Types and formation of partnerships

Sources of partnership law

What is the statutory basis for partnerships, and partnership-like structures in your jurisdiction? To what extent do these laws overlap or share features with company law?

Partnerships in Saudi Arabia are generally regulated by the Saudi Companies Regulations, issued pursuant to Royal Decree Number M/3, dated 10 November 2015 (the Companies Law); and the Professional Partnership Regulations, issued pursuant to Royal Decree Number M/4, dated 29 August 1991 and its implementing resolutions (the Professional Companies Law).

The Professional Companies Law sets out various provisions that are specifically applicable to professional partnership companies (ie, partnership companies formed among qualified professionals such as lawyers, engineers and accountants). However, the Companies Law applies to professional companies to the extent that it does not conflict with the Professional Companies Law or the nature of professional companies.

Types of partnerships

Identify the types of partnerships or other partnership-like structures permitted in your jurisdiction. What are they typically used for?

The Companies Law include provisions that govern various type of partnerships and companies, including:

  • partnership companies, which can be formed by at least two individual (not corporate) partners, whereby liability is not limited and the partners will be jointly and severally liable to third parties for the obligations of the partnership company; and
  • limited partnership companies (between two classes of partners), with general partners responsible for the day-to-day management of the partnership that are fully liable for the debts and liabilities of the partnership, and limited partners, whose liability is limited to their investment in the share capital but cannot be involved in the management of the company.

Both the partnership company and limited partnership company are rarely used in practice owing to the disadvantages discussed in ‘Differences between types of partnership’. In this regard, and with the exception of certain professions (eg, engineering), business partnerships in Saudi Arabia are generally organised as private limited liability companies or close joint-stock companies.

Private limited liability company (LLC)

This type of company is by far the most common corporate form used by local and foreign investors in joint ventures, corporate acquisitions and generally in conducting any for-profit business activity in Saudi Arabia. An LLC cannot be used to conduct banking, financing, insurance or regulated investment activities, which can only be conducted by a joint-stock company. Moreover, LLCs are not permitted to raise capital by way of bonds issuance or public-private placement.

Public (listed) and private joint-stock company (JSC)

The JSC is the second most common corporate form used in Saudi Arabia. It is a preferred vehicle for investors who wish to avoid the restrictions over the LLC, such as raising capital by way of debt or equity placement. It is also quicker and easier to trade shares in a JSC as it is not required to register each transfer with the authorities.

Other than the companies recognised by the Companies Law, the Professional Companies Law sets out the rules applicable to partnerships that can be formed among entities or individuals who are qualified to practice certain professions (such as engineers, accountants, or lawyers). This type of partnership is referred to as a ‘professional company’. Certain professional services are not permitted to be organised as an LLC or JSC and can only take a form of a professional company.

Other complex and innovative investment structures may be vested in a form of privately or publicly listed investment fund regulated as per the regulations of the Saudi Capital Market Authority (CMA). These funds must be managed by a licensed fund manager (ie, authorised person) licensed by the CMA, and must be formed and managed as per the regulations of the CMA. This chapter will not discuss this structure as a fund is not, per se, a partnership, but fall under a collective investment scheme regulated by the CMA.

Differences between types of partnership

What are the key differences between the various types of partnerships (and similar entities) available in the jurisdiction? Are partnerships treated as bodies of persons or bodies corporate?

The Companies Law only recognises the form of corporate entities regulated therein. Any company or partnership that is not formed as per the Companies Law (other than partnerships formed by other regulations, such as the Professional Companies Law) will be void and its founders will be jointly and severally liable for any contract or transaction entered into by such unrecognised partnership.

Therefore, any company that is not formed as per the Companies Law or the Professional Partnerships Law will not be treated as a body corporate and will not have the independent corporate capacity to enter into contracts and transactions.

The disadvantages of a partnership company and limited partnership company, in comparison to the LLC and JSC, make them rarely used or attractive for investors. The major disadvantages of the partnership company are:

  • the partners in a partnership company (or general partners in a limited partnership company) are jointly and severally liable to third parties for the obligations and debts of the company;
  • partnerships can only be formed by individuals and cannot be formed by corporate entities;
  • the trade name of the company must include all or one of the partners’ names;
  • the partners are subject to statutory non-compete covenants; and
  • the partners in a partnership company cannot exit the company without a court order or if the company has no limited duration, at a time that is appropriate for other partners.

In professional companies, however, it is possible to form a professional company between qualified individuals and professional firms and the partners are generally permitted to exist the company without a court order.

Reasons for choosing a partnership structure

What are the typical reasons that businesses choose to operate through a partnership structure in your jurisdiction? Do any factors discourage adopting a partnership structure?

As discussed above, unless the regulations require forming a professional partnership company (such as the case for legal or engineering consultancies), businesses will typically choose to do business in Saudi Arabia by setting up an LLC or JSC.

The fact that partners in a partnership company have no limited liability (and the other disadvantages discussed in ‘Differences between types of partnership’) or generally because there are no other benefits to partnerships over LLCs or JSCs makes such vehicle unattractive for businesses.

Formation (formalities and bars to formation)

How are partnerships and the similar structures available in your jurisdiction formed?

Formation process

The process of forming a company starts by filing an application to the Ministry of Commerce and Investment (the Ministry) to reserve its trade name. Once it is reserved, an application, together with draft articles of association prepared in accordance with the forms of the Ministry, will be filed with the Ministry for approval.

Once the draft articles of association are approved by the Ministry, they must be signed by the founding partners (or shareholders, or their duly appointed representative) before the notary public in Saudi Arabia. Once the articles of association are notarised, the Ministry will issue a commercial registration certificate. The issuance of the commercial registration certificate will complete the formation process.

Nature of the business

In respect of certain activities (such as insurance, banking and financial), which are regulated by other laws, the prior written consent (or initial approval) of the relevant regulator is required to start or proceed with the formation process of the company. For example, if a group of individuals wish to establish an engineering consultancy firm, they will be required to obtain the approval of the Saudi Council of Engineers.

Share capital or place of business

It is not generally required to acquire or rent offices or deposit the share capital before or during the incorporation of the company. Partnership companies and professional companies have no statutory share capital similar to LLCs or JSCs.

The shareholders of an LLC or JSC are required, however, to deposit the statutory share capital within 90 days from the day the company is incorporated. The company is also required to rent or own a place of business suitable for its activities. The company will not be permitted to recruit employees before it has a place of business approved by the competent municipality.

Nationality of investors (foreign investment)

All investments by foreign (individuals who are not nationals of the Gulf Cooperation Council (GCC)) companies and individuals in Saudi Arabia are subject to the approval of, and require an investment licence from the Saudi Arabian General Investment Authority (SAGIA). The proposed shareholders of the company will, therefore, be required to apply to SAGIA to obtain the required licence before formation of the company. The applicant shareholders of the company will be required to provide SAGIA with certain supporting documents including their constitutional documents (articles of association, commercial registration, etc) and audited financials for the past year. Generally, foreign nationals are permitted to own up to 100 per cent of the share capital of a company, unless a company is involved in an activity on the Negative List or otherwise restricted (such as insurance activities, which require minimum local ownership).

Currently, professional companies that are partially owned by non-GCC investors, are not required to obtain a licence from SAGIA. The ownership of non-GCC partners in professional companies cannot exceed 75 per cent of the ownership and the remaining 25 per cent must be owned by a Saudi Arabian-qualified partner. The non-GCC partner must also demonstrate its good reputation, qualification and experience in its home country, and its existence for at least 10 years.