Partnership agreements

What is a partnership agreement?

A partnership agreement (or partnership contract) is a legal document that sets out the business relationship between two or more people who manage and operate a business together.

What matters are the arrangements, not the business sector

A partnership agreement is all about the structure and management of a business.

It does not matter what industry the partners involved in the business work in. They could be professionals, like accountants or architects, or retailers or builders.

Furthermore, your business as partners could be a single specific project, such as a technology development project, and does not necessarily have to be commercial in nature.

Partnerships are quite distinct from companies in many areas, so the issues you need to cover in your agreement can be quite different to those that owners of a company might consider.

Common issues with informal business partnerships

Every state or territory in Australia has a different partnership act. All of them were written a log time ago - for example, 1892 in New South Wales and 1958 in Victoria.

Each sets out the default positions of how a partnership works. In other words, if you don't have a written partnership agreement, or you have an informal partnership agreement then your state's act controls how your business works.

For any modern business, these default provisions are unlikely to be what you want. How businesses are managed has moved on since the law was written.

In particular, you are likely neither to want equal ownership and liability with other partners involved, nor the default method for ending the partnership.

Unless your agreement states otherwise, partners have equal rights to take on contracts and equal responsibility to fulfil them. Profits and losses are also shared equally.

Commonly in partnerships, disagreements occur over contributions to the business and how profit and assets should be divided. In the real world, partners do not contribute equally.

The solution is to use a written partnership agreement

You should use a comprehensive written agreement to override these default positions. Your business partnership agreement should set out how skills, initial funding, different working hours and assets such as customer contact lists are valued, because different people place very different values on them. If you work for six days a week but your partner only works for two, you will want to make sure you are rewarded for your additional effort.

By default, liability is joint and equal. Without a partnership agreement stating otherwise, a partner could make a contract in the course of business that carries high risk. If that contract goes wrong, he or she, and every other partner is liable for the whole partnership debt equally.

A partner in a business that isn’t regulated by a partnership agreement can find himself or herself in a position of personal bankruptcy as a result of a bad decision made by someone else, and about which the partner wasn’t made aware.

The other default position of the partnership acts to avoid relates the ending of the partnership – the dissolution. The acts provide only one way to handle a partnership split or break. That is to put everything under the hammer at auction, leaving the partners to buy or not, as they choose. In our regulated society and business environment, that outdated provision can cause huge problems. The only way to avoid it is to have a modern partnership agreement which provides a proper exit route.

However, there is far more to a Net Lawman partnership agreement than just overriding these defaults. Each template provides a large framework with many options, and extensive notes that guide you carefully through, paragraph by paragraph.

Why a short agreement is unlikely to be suitable for you

Other partnership agreements on the Internet, particularly ‘short’ versions, might cover the basics to form a partnership, but they aren’t likely to protect your interest in your new business sufficiently. Far more issues are considered in our documents than in any other business partnership agreement template we have seen.

For example, the Net Lawman partnership agreement templates provide a set of easy to edit paragraphs covering intellectual property protection in depth.

Most businesses have valuable IP, whether know-how or designs, but few partnership agreement templates address intellectual property, whether recognising who brings it into partnership, or who has the right to use it during and once the partnership ends. We help you to identify and protect ownership of valuable intellectual property and other assets that belong to just one partner.

What should a partnership agreement cover?

The short answer is that a business partnership agreement should cover everything of importance.

The partnership agreement sets out the  that relate to operating the business partnership such as, amongst others,

The point of having a partnership agreement is that you will have a detailed document that governs every aspect of management and operation of the business partnership. So for a partnership agreement to do its job, it must be a comprehensive document.

A partnership agreement is likely to include:

• the identity of the partners
• the initial capital contributions made by each, and their corresponding share of profits (and losses)
• that each partner's capital account is to be kept separate to those of the others
• the process as to how new partners are taken in
• how assets and capital brought into the business partnership (specifically property and cash) are owned
• how a partner can be removed (for example, if they are involved in a malicious or criminal act or commit a material breach of the partnership agreement or of their fiduciary duties) and the process for doing so (for example, through a written notice)
• how decisions concerning the business partnership will be made (a proper procedure for authority and voting)
• how further capital contributions will be made
• how dissolution of the partnership will occur
• procedures when a partner dies - how a partner's interest is bought or transferred

Using a partnership agreement for your family business

The importance of having a written partnership agreement is not diminished if a husband or wife or family members are running a business together.

Because the default law still applies regardless of a family or marital relationship between partners, informal partnerships can result in serious problems for family businesses.

For example, in the absence of a partnership agreement, the business is owned equally by the partners. This may not be the arrangement you would prefer to have if divorce is possible, or if not all family members should have an equal say.

So while a family business partnership agreement does not have to be as formal as a general partnership agreement where the all the partners not personally known to you, you should still have one.

Who should use these agreements

The specific purpose of a partnership agreement is to set out the arrangements between the parties about how they will work in business together, in much the same way as a shareholders’ agreement does for a company.

So these templates have a wide range of uses.

• They are ideal for partnerships with between two and ten partners.
• The basis on which decisions are made can be as you like, and different for different types of decisions.
• Ownership of partnership assets and share of income and expenses does not have to be in equal proportions. Your profit and loss sharing ratio could be 50:50, but it could also be 60:40, 70:30 or any other.
• These agreements can be used if one or more of the partners is 'sleeping' or 'silent', i.e. contributes money, experience or assets but does not take part in the day to day running of the business.
• Whilst partners are likely to be human individuals, these agreements can be used where one or more is a company or a not-for-profit organisation.

What these partnership agreement templates contain

You need a partnership agreement to record all the points agreed about what exactly is the partnership business; how you will manage it; who may take out what money, and much more.

These are professionally drawn; comprehensive documents designed to protect and help you. As well as giving you a legal structure, they contain extensive commercial and practical provisions that will help you manage your business and inter-partner relationships.

Despite the completeness and thoroughness of these documents, editing is easy. They are written in plain English, without legal jargon or complicated paragraph referencing so that you can simply and easily delete what you don't need.

Just a few of the provisions covered include:

• loans to the partnership
• banking arrangements
• records and accounts
• meetings and voting
• holidays and absence
• cars
• insurance
• good faith
• partnership policies
• restrictions on partners
• maintenance of the partnership books and records
• intellectual property
• confidentiality
• no competition
• expulsion
• termination of the partnership
• after termination
• indemnity for the partnership
• publicity and announcements

Limited Partnerships

Just as the liability of shareholders of private limited liability companies can be limited if things go wrong, so can partnerships.

As the name implies, a limited partnership (sometimes called a limited liability partnership) is one where the liability of one or more partners for the debts and obligations of the business is capped.

It is used most commonly for high-risk ventures in property, finance, mining or research, or for ventures abroad, where there may be political risk.

A limited partnership must comprise of one or more general partners (abbreviated to GP) and one or more limited partners (abbreviated to LP).

The GP or GPs conduct business on a day to day basis. Their liability for the debts and obligations of the business is unlimited. They have the power to enter into binding agreements on behalf of the business.

A general partner may be a limited company with little or no assets, so preserving the assets of each of the other partners.

An limited partner can only be a passive investor in the business venture. As long as they are, their liability is capped to the capital contributions they have made to the business.

Often, all limited partners are also companies.

To form a limited partnership, the business needs to meet certain criteria and then be registered. Registration confirms each LP's investment and liability.

Net Lawman provides a limited partnership agreement template if you want to set up this type of business structure.