A partnership agreement is an agreement between two or more parties who wish to enter into business together in the form of a partnership.
A partnership agreement is designed to document the relationship of the partners, much like a shareholders agreement documents the relationship of the shareholders of a company. It sets out the fundamental terms of the relationship between the partners who are in partnership. These terms may include:
Purpose of the Partnership Agreement
A partnership may be established in order to carry on a business, own an asset or for some other purpose. In each of these cases, the purpose of the partnership should be clearly documented.
Name of the Business Operated by the Partnership
If a partnership is established in order to carry on a business then the partners should agree on the partnership name under which the business will be carried on.
Rights, Responsibilities and Obligations of the Partners
A partnership agreement can be prescriptive and specify rights, responsibilities and obligations of the partners, restrict what they can and can’t do or require them to seek the consent of their other partners before making certain decisions. Although this is not required, such restrictions are generally designed to protect the partners and tailor the partnership agreement to their circumstances.
How Profits and Losses are to be Divided Among the Partners
Generally, profits and losses of a partnership are shared equally by the partners, unless they agree otherwise. It can often be difficult to determine whether a partnership has made a profit or loss for a financial year, or if this can be determined then the exact amount cannot be determined, until the partnership’s financial accounts have been finalised. It is therefore common for partners to receive partnership drawings throughout a financial year on account of their share of anticipated partnership profit for the financial year and then for an adjustment to be made after the end of the financial year when the partnership profit/loss has been determined.
How Long the Partnership is Intended to Operate
Generally, a partnership will continue for an unspecified period, but may be terminated by notice of either partner or on the occurrence of a specified event (e.g. death or bankruptcy of one of the partners).
Tax and Governing Law
A partnership is governed by any partnership agreement entered into by the partners and the relevant State legislation. Unlike a company, a partnership is not a separate legal entity, although it must have a tax file number (TFN) and Australian business number (ABN) and it must lodge a tax return. Each partner must pay tax on the proportion of partnership income that they receive in a financial year and the partners are jointly and severally liable for the debts and liabilities of the partnership. This is an important distinctions between a partnership and other types of business structures, most notably a company. In a company, the shareholders of the company are not personally liable for the debts and liabilities of the company, but the directors of the company may be if they have provided personal guarantees in relation to any contracts entered into by the company.
If partners do not enter into a partnership agreement then their partnership is governed by the relevant State legislation and case law developed by the courts.
A Partnership Agreement can be a complicated document. The LegalVision customised Partnership Agreement works well in less complicated situations. If are planning on putting together a more complex Partnership Agreement it might be a good idea to have your document reviewed and amended by one of the LegalVision network of lawyers.