You and your business partner have been running the show for months, but nobody has written down who is responsible for what, or how the big decisions get made. If that sounds familiar, you are not alone, and you are not unprotected either: Australian law treats you as a partnership whether or not you have signed anything, and it has already decided a surprising amount about how your partnership works. This article sets out the legal defaults that apply to every partnership, the decisions you need to make on top of them, and what a partnership agreement actually needs to contain to turn a handshake arrangement into something you can rely on.
The Partnership Act has already filled in the blanks
A partnership is simply the relation that exists between persons carrying on a business in common with a view of profit: s 1 of the Partnership Act 1892 (NSW) (the Act). No paperwork is needed to create one. Share profits with someone while running a business together and, from the law's point of view, you are likely in a partnership. Receiving a share of a business's profits is prima facie evidence that you are a partner (s 2), even if you never sat down to "form" anything.
Every state and territory has its own Partnership Act, and they all follow the same English model, so the rules below apply across Australia with minor wording differences.
Where you have not agreed otherwise, the Act supplies a complete default code for how the partnership runs:
- Profits and losses: all partners share equally in capital and profits, and must contribute equally to losses, unless you agree otherwise (s 24(1)).
- Management: every partner may take part in managing the business, and no partner is entitled to be paid for doing so (s 24(1)).
- Day-to-day decisions: differences over ordinary matters connected with the business are decided by a majority of the partners (s 24(8)).
- Big changes: no change may be made to the nature of the partnership business without the consent of all existing partners, and no new partner can be introduced without everyone's agreement (ss 24(7) and 24(8)).
- Books: every partner may inspect and copy the partnership books (s 24(9)).
- Authority: every partner is an agent of the firm and of the other partners, and a partner acting in the usual way of the firm's business binds the firm and everyone in it (s 5).
- Liability: every partner is liable jointly with the other partners for all of the firm's debts and obligations (s 9).
- Good faith: partners must render true accounts and full information about the partnership (s 28), account to the firm for any private benefit taken from partnership property, name or connections (s 29), and pay over any profits made from a competing business (s 30).
These are not just statutory detail. The High Court has long treated partners as fiduciaries who owe each other the utmost good faith, describing the statutory duties as instances of a fundamental principle of fiduciary loyalty (Birtchnell v Equity Trustees, Executors and Agency Co Ltd [1929] HCA 24).
The catch is that these rules are defaults, not a complete answer. Section 19 of the Act lets the partners vary their mutual rights and duties by consent, whether that consent is express or inferred from a course of dealing. That is what a partnership agreement is for. But it cuts both ways: if you have been operating a certain way for years, a court may treat that pattern of behaviour as an agreed variation of an old written document.
Why a role split is only half the job
A lot of the guidance on dividing roles between partners is really about assessing each partner's strengths and allocating responsibilities to match. That exercise is worth doing, but it is only half the job. The legal half is understanding what a role allocation does and does not achieve.
An internal division of duties does not limit a partner's authority to outsiders. Under s 5, a partner who does any act for carrying on, in the usual way, business of the kind the firm carries on binds the firm and all the other partners. The exceptions apply only where the partner in fact has no authority and the person dealing with them either knows that, or does not know or believe the person is a partner.
In practice, that means if you allocate supplier relationships to your partner, and your partner signs a supplier contract that is ordinary for the business, the firm is bound even though the task sat in their allocated area. The role split works between you: your partner may be in breach of the internal arrangement, and you can hold them to account for that. But it does not protect the firm from a third party who dealt with an apparently authorised partner in the usual course of business.
The flip side is s 7: if a partner pledges the firm's credit for a purpose apparently unconnected with the firm's ordinary business, the firm is not bound unless the other partners specially authorised it. And on the fiduciary side, ss 28 to 30 stop a partner channelling the firm's opportunities into their own pocket. Consider a partner in a marketing agency who takes on a client's side project using the firm's name or contacts. They must account to the firm for the benefit, and a partner who quietly runs a competing business on the side must pay the profits over to the firm.
So the role definition exercise is genuinely worth doing, but its value is internal. Write the split down, agree the limits of each partner's authority, and understand that the document governs your rights against each other, not the firm's exposure to outsiders.
Deciding how you will decide
The Act's default decision-making rule is simple: majority for ordinary matters, unanimity for changing the nature of the business and for admitting new partners. Everything else, including how much debt the firm can take on, whether to open a second location and who can sign what, is left to your agreement.
That is where a common misconception creeps in. The idea that "major decisions require unanimous consent" is a recommendation, not law. If your agreement is silent, taking on significant debt or signing a major lease is an ordinary matter that a majority can decide, and in a two-person partnership a majority means both of you. When you cannot agree, the Act has no internal answer. An unresolved difference is not resolved by the statute, and the only statutory exit is a court-ordered dissolution, available on grounds such as a partner persistently breaching the agreement or conducting themselves so that it is not reasonably practicable to carry on the business (s 35).
So the decision-making section of your partnership agreement does the real work. Decide and write down:
- Voting structures: whether votes are equal or weighted by ownership share, remembering that the default is equal sharing of profits and capital (s 24(1)) unless you agree otherwise.
- Reserved matters: which decisions need unanimity, which need a specified majority, and which a single partner can make within their own area. Common reserved matters include borrowing above a set limit, signing leases, hiring and firing senior staff, admitting new partners, selling part of the business and changing the nature of the business.
- Procedure: how votes are called, the notice required, whether meetings can be held by video link, and how decisions are recorded in minutes.
- Deadlock: what happens when a reserved matter cannot get the required majority. Options include a rotating casting vote, referring the matter to an external expert or mediator, a buy-out mechanism, or an agreed process for winding up the partnership.
What your partnership agreement should cover
A written partnership agreement is the vehicle for varying the statutory defaults under s 19, and it is the document that will be produced if a dispute reaches a court or a mediator. Beyond the decision-making rules above, a workable agreement should cover:
- Roles and authority: each partner's responsibilities and any limits on their power to bind the firm.
- Money: capital contributions, how profits and losses are shared (the default is equal shares), drawings, and how accounts are kept and reported. The Act gives every partner a right to inspect the books (s 24(9)), but the agreement should set the reporting cadence: monthly management accounts, annual statements, and who prepares them.
- Dispute resolution: a staged process, starting with negotiation between the partners, then mediation, then arbitration or expert determination if needed. Without this, an internal deadlock has no built-in mechanism short of court proceedings or dissolution.
- Admission and exit: how new partners join, how a partner retires, and what happens on death or incapacity. The Act's default positions are worth knowing here: an incoming partner does not by admission alone become liable for what happened before they joined, while a retiring partner does not by retirement alone cease to be liable for debts incurred while they were a partner (s 17).
- Communication: meeting cadence, what gets minuted, and reporting commitments. The source of most partnership disputes is not malice but misunderstanding, and regular structured communication is the cheapest insurance available.
One trap is worth flagging before you sign. Because s 19 allows the partners to vary their arrangement by a course of dealing, an outdated written agreement can be silently overridden by years of different practice. If your agreement no longer reflects how the business actually runs, update it rather than assuming the document wins.
When a lawyer earns their keep on your partnership
Much of what is described above you can decide yourselves over a coffee. The points where a commercial lawyer adds value are the ones where the stakes are structural:
- Drafting the agreement: turning your decisions into clauses that will actually be enforced, particularly the deadlock, buy-out and dispute resolution provisions, where small drafting choices have large consequences.
- Checking the structure: whether a partnership is the right vehicle at all. Unlike a company, an ordinary partnership is not a separate legal entity: the partners hold the business's assets personally and are jointly liable for its debts. If liability exposure, tax treatment or raising outside capital matters to you, a company or trust may serve you better, and that decision is best made before the partnership agreement is signed.
- Unwinding existing arrangements: partnerships formed by conduct with nothing in writing, where you need to reconstruct who owns what and how disputes should be resolved, or where a partner has already taken profits they should have accounted for.
An Artificer Legal commercial lawyer can review your situation, draft the agreement that matches how your partnership actually operates, and help you negotiate the provisions that most often end up in dispute. If you are already in conflict, we can also advise on your options, including an application to dissolve the partnership under s 35, or a claim against a partner who has breached their fiduciary duties.
The point that most partners miss
Roles are internal. Liability is not. You can divide responsibilities as carefully as you like, but under the Act every partner remains an agent of the firm with power to bind you in the ordinary course of business, and every partner is jointly liable for the firm's debts. The partner you trust to handle suppliers can sign the firm up to an obligation you knew nothing about, and creditors can come after you personally for it. That is the nature of a partnership, and no internal role allocation changes it; only a different legal structure, or very careful drafting of authority limits that outsiders actually know about, does.
In short: understand the statutory defaults before you agree to anything different, write your roles, decision-making rules and dispute resolution process into a partnership agreement, keep that agreement current as the business changes, and take advice before you rely on informal arrangements where the financial stakes are significant.