners in detail on matters the articles may not cover, such as work commitments and valuation and exit mechanisms. The agreement must not conflict with the articles of association or with the law. To learn about our services in this area, visit our partnership agreements page.

Frequently Asked Questions

Q: Can one partner contribute effort only? A: This is possible in some company forms. In that case the value of the contribution and its share of the profits must be clearly stated in the agreement, taking into account what the chosen legal form permits.

Q: Does the partnership agreement need to be notarised? A: Setting up the company requires completing the registration procedures with the Ministry of Commerce. Related agreements and declarations can also be notarised through the Najiz platform or a licensed notary to strengthen their evidential weight.

How can we help?

FATIMA AL ASMARI Law & Intellectual Property Company in Jeddah helps partners choose the right legal form and draft the partnership agreement and shareholders' agreement to protect the business, serving clients across all regions of Saudi Arabia. Request your consultation or call +966 56 685 9556.

Legal sources

This article is for general awareness and is not legal advice.