Is it enough for business partners to agree on an idea for a company to come to life? The truth is that a company’s establishment doesn’t start with good intentions but with legal groundwork. In company law, things only begin officially when the partners move to the formal steps and legal documentation. The company’s contract is the foundation, the point from which any business entity begins, but it holds no value unless it’s executed in the proper legal form.
Many projects start with passion and high expectations, then suddenly stall at the first legal obstacle, simply because the partners overlooked the formal requirements of the incorporation contract under the Saudi Companies Law.
In this article, Sada Law Firm offers a clear and practical explanation of the key formal requirements under the Saudi Companies Law, highlighting the essential points that founders should keep in mind before taking any official steps.
The Nature of the Partnership Contract and the Importance of Formality
In corporate law, a partnership contract is an agreement between two or more persons, each of whom commits to contributing a share of money or work to a project aimed at generating profit, with an agreement to share any resulting profits or losses.
The Saudi Companies Law clearly defines this concept in Article (2), which states:
“A company is a contract whereby two or more persons agree to participate in a project intended for profit, by contributing a share of money or work, to share any profit or loss arising from that project.”
— Source: Saudi Companies Law, issued by Royal Decree No. (M/132), 1443 AH, Article (2)
From this, the importance of formality in a company contract becomes evident. It serves as a legal safeguard to ensure transparency and protect the rights of both partners and third parties. Failure to comply with the requirements of writing, notarization, or registration may result in the contract being nullified or deemed invalid before courts and official authorities.
The Formal Elements of a Company Contract under Saudi Law
By reviewing the provisions of the Saudi Companies Law and relevant legal references, the key formal elements required for a valid company contract can be summarized as follows:
| Formal Element | Explanation | Legal Basis / Practice |
| Written and Notarized Contract | The articles of association, as well as any amendments, must be written and officially notarized. If the contract is not in writing or not notarized, it has no legal effect toward third parties. | Article 8 of the Companies Law stipulates that a company contract or its amendment is void if not written and registered. Legal practitioners also affirm that the written form is essential for the contract’s validity against others. |
| Public Disclosure and Registration in the Commercial Register | The contract cannot be invoked against third parties unless it is registered in the Commercial Register and duly disclosed with the necessary information. | Article 8 of the Companies Law requires registration and disclosure. Failure to register renders the contract unenforceable against third parties. Saudi legal practice also emphasizes that disclosure ensures public awareness of the company’s existence. |
| Language of the Contract and Essential Clauses | The contract must be drafted in Arabic (a translation may be attached) and must include all mandatory details as per the company type, such as partner names, headquarters, purpose, capital, profit and loss distribution, management, and other key data. | Articles 7 and 8 of the Companies Law define the required documentation and details that must be included in the articles of association or bylaws. |
| Formality of Amendments | Any modification or clause introducing changes to the contract must follow the same level of formality (writing and registration) to be legally valid. | The Companies Law provides that unregistered amendments are not enforceable against third parties. |
The Commercial Companies Law
In Saudi Arabia, the Commercial Companies Law serves as the main legal framework governing all types of commercial companies. It defines their forms, conditions, and governing provisions. The Saudi Companies Law stipulates that a company is a contract in which two or more persons agree to participate in a profit-oriented project, each contributing money or work.
The law also specifies that every company must take one of the legally recognized forms; otherwise, it shall be deemed invalid. Moreover, registration in the Commercial Register is mandatory for the company to acquire a distinct legal personality and to be recognized before third parties.
Limited Liability Companies (LLC) under Saudi Law
This type of company (LLC) is particularly popular among small and medium-sized enterprises because it offers a balance between legal protection and ease of establishment.
Key characteristics of LLCs under Saudi law include:
- The number of partners may not exceed 50.
- The liability of each partner is limited to the value of their share in the company’s capital. Partners are not personally liable for the company’s debts beyond their contribution.
- There is currently no strict minimum capital requirement, giving flexibility to smaller ventures, though the capital must still be sufficient to ensure the company’s proper operation.
- If the company’s losses reach half of its capital, the manager must call a meeting of the partners within a specified period to decide on an appropriate course of action, such as dissolving the company or injecting additional capital.
Joint Stock Companies under Saudi Law
When it comes to joint stock companies (JSCs), this type of entity is typically associated with large enterprises whose capital is divided into shares held by multiple shareholders. Such companies enjoy the ability to trade shares and, in many cases, to be listed on the stock market.
With recent reforms, the Simplified Joint Stock Company (SJSC) model was introduced to give founders greater flexibility. Among its most notable features:
- In some cases, there is no minimum capital requirement.
- The company may issue different classes of shares.
- Management can be structured through a single manager or a board of directors, depending on the company’s needs.
These provisions give founders wider options and greater flexibility in shaping their businesses.
Traditional joint stock companies, on the other hand, remain subject to stricter requirements, such as a minimum capital threshold, comprehensive disclosure obligations, and continuous financial auditing and oversight.
In essence, the new SJSC model was introduced to align with the evolving needs of the Saudi market and to offer practical, modern solutions for founders, while traditional JSCs continue to serve those requiring a more formal and conservative organizational structure.
The New Companies Law
The new Companies Law in the Kingdom of Saudi Arabia came into effect with the issuance of its executive regulations in January 2023.
This law represents a major step in restructuring the business environment and marks a qualitative leap in how companies are established, managed, and amended. It grants greater flexibility for the formation of small and medium enterprises and introduces the Simplified Joint Stock Company (SJSC) model to support entrepreneurs and facilitate their entry into the market.
The law also brings together the regulations governing professional firms and non-profit companies under a unified legal framework, simplifying procedures and ensuring consistency across different company types.
Furthermore, the executive regulations strengthened the principles of transparency, governance, and disclosure, establishing precise mechanisms for monitoring and review to ensure that company formation and management are carried out with clarity, accountability, and practical efficiency.
What to Know Before Establishing a Company (Practical Tips)
1. Choosing the Right Company Structure
When planning to establish a company, the first essential step is selecting the type of company that best fits your business activity and long-term goals.
In Saudi Arabia, available company types include:
- General Partnership
- Limited Partnership
- Limited Liability Company (LLC)
- Joint Stock Company (JSC)
- Simplified Joint Stock Company (SJSC)
Each type comes with its own capital requirements, management mechanisms, and disclosure or regulatory obligations, which vary according to the chosen legal form.
You may contact Sada Law Firm to understand these differences in detail and determine which structure best suits your business.
2. Accurate Drafting of the Articles of Association / Bylaws
The company’s founding contract or bylaws must include clear and precise provisions covering:
- Names of partners or shareholders, and their legal status (residence and address).
- The company’s purpose and business objectives.
- The capital amount and distribution of shares or equity stakes.
- The method of profit and loss distribution.
- The decision-making process (required majority, meeting procedures).
- Management structure (who manages, and the powers of the manager or board).
- Terms for the transfer or assignment of shares or equity.
- The company’s duration (if applicable) and conditions for dissolution or liquidation.
These elements form the legal and operational foundation of the company. Clarity at this stage prevents future disputes and ensures regulatory compliance from the very beginning.
Ensuring Compliance with the New Law
When using an old template for a company’s articles of association, some clauses may no longer be suitable under the new Companies Law of 2023. It is therefore essential to review and verify that the document aligns with the latest legal amendments, particularly those related to new company types, governance rules, financial disclosure, and the powers of managers or boards of directors.
In certain cases, existing companies may need to update their contracts to comply with current legal requirements and avoid future violations or the risk of invalidity.
Conclusion
A company contract is the document through which a business’s legal personality is born and its credibility before others is built. Adhering to the formal requirements, writing, notarization, and registration grant the company its legal protection and ensure its continuity without disputes or nullification.
With the introduction of Saudi Arabia’s new Companies Law in 2023, the establishment process has become clearer and more streamlined. Yet this also means that precision and attention to every legal detail are now more critical than ever. A single clause that fails to comply with the new law could cause serious problems later on. That’s why reviewing company contracts is a step that should never be delayed.
At Sada Law Firm , we see every day how solid legal preparation can make the difference between a company that grows steadily and one that falters due to foundational legal errors. Our role is to accompany our clients from the very first step, reviewing and drafting their contracts, ensuring they meet all regulatory standards, and safeguarding their interests before official authorities.
Frequently Asked Questions (FAQ)
1. Why is notarizing the company’s contract with the Ministry of Commerce important?
Notarization gives the contract its legal validity before third parties. Without it, the company does not acquire a legal personality, and its contracts or transactions may not be recognized.
2. When should I amend my company’s contract?
An amendment is required whenever a core clause changes, such as the number of partners, capital amount, company purpose, or management structure. Updates are also necessary when new legal regulations affect the validity of existing terms.
3. What are the legal risks of ignoring formal requirements?
Neglecting formalities such as writing or registration may lead to contract nullification or make partners personally liable for the company’s obligations. In short, the company becomes legally “invisible.”
4. How can Sada Law Firm assist me in establishing my company?
Sada’s legal team reviews company contracts, prepares legally sound documentation in line with the new Companies Law, follows up on notarization and registration procedures, and ensures that the company’s establishment is compliant from day one.
5. Does Sada Law Firm provide post-establishment services?
Yes. We continue to support our clients through amendments, internal policy updates, governance and disclosure reviews, and provide ongoing legal advisory services to protect their companies at every stage.
