A partnership agreement between two parties is a written contract in which two people or businesses agree to work together on a shared activity, set out what each one contributes, and decide how profits, losses, management and exit will be handled. A good agreement answers in advance the questions that usually cause disputes later: who decides, who pays, who gets what, and what happens if one partner wants to leave. This guide lists the clauses the agreement needs, gives a template as an ordered list of clauses you can build into a Word file, and explains when a private agreement is not enough and a company should be registered instead.
What is a partnership agreement between two parties?
It is a private contract between two partners. It can cover a single project, such as a joint bid or the delivery of one supply contract, or an ongoing activity, such as running a shop or offering a service together. The agreement binds the two parties to each other, but it does not, on its own, create a new legal entity with its own name, commercial registration and bank account.
People search for this document under many names: partnership contract, agreement between two parties, cooperation agreement or memorandum of understanding. The name matters less than the content. An agreement that clearly covers contributions, profit and loss, decisions and exit is far more useful than a long document that leaves those points vague.
Partnership agreement or a registered company?
A private agreement and a registered company serve different purposes, and choosing the wrong one is one of the most expensive mistakes partners make.
- A private partnership agreement suits a limited cooperation in which each party keeps operating under its own license and commercial registration, for example two established businesses sharing one project.
- A registered company under the Companies Law is the usual route when the partners want to run a business together under one name, hire staff, contract with customers, open a bank account and invoice in the business’s name. Company forms include the limited liability company, the general partnership and the simplified joint stock company, among others. Companies are registered electronically through the Saudi Business Center and the Ministry of Commerce.
Two points need special care. First, if one partner is a foreign investor, the investment generally has to be registered with (or licensed by) the Ministry of Investment (MISA) before the business is set up. Second, a private agreement must not be used to let a non-Saudi run or own a business that is registered only in a Saudi’s name. That arrangement is commercial concealment, which is prohibited under the Anti-Concealment Law and carries serious penalties for both parties.
The clauses every partnership agreement needs
Parties and purpose
Full names, identity or commercial registration numbers, addresses and the capacity in which each party signs. Then a precise description of the purpose: what the partnership will do, where, and what falls outside it.
Contributions
What each partner brings: cash, equipment, premises, a license, clients or work. In-kind contributions and work should be valued in the agreement itself, and the timing of each contribution should be stated.
Profit and loss sharing
The share of each partner in profit and in loss, how profit is calculated, when it is distributed and whether part of it is kept in the business. Under the Civil Transactions Law and the Sharia principles it reflects, loss in a partnership generally follows each partner’s share of the capital, and a clause that gives one partner all the profit or excuses one partner from any loss can be challenged. Have a lawyer check this clause.
Management and decisions
Who runs daily operations, who signs on behalf of the partnership, and which decisions need both partners’ written approval, such as borrowing, large purchases, hiring key staff or bringing in a new partner.
Books and accounts
Where the money is kept, who keeps the books, how often each partner receives reports, and each partner’s right to review the accounts and the supporting documents.
Exit and transfer
Whether a partner may sell or assign their share, whether the other partner has a right of first refusal, how the share will be valued, and the notice required before leaving.
Death or incapacity
What happens if a partner dies or loses legal capacity: whether the heirs take the partner’s place, or whether the other partner buys the share at a value set by an agreed method.
Disputes and governing law
The steps for settling disagreements, usually negotiation first, then mediation, then the competent court or arbitration, and a clause stating that the laws of the Kingdom of Saudi Arabia govern the agreement.
A partnership agreement template, clause by clause
The following order works for most two-party agreements. It can be typed into a Word file as headings and then adjusted to the deal:
- Title and date of the agreement, and the place where it is signed.
- The first party and the second party: names, identity or registration numbers, addresses, and representatives where a party is a company.
- Preamble: the background and why the parties are entering the agreement, stating that it forms part of the agreement.
- Definitions of the key terms.
- Purpose and scope of the partnership.
- Term: start date, end date or the event that ends the agreement, and whether it renews.
- Contributions of each partner, their value and their timing.
- Profit and loss sharing and the distribution schedule.
- Management, authority to sign, and decisions reserved for both partners.
- Bank account and payment controls.
- Books, accounts and reporting.
- Obligations of each partner, including confidentiality and non-competition.
- Transfer of shares and admission of new partners.
- Withdrawal and exit, with the valuation method.
- Death or incapacity of a partner.
- Breach of the agreement and its consequences.
- Termination and settlement of accounts.
- Dispute resolution.
- Governing law.
- Notices and addresses for correspondence.
- Entire agreement, and amendments in writing only.
- Copies of the agreement and signatures of both parties, with witnesses if they wish.
Common mistakes
- Relying on trust and a short paper that says nothing about exit, death or deadlock.
- No value for in-kind contributions or work, which makes it hard to calculate shares fairly later.
- No deadlock rule. With two equal partners, any disagreement can freeze the business. Agree in advance how a tie is broken.
- Running a full business on a private agreement instead of registering a company, which can leave each partner personally exposed to third parties and the business unable to contract in its own name.
- Using a template copied from another country, with laws and terms that do not apply in Saudi Arabia.
- Mixing personal money with partnership money, with no separate account or records.
- Not signing or not keeping the original, or amending the agreement by word of mouth only.
Why a lawyer should review the agreement
A partnership agreement is a legal document, and its details decide how a dispute ends. A licensed lawyer in Saudi Arabia can check that the clauses are valid and enforceable, that the profit and loss split is acceptable under the rules the courts apply, that the dispute clause will work in practice, and that the arrangement does not breach the Companies Law, the investment rules or the Anti-Concealment Law. Templates, including the one above, are a starting point for discussion, not legal advice.
Innovant is a business advisor, not a legal practice. We can help partners choose between a private agreement and a registered company, prepare the financial terms such as contributions, valuation and profit distribution, and handle company registration once a lawyer has reviewed the legal wording.
Frequently asked questions
Is there a ready partnership agreement template in Word?
Is an agreement between two parties binding without registration?
Can a partnership agreement be changed later?
What is the difference between a partnership agreement and a company’s articles of association?
How is profit split between two partners?
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