Going into business with a friend, relative or colleague often starts with a handshake. Everyone is keen and the details seem easy to sort out later. Trouble tends to arrive when money runs short, one partner wants out or the business grows faster than expected. A written partnership agreement is the simplest way to settle those questions before they turn into a dispute.
This guide explains how a partnership works under Australian law and why the agreement matters. It covers what the agreement should include and what happens when a partnership ends. It is general information for small business owners who are setting up or reviewing a partnership.
What a partnership is
A partnership is a business structure made up of 2 or more people who share income or losses. It is relatively easy and inexpensive to set up. Reporting requirements are also minimal compared with a company. That simplicity is a big part of the appeal for small trades and service businesses.
The trade off is liability. In a general partnership, each partner has unlimited liability for the debts and obligations of the partnership. Personal assets can be exposed if the business cannot pay what it owes. This is the main reason partners need to trust each other and agree on how decisions are made.
Partnerships sit within a much wider body of business law. Our overview of commercial law in Australia explains how contracts, liability and regulation fit together. A partnership agreement is one of the most important contracts a small business will sign.
Types of partnership
A general partnership is the most common type. All partners manage the business and all carry unlimited liability. Most small partnerships between two or three owners fall into this group.
A limited partnership has at least one general partner and at least one limited partner. Limited partners are passive investors, and their liability is capped at what they contributed. A limited partnership must be registered with your state or territory government. An incorporated limited partnership is a special type used for venture capital investments and must also be registered.
Each state has its own Partnership Act
Partnership law is set at state and territory level. Each state and territory has its own Act, such as the Partnership Act 1892 in New South Wales and the Partnership Act 1958 in Victoria. Western Australia has the Partnership Act 1895 and Queensland has the Partnership Act 1891. The rules are broadly similar but they do differ, so check the Act where your business operates.
These Acts fill the gaps when partners have not agreed something in writing. If you have no partnership agreement, the Act will decide matters such as how a partnership is dissolved. That default position may not match what the partners actually intended. A written agreement lets you set your own terms within the law.
Do you have to have a partnership agreement?
You do not have to make a partnership agreement. Even so, business.gov.au notes that having one sets expectations and can reduce disputes. It also suggests having a lawyer review the agreement. A short review at the start costs far less than a disagreement later.
Think of the agreement as a record of the conversation you should have before trading. It forces partners to talk about money, roles and exit plans while relations are good. Our article on common legal agreements for small businesses shows how written terms protect owners in other parts of the business too.
What a partnership agreement should cover
The government guidance on partnership business structures lists the main points an agreement should address. Each one is a common source of argument if it is left unwritten. Use the list as a starting point for a discussion with your partners and your lawyer.
- business details and the start date
- each partner’s contributions and share of ownership
- how profits and losses will be split
- each partner’s role in the business
- who owns any intellectual property
- how decisions are made, including whether major decisions need unanimous agreement
- how disputes will be resolved
- how partners are added or removed
- how the partnership ends and how remaining assets are divided
Intellectual property deserves a careful look. A business name, logo, website content or client list can be worth a lot. If ownership is not clear, a departing partner may claim a share or keep using it. Our article on sending a cease and desist letter explains one way owners respond when someone uses their work without permission.
Tax and registration basics
A partnership needs its own ABN and tax file number. It must register for GST once its annual turnover reaches $75,000. The partnership lodges its own tax return with the ATO each year. Each partner then pays income tax on their share of the income.
Partners also look after their own superannuation. The agreement should state how profits are divided, as that split carries through to each partner’s tax return. Talk to a registered tax agent or accountant about how this works for your figures.
When a partnership ends
A business partnership dissolves when the business closes or when the people in the partnership change. If partners change, check with the ATO whether a new or reconstituted partnership is needed. Start by reading your partnership agreement for any terms about ending the partnership. If it has no such terms, you will need a dissolution agreement or must follow your state or territory law.
A formal dissolution agreement is worth having even where a partnership agreement exists. It can record why the partnership is ending and the end date. It can set out how assets and debts are divided and who handles the remaining tasks. It should also deal with clients, contracts, employees, intellectual property and the business name.
Some states have extra steps. You may need to publish a notice in a government gazette or newspaper telling people the partnership is dissolving. In Western Australia, publishing a notice can help protect a departing partner from creditors who deal with the remaining partners after the notice date. Check with the business authority in your state or territory.
Handling disagreements between partners
Disputes are easier to manage when the agreement already sets out a process. That might be a meeting, then mediation, then other steps if needed. Some states offer help, such as the dispute resolution service run by the Small Business Development Corporation in Western Australia. Legal advice is wise before ending a partnership, especially where there is a dispute.
Partnerships are common in professional practices as well as trades. Our article on why a commercial lawyer for a dental practice is valuable covers the same need for clear terms between practice owners. The earlier the paperwork is in place, the fewer surprises later.
Frequently asked questions
Is a partnership agreement a legal requirement?
No, you do not have to make one. Without it, your state or territory Partnership Act decides many matters for you. Most partners are better served by agreeing their own terms in writing.
Am I liable for my partner’s business debts?
In a general partnership, each partner has unlimited liability for the debts and obligations of the partnership. That can include personal assets. A lawyer can explain how this applies to your situation.
Does a partnership pay its own income tax?
The partnership lodges its own tax return each year. Each partner then pays income tax on their share of the income. An accountant can help you set this up correctly.
What happens if one partner wants to leave?
A change of partners dissolves the partnership. Check your agreement first, then consider a dissolution agreement. You may also need to form a new partnership and follow your state’s rules.
This article is general information only and is not legal advice. Partnership laws differ between states and territories and can change over time. Speak with a qualified lawyer about your own partnership.