You have found the person you want to build a business with. The idea is settled, the name is chosen and you have talked through who will do what. Then someone raises the paperwork question: should the two of you sign a partnership agreement before the venture starts? The question usually lands at the least convenient time, right when you are both most enthusiastic and least interested in negotiating with each other. This article sets out what is actually at stake in that decision and the questions a written agreement forces you to answer.
Two ways to run a partnership
You have two real options. The first is to start trading without a written partnership agreement and let the default rules in your state's partnership legislation govern the relationship. The second is to sign a partnership agreement that sets out your own terms on money, control, liability and exit. The narrower question hiding inside "do we need a partnership agreement" is whether you are comfortable with the state Act writing the rules of your business, or whether you want to choose them yourselves.
The common assumption is that a partnership without paperwork has no rules at all. That is wrong. A partnership can come into existence without a single document: under s 1 of the Partnership Act 1892 (NSW) (the Act), it is simply the relation between people carrying on a business in common with a view of profit. Once the relationship exists, the Act supplies a complete set of default terms for anything the partners have not agreed. Every state and territory has its own version of this legislation with broadly similar provisions. In Victoria, for example, the Partnership Act 1958 (Vic) mirrors the NSW rules on the points that matter most. So the decision is not between having rules and having no rules. It is between the Act's defaults and the terms you choose for yourselves.
Even a partial record changes the picture. Section 24 of the Act makes its rules subject to any agreement expressed or implied between the partners, so a few emails or a signed heads of agreement will displace some defaults while the Act fills every gap you did not cover. The result can be a patchwork nobody planned. A single comprehensive agreement avoids that uncertainty, because it states the whole deal in one place and leaves no doubt about which gaps the Act still fills.
Five things to weigh before you decide
These are the questions a partnership agreement answers, and the questions the Act answers for you, in its own way, if you stay silent.
The Act writes your terms if you don't
The default rules in s 24 of the Act are a snapshot of what a generic, equal, no-frills partnership looks like:
- Equal shares: all partners share equally in the capital and profits of the business and must contribute equally towards its losses.
- No pay for work: no partner is entitled to remuneration for working in the business.
- No interest on capital: partners earn no interest on the capital they subscribe, although a partner who advances money beyond their agreed capital gets interest at 7% per annum.
- Indemnity: the firm must indemnify every partner for payments made and liabilities incurred in the ordinary and proper conduct of the business.
Those defaults fit a business where both partners contribute equally and work equally. They fit poorly where one partner puts in the capital and the other puts in the time, or where the split was always meant to be 60/40. If the split in your head is not an equal split, the Act will not reflect it.
Any partner can bind the business
Under s 5 of the Act, every partner is an agent of the firm and of the other partners. An act done in the usual way of carrying on the kind of business the firm runs binds the firm and all the partners. A partner who signs a three-year lease for a second shop, orders stock on credit or hires staff has committed the partnership, and therefore the other partners, even if nobody was consulted. There is an escape hatch, but it is narrow: the act does not bind if the partner had no actual authority and the person dealing with them knew that, or did not know or believe them to be a partner. An outsider who knows they are dealing with a partner can usually assume that partner can act for the firm. A partnership agreement can define who has authority to sign, and a partner who oversteps can be held to account between the partners. But an internal restriction in the agreement will not always protect the firm against a third party who dealt in good faith.
Compare that with a company. In a company, authority is allocated by the constitution and the Corporations Act, and an outsider cannot simply assume that any single person can commit the whole business. In a partnership there is no such boundary: every partner is an agent, and the firm's exposure follows automatically. That is why the authority clauses in a partnership agreement matter. They do not redesign the agency rule, but they set the boundaries of each partner's actual authority, so a partner who steps outside them has broken the partnership's own rules, not just an unwritten understanding.
Your personal assets back the partnership's debts
A partnership is not a separate legal entity in the way a company is. The partners are the business, and that shows up in liability. Under s 9 of the Act, every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while they are a partner. Where the firm becomes liable for a wrong, such as negligence in the ordinary course of the business, the partners are jointly and severally liable under s 12, which means a claimant can pursue any one partner for the whole amount and leave that partner to seek contribution from the others. Creditors of the partnership can look to the partners' personal assets: the house, the car, the savings. If asset protection matters to you, a partnership may not be the right structure at all, and that is a conversation worth having before any agreement is drafted.
A partnership agreement cannot change this exposure to outsiders. Its clauses about liability operate between the partners: who indemnifies whom, how losses are shared, and how contribution is recovered from a partner whose conduct caused the debt. A creditor of the firm is not bound by that internal deal and can still pursue any partner for the full amount. What the agreement can do is make the risk explicit, so each partner decides with open eyes whether the business's debts sit behind their personal assets, or whether a company structure should hold the business instead.
Money, control and new partners
The default rules answer the questions you have probably already discussed but not written down. The Act says ordinary differences can be decided by a majority of partners, but no change can be made to the nature of the business without everyone's consent, and no new partner can be introduced without the consent of all existing partners. It also gives every partner a right to take part in management and to inspect the partnership books. An agreement lets you go further and decide:
- Profit and drawings: how profits are actually distributed, and whether partners take salaries or drawings and when.
- Capital: how much each partner contributes and when further calls can be made.
- Authority: who can sign contracts, open bank accounts and hire staff, and which decisions need unanimous approval.
- New partners: how someone joins the business and who must agree.
These are the terms that stop a disagreement about money from becoming a disagreement about the relationship.
What happens when someone leaves
The Act's exit rules are blunt. A partnership entered into for an undefined time is dissolved by any partner giving notice of an intention to dissolve under s 32. The death or bankruptcy of any partner dissolves the partnership, subject to any agreement between the partners, under s 33. If the only asset of value is the business itself, a dissolution can mean selling it up and dividing the proceeds at the worst possible moment. A well-drafted agreement replaces those defaults with an orderly exit:
- Valuation: how a departing partner's share is valued.
- Buy-out: whether the remaining partners have a right to buy the share, and how payment is structured.
- Death and incapacity: what happens on death or incapacity, often funded by insurance on each partner's life.
Without those terms, a founder's death can leave their family holding a share of a business the surviving partner cannot easily buy.
Winding up under the Act is a process, not an event. The partnership's assets, including any premises or goodwill, may need to be sold to pay the firm's debts, and the remaining value is divided among the partners. For a service business whose value sits in its client relationships, a forced sale can return far less than the business is worth to the people already running it. A continuation clause in the agreement, which lets the remaining partners carry on the business and buy out the departing partner's share, is often the difference between an orderly transition and a rushed sale.
How an Artificer Legal lawyer helps
A partnership agreement is a contract, but it is drafted against a statutory backdrop and it sits inside a wider legal framework. Contract law governs the agreement itself, the partners owe each other fiduciary duties, and the business deals with customers under the same consumer protection laws that apply to any trader. The Australian Taxation Office explains that a partnership does not pay income tax itself: it lodges a partnership tax return, and each partner is taxed on their share of the net income in their own assessment. An Artificer Legal lawyer can check whether a partnership is even the right structure for what you are building, then draft an agreement that addresses the five areas above and the parts unique to your industry. Putting the agreement together is usually a short, structured exercise. Your lawyer takes you through the schedule of capital contributions and the profit split, works out who signs what, and walks through the exit scenarios one by one, including death and incapacity, so the document is tested against the outcomes most likely to hurt. The same conversation will usually cover whether the partnership is taxed the way you expect and whether the structure still suits you as the business grows. The drafting is done before money and misunderstandings make the conversation harder. Most firms, including ours, offer an initial consultation at no cost, and a short phone call is normally enough to tell you whether a partnership agreement is worth doing now or whether your situation can wait.
Write it down while it is easy
The misstep that costs the most in this area is timing. The partnership agreement is easiest to write at the start, when goodwill is high and there is nothing yet to argue about. The moment it becomes obviously necessary, a dispute, an exit, a death, is exactly when negotiating it is hardest. The law will always provide rules for your partnership. The only question is whether they are the ones you chose.
Before you sign anything or open the bank account, write down your answers to the five questions in this article. If the two of you cannot agree on paper now, when there is nothing at stake, that is information worth having before you commit to each other.
In short: a partnership can exist without any written agreement, and when it does, the state Act supplies the terms. Those defaults include equal profit shares, joint liability for the firm's debts, the power of any partner to bind the business, and dissolution on notice or on a partner's death. A partnership agreement replaces those one-size-fits-all rules with terms you choose, covering contributions, profit distribution, authority, control, exit and dispute resolution. If the default rules match the deal you actually intend, an agreement may add little. If they do not, a written agreement is a modest cost compared with sorting out the difference later.