Business Partners need a Partnership Agreement!

Legal definition of a partnership

A partnership is a relationship between people or entities carrying on a business, with a common view of making a profit.

There are three different types of partnerships;

  • Normal partnership;
  • Limited partnership;
  • Incorporated limited partnership.

The focus of this piece is normal partnerships. The other partnerships mentioned are more complex.

Some may confuse partnerships with joint venture arrangements, but that is for another day.

Advantages and disadvantages of a partnership

There are many advantages of a partnership:

  • Sharing the same vision of success.
  • There are minimal reporting requirements.
  • The costs involved in setting up a partnership are generally cheaper than creating a company.
  • Sharing of skills, experience, equipment and financial resources.
  • Partners have equal responsibility in the management of the business and likewise share net profits equally.

However, some disadvantages of a partnership include:

  • A partnership has no independent legal status.
  • There is potential for conflict between business partners.
  • It takes more time to make business decisions because all partners need to be consulted first.
  • Partners are jointly and severally liable, which means that as well as having a shared liability for all the debts of the partnership, they are also individually personally liable for all debts incurred by or in the name of the partnership.

What is a Partnership Agreement?

A Partnership Agreement is a contract between the partners and outlines each partner’s duties and responsibilities, governs important matters that arise from the business, procedures for making business decisions and how to resolve disputes amongst partners.

Why do we need a Partnership Agreement?

There will always be potential for disputes between partners about the management of their business. A Partnership Agreement can address all issues involved in running a business and clarify the roles and responsibilities of all partners, including what is required of the partners when a dispute arises.

If you do not have a Partnership Agreement, your partnership business and its operation will be governed by the Partnership Act (WA) 1895 which may, or may not, satisfy your needs.

What is included in a Partnership Agreement?

A Partnership Agreement can be verbal or written. Clearly, a written Partnership Agreement is to be recommended, including as there can then be no doubt about the arrangements agreed to between the partners.

A comprehensive Partnership Agreement is vital for risk management and could save business partner’s time, money and stress. We also recommend that each partner seek independent legal advice regarding the terms of the Partnership Agreement.

There are many factors that need to be considered when a Partnership Agreement is being drafted. It is always best to ensure that your Partnership Agreement is tailored to your business needs. Here are a few factors that should be included in a Partnership Agreement:

  • How partnership decisions are to be made and what procedure should be followed if there are any disagreements.
  • Details of how funds for the business will be used; how much each partner will contribute to starting the business and how the partnership will acquire more funds for business operations/expansion.
  • Distribution of profits between partners. For example, if one partner does more work than another, will they be paid more? A Partnership Agreement can include a clause that allows one or more partners be paid a salary.
  • Procedures for a partner who wants to leave the partnership. For example, how much notice a partner needs to provide of their intention to leave, how outstanding debts will be paid, what rights, if any, will departing partners have if they want to start a similar business. These factors should be the first thing that is considered as at this point in time, partners are usually on good terms with each other and there are no business disputes. This allows for partners to be objective when discussing what will occur when one of them wants to leave the partnership. It is extremely important the plan put in place safeguards all the partners’ interests so that if and when a partner leaves, there is minimal financial burden on the remaining partners.
  • What will occur if a partner becomes incapacitated or dies. For example, this may include a right for the other partners to buy that partner’s share, and the mechanism used to value the share.

The above list is not exhaustive, and we recommend you speak to our lawyers who can ensure your Partnership Agreement is tailored to your business needs.


All businesses and relationships between partners of a business are unique, so to avoid disputes and complications, we strongly recommend you speak to a lawyer.

A Partnership Agreement helps business partners understand their duties, roles and obligations and reduces the potential for disputes between partners about the management of their business. A comprehensive Partnership Agreement is vital for reducing risks and could save businesses money and stress in the future.

If you or someone you know wants more information or needs help or advice, please contact us on (08) 9758 8073 or email [email protected].