Partnership Agreement

What is a Partnership Agreement?

A Partnership Agreement is an agreement between two or more individuals who would like to manage and operate a business together in order to make a profit. It is a relatively common business structure in Australia, and can be contrasted to other common business structures such as a sole trader, a company or a trust. This agreement can be used for a partnership, but is not appropriate for a sole trader, company, trust, or other legal structure.

In a partnership, several partners are able to work together (unlike a sole trader). Each partner shares a portion of the partnership's profits and losses and each partner is personally liable for the debts and obligations of the partnership.

What is the difference between a partnership and a company?

A partnership is an arrangement between the various partners and is not actually a separate legal entity. A partnership is more simple to set up, and is subject to fewer regulatory obligations than a company. Therefore a partnership can have lower set up and administration costs. However, the partners are all liable for any debts or obligations of the partnership, meaning that if the partnership owes a debt, then the partners' personal assets could be used to pay that debt. Furthermore, a partner can become liable for debts that another partner has incurred on behalf of the partnership.

A company is a separate legal entity from its owners (also known as its shareholders). A company is more complicated to set up and has more regulatory/reporting obligations than a partnership does. However, an advantage of a company structure is that it provides limited liability protection for its shareholders. This means that the shareholders are usually only liable for the amount that they invested in the company (and their personal assets can be protected).

In addition, tax rates and obligations can be different for companies than for partnerships in Australia.

Is it mandatory to have a Partnership Agreement?

No, it is not mandatory to have a written Partnership Agreement, but it is highly advisable to have one. Having a written Partnership Agreement helps protect the interests of all partners. It also helps ensure that the partners understand the terms, are able to cooperate throughout the life of the partnership, and are able to enforce their rights if an issue arises.

What is a "capital contribution"?

In a partnership, a partner's capital contribution is the capital that they initially contribute to the partnership. This could be cash, property, goods or services.

What is an "ownership interest"?

In a partnership, a partner's ownership interest is the partner's share of the ownership of the partnership's assets, earnings or other value. This is often expressed as a percentage.

Who can enter into a Partnership Agreement?

To enter into a Partnership Agreement, a person should be aged 18 or older and should have the mental capacity to understand what they are doing.

It is also possible for companies to enter a partnership. So, for example, two companies could sign a Partnership Agreement and enter a partnership together.

What has to be done once the Partnership Agreement is ready?

Once the Partnership Agreement is completed, all of the partners should sign and date the Agreement. For any partners that are individual people (rather than companies) their signature can be witnessed by an independent adult, meaning somebody over 18 years old, who is not involved with the partnership. This means the partners can not witness each other, and people closely connected to the partners (such as their respective spouses) should not act as witnesses either.

Most partners make sure to keep copies of their Partnership Agreement, for their own records. In most cases, if the partners wish to change any terms of the Partnership Agreement at a later date, they make sure to do so in writing.

Is it necessary to have witnesses for a Partnership Agreement?

No, witnesses are not mandatory for a Partnership Agreement, but they are useful for evidentiary purposes. If there is ever a dispute over the Partnership Agreement, witnesses can help to prove that each party's signature is valid.

Witnesses should be independent adults (aged over 18), who have the mental capacity to understand what they are doing. They should not be related to one of the parties. This means the partners can not witness each other, and people closely connected to the partners (such as their respective spouses) should not act as witnesses either.

What must a Partnership Agreement contain?

A Partnership Agreement should contain the following information:

• Partnership name: the legal name under which the partnership will do business
• Purpose of the partnership: a brief description of the business that the partnership will conduct
• Partner information: the legal names and addresses of all of the partners currently involved in the partnership
• Capital contributions: a description of the cash, property, services, and other resources initially contributed to the partnership by each of the partners
• Ownership interest: a description of the percent of the partnership owned by each of the partners
• Profit/Loss distribution: a description of how the profits and losses of the partnership will be distributed between the partners, often based on capital contributions and/or ownership interest, and how often distribution will take place
• Management and voting requirements: a description of how the partnership will be managed, how voting weight will be determined, and whether unanimous or majority votes will be required to make important decisions about the finances and operations of the partnership
• Partner addition and withdrawal: the guidelines for how the partnership will handle the addition of partners, the voluntary withdrawal of partners, and the involuntary withdrawal of partners
• Partnership dissolution: an outline of the circumstances under which the partnership can be dissolved and a description of how the remaining assets of the partnership will be divided between the partnership if the partnership is dissolved

The Agreement may also define management roles within the partnership if the partners wish to do so.

What laws are applicable to a Partnership Agreement?

Each state and territory in Australia has a Partnership Act.

General principles of contract law, as provided by the common law, may also apply.

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