What is a Partnership Agreement?
A Partnership Agreement is a legal agreement between two or more parties who wish to conduct a business together in the form of a partnership.
A Partnership Agreement governs all of the important terms of the working relationship – don’t form a partnership without one!
Some of the most important terms of the agreement include the contributions of each party, decision making, share of profits and winding up.
Unless you have agreed otherwise, all partners are equal and must share the business profits and losses equally.
What is a Partnership business structure?
A partnership is a group of people who conduct a business together and distribute income or losses between themselves. For example, if you and a friend or family member decide to set up a business together, you might operate it as a partnership..
Partnerships are relatively easy and inexpensive to set up and operate. The partners share income, losses and control of the business.
Key features of a partnership:
require a separate tax file number (TFN)
must apply for an Australian business number (ABN) and use it for all business dealings
share control and management of the business
don’t pay income tax on the income earned – each partner is taxed separately on their share of the partnership income
require a partnership tax return to be lodged with the Australian Taxation Office (ATO) each year
require each partner to be responsible for their own superannuation arrangements
must register for GST if turnover is $75,000 or more
Do I need a written contract for a partnership?
Yes, it’s highly recommended! A Partnership Agreement protects everyone involved.
A Partnership Agreement will help to set the ground rules in black and white so everyone is clear on their obligations and responsibilities from the start. Having a formal written agreement will also reduce the likelihood of disputes.
A Partnership Agreement is about more than wrapping your partners up in red tape and telling them what they can’t do. Think of your contract as relationship insurance: it does all the hard, boring work of keeping the relationship on track, so you can focus on the fun part – the actual business.
What does the Partnership Agreement template include?
Our Partnership Agreement template covers everything you need:
★ Partnership details – including details for each partner and the partnership name
★ Duration and Termination of the Partnership – start date and notice period required before dissolving the partnership
★ Labour Contribution – how much labour each partner will contribute (e.g. full-time, part-time)
★ Decision Making – how decisions can be made (e.g. unanimous vote)
★ Financial Matters – includes capital contribution, drawings, profit split, wages and bookkeeping
★ Insurance – requirements for insurance
★ Restrictions on the parties – conditions around entering contracts, borrowing money and incurring debts for the partnership
★ Costs and Expenses – how expenses will be split
★ Winding Up – conditions for winding up the partnership (e.g. if one partner wants to leave)
★ Dispute Resolution – this clause explains the process to deal with a dispute
★ General – standard contract clauses such as Assignment, Severance, Entire Agreement, Waiver and Governing Law
Do I need a Partnership Agreement for a one-off project?
No, a Partnership Agreement is really designed for an ongoing business relationship where two or more people formalise the terms of their partnership business structure into an agreement.
For a one-off project, you should have a look at a Collaboration Agreement instead.
Does the partnership name have to be our real names?
No, you can choose a different partnership name if you like.
You may choose to register a business name to use as your trading name.
Otherwise, you can use a combination of the partners names (e.g. John Smith & Jane Smith)
How long is a Partnership Agreement effective for?
Partnership Agreements can either be indefinitely effective or include a specified termination date. Either side of the partnership can look to have the agreement dissolved providing they abide by the outlined notice period.
A partnership can also come to an end in circumstances such as when a partner is legally unable to remain a partner, this can be the case through death or a court order.
Can we negotiate on the key terms of the Partnership Agreement?
Before you kick off your partnership, you should discuss what each party is bringing to the table – including financial contributions, equipment and resources – and how you will manage the partnership once it’s established. You can use our Partnership Agreement template to guide you on some of the things you can discuss before you get started.
What can I do if things don’t work out?
We have included a winding up clause in the contract which stipulates the conditions for winding up the partnership, such as if one partner wants to leave.
Generally when a partner no longer wants to be involved with the partnership, they must provide formal written notice to the other partner(s) of their intention to dissolve the partnership.
If notice of partnership dissolution is given, the partners need to arrange for a valuation of the partnership assets and agree to a split of the total value of partnership assets.
What are some common issues with partnerships?
Here are some issues that often come up in partnerships:
- Someone who isn’t pulling their weight in the partnership is demanding an equal share of the profit
- One of the partners wants to use their work in another project
- Another partner doesn’t want anything to do with you anymore, and wants their work taken out
- A third party sues you over something that one of the partners contributed to the partnership
A Partnership Agreement will help you to avoid these issues.
How much will each partner get paid?
You should negotiate before you start to work out how and when you will be paid, and what the profit split will be, You could split everything 50/50, or you could choose a different percentage split.
Factors that could influence remuneration include the resources each party contributes (ie how much they put in!), how much time they spend on the partnership or how much they sell (if you are working on a commission structure).
Is this Partnership Agreement template legally binding?
All of our templates have been drafted by qualified Australian lawyers who hold an Australian legal practicing certificate.
We are affiliated with a commercial law firm based in Sydney.