How to split partnership shares between business partners

Two of you are about to start a business together, or a long-standing partner is taking on someone new, and the conversation has reached the point where someone asks what percentage of the partnership each of you will hold. It often gets answered on the spot with a number that feels fair at the time. That number then drives how profits and losses are divided, how much say each of you has, and what each of you owes tax on, for as long as the partnership runs. Getting it into the partnership agreement, rather than leaving it as an agreed-in-principle figure, is the part founders most often skip.

The real question: equal shares or a negotiated split

A partnership is simply the relationship between people carrying on a business together with a view to profit. Under s 24 of the Partnership Act 1892 (NSW), the default position, where there is no agreement, is that all partners share equally in the capital and profits of the business and contribute equally towards its losses. Every state has an equivalent provision, and the default applies unless the partners agree otherwise.

The decision you are actually making is whether to accept that equal default or negotiate a different split, and on what basis. The law imposes no formula for an unequal split. A 60/40 division is just as valid as 70/30 or 55/45, so long as the partners agree and record it. Three things are worth flagging before you start weighing the factors below:

• Profit share and capital are separate ideas: You can agree that one partner contributed most of the start-up money but still split profits 50/50, or vice versa. The split that matters for the percentage question is the one that divides profits and losses, because that is what the agreement, and the tax system, work off.
• The split does not need to track salaries: A partner can be paid a regular amount for the work they do, but under the default rule in the Act a partner is not entitled to remuneration for acting in the partnership business. A so-called salary is usually just a drawing against that partner's share of profits, unless the agreement says otherwise.
• The default bites only when you do nothing: If you never record a different split, the law's answer is equal shares, and that answer also governs the books and accounts if the partnership ends in dispute.

Start from the default, then decide what justifies a departure

The cleanest way to approach the negotiation is to treat equal shares as the baseline and ask, for each partner, what facts justify moving away from it. The factors below are the ones Australian founders actually weigh. No single factor is decisive, and most partnerships end up with a split that reflects several of them together.

Capital and other contributions at the start

The first thing to weigh is what each partner is putting in. If one partner funds the fit-out, the stock and the first year of rent while the other contributes their time, a simple equal split can feel lopsided. The law itself recognises that money and effort are different things. Under s 24 of the Partnership Act 1892 (NSW), a partner who advances money beyond the capital they agreed to subscribe is entitled to interest at seven per cent a year from the date of the advance, and a partner gets no interest on the capital they subscribed. Both rules are default only and can be varied by agreement.

Capital is broader than cash:

• Cash and assets: equipment, premises, stock and intellectual property brought into the business all count.
• Sweat equity: the partner who builds the website, wins the first clients or designs the product is contributing real value that never appears on a bank statement.
• Borrowing and guarantees: a partner who personally guarantees the business loan is taking on risk that the others are not.

One practical approach is to assign a dollar value to each partner's total contribution at the start, then test whether the proposed percentage is roughly proportionate. But contribution rarely stays fixed, which is why the next factor matters.

Time, effort and the salary question

Partners rarely put in equal hours. One may run the business day to day while the other holds down outside work, and the split should usually reflect that difference. Before the business makes any profit, the partner giving it most of their working week is effectively unpaid while the other is not. A split that compensates the working partner through a larger share of profit is one way to recognise that.

The salary question complicates things. It is common for a partnership agreement to provide for a working partner to be paid a fixed amount as a priority distribution before profits are divided, or for the split itself to reflect the difference in effort. The two approaches produce different outcomes. A priority distribution pays the working partner first and leaves the agreed percentage applying to whatever is left, while a bigger percentage share pays them more in good years and less in bad, because it applies to the same pool of profit as everyone else's share.

Whichever way you go, put it in writing. A partner's entitlement to be paid for their work is exactly the kind of term the default rules in the Act do not cover, and it is a frequent source of dispute between partners who assumed the arrangement was obvious.

Control, voting and the link to percentage

The percentage also tends to shape control, though it does not have to. Under the default rule in s 24 of the Partnership Act 1892 (NSW), differences over ordinary matters connected with the business are decided by a majority of partners, while a change to the nature of the business requires the consent of all partners. Nothing in that default ties voting weight to percentage. Two partners on a 70/30 split still have one vote each on ordinary matters, unless the agreement says otherwise.

The agreement can align voting with percentage, give each partner one equal vote regardless of share, or reserve particular decisions such as borrowing, hiring or selling assets to a specified partner or to unanimous consent. The choice is a real one:

• Percentage-weighted voting: the partner with the larger share controls more decisions, which concentrates power in the same hands as the money.
• Equal voting with a weighted split: ownership and profit follow the percentage, but neither partner can be outvoted on ordinary matters by the other's larger share.

There is no right answer, but there is a consistency question worth asking. If the larger-share partner expects to control the business because of their percentage, the agreement should say so. If control is meant to be shared, the agreement should say that instead, because the default rule gives equal say only in the limited sense that each partner votes, and majority decides.

What happens when partners join or leave

The split you set today has a shelf life. Under s 24 of the Partnership Act 1892 (NSW), no person may be introduced as a partner without the consent of all existing partners, which protects the existing split from being diluted behind anyone's back. But consent alone does not decide the terms on which a new partner comes in, and nothing in the Act fixes what a departing partner's share is worth or whether they must sell it.

Three future events deserve attention in the negotiation:

• A new partner joins: do the founders' percentages reduce proportionately, or is a new partner's share carved out of a specific partner's holding? The agreement should state how the percentages are recalculated.
• A partner wants out: whether the remaining partners have a right to buy the departing partner's share, and how it is valued, determines whether the split you agreed on is worth anything in practice. A fixed percentage of a business no one can buy is not much of an asset.
• A partner dies or becomes incapacitated: the default position is that the partnership dissolves on a partner's death, which may be the last thing the surviving partners want. A provision keeping the business running and dealing with the deceased partner's share avoids that outcome.

None of these need to be settled today in final form, but the percentage discussion is the moment to decide the principles, so the agreement can be drafted around them.

Tax follows the agreed split

The percentage in the agreement does more than divide the money. A partnership itself is not taxed as a separate entity, and each partner is assessed on their share of the partnership's net income for the year, whether or not that share is actually drawn out of the business. The ratio in the agreement is what the Australian Taxation Office works from, so the split you negotiate becomes the split that determines each partner's personal tax liability.

That makes the percentage decision one to take with tax in mind, not just fairness in mind. A partner on a small percentage of a profitable partnership can still owe tax on a meaningful share of its income if the business is profitable and the drawings stay in the business. Because the interaction between profit share, drawings and personal tax position is specific to each partnership's numbers, this is the point where a tax adviser's input, before the agreement is signed, is usually worth more than fixing the problem after a tax bill arrives.

How an Artificer Legal practitioner helps you settle the split

The percentage conversation is a negotiation, but it is also a drafting exercise, and the two should happen together. An Artificer Legal practitioner can help you stress-test the assumptions behind the proposed split: whether the contribution that justified a 60/40 division is valued realistically, whether the working partner's time is properly recognised, and whether the split still makes sense if the business is loss-making in its first year, when the loss-sharing consequences of the same percentage apply.

We can also model the downside. The split that feels fair when the business is growing can look very different when one partner stops contributing, when a new partner is needed, or when the partnership dissolves and the assets are divided. Working through those scenarios before signing is cheaper than litigating them after.

Finally, we draft the documents the decision needs: a partnership agreement that records the percentage, the profit and loss sharing rules, the treatment of capital and drawings, the voting arrangements and the exit and buy-out terms. Where the partners want to vary the statutory defaults, we make sure the variation is expressed clearly enough to displace them. The mutual rights and duties of partners can be varied by the consent of all of them under s 19 of the Partnership Act 1892 (NSW), but consent that is only spoken about, or only inferred from how the partners deal with each other, is a poor foundation for a percentage split. Written terms are the foundation that survives.

The split you do not document is an equal split

If there is one thing to remember from this article, it is that the percentage is whatever you agree and record, and if you record nothing, the law supplies an equal split. The negotiation factors are judgement calls that no lawyer or formula can make for you. What a lawyer can do is make sure the agreed split is actually the split that operates, in profit, in loss, in control and in tax, for the life of the partnership.

The practical path is straightforward. Start from the equal default, test the proposed split against the contributions each partner makes, the time each will give, the control each expects and the way the partnership will change over time, then have the resulting percentage documented in a partnership agreement before the business trades. Getting the split on paper early, while the relationship is good, is the difference between a percentage that runs the business and a percentage that is argued about when the business ends.