Entering into a business partnership is exciting – but without a properly drafted partnership agreement, it can quickly become risky. Because partners can legally bind each other, having a clear and enforceable agreement is absolutely critical.
In this guide, our M&A contracts solicitor outlines the five essential clauses every partnership agreement must include to protect your business, finances, and future.
For a deeper understanding of when a written agreement is needed (and whether you might need a shareholders agreement instead) check out What Is a Partnership Agreement?
Key Takeaways
A partnership agreement is legally essential because partners can bind each other to contracts and debts.
All financial and non-financial contributions must be clearly documented.
Defining roles, authority, and decision-making power prevents disputes.
Your agreement must clearly outline how profits, losses, and salaries are handled.
A strong exit strategy and buy-out clause protects everyone if a partner leaves.
Restraint of trade and non-compete clauses help safeguard your business after a partner exits.
1. Partner Contributions to the Business
Every partnership begins with contributions – but they are rarely equal. Some partners invest cash, while others contribute:
Equipment or property
Existing customers or goodwill
Industry contacts
Management, sales, or operational expertise
Your partnership agreement must clearly state:
What each partner is contributing
Whether contributions are monetary or non-monetary
The value of each contribution
Ongoing Contributions
Your agreement should also address:
Whether further contributions may be required
What happens if a partner cannot meet a funding request
Whether non-financial contributions can offset financial input
Admission of New Partners
A well-drafted agreement should specify:
Whether new partners can be admitted
What capital or expertise they must contribute
How their ownership percentage is calculated
2. Rights, Roles and Responsibilities of Each Partner
Unclear roles are one of the most common causes of partnership disputes. Your agreement must define:
Who controls daily operations
Who manages finances, staff, marketing, and compliance
Who has authority to sign contracts
Decision-Making Structure
Your partnership agreement should clearly state whether decisions are made by:
Majority vote
Unanimous agreement
A Managing General Partner
This prevents deadlocks and ensures smooth operations.
3. How Profits and Losses Are Shared
Money disputes destroy more partnerships than almost anything else. Your agreement must clearly explain:
How profits are calculated
When profits are distributed
Whether partners receive salaries, bonuses, or commissions
How drawings during the year are handled
Distribution of Losses
If your partnership suffers a loss, the agreement should state:
Whether losses are shared equally
Or based on ownership percentages
Whether passive investors are protected from operational losses
Planning a business purchase? Avoid common pitfalls by reading Common Mistakes in Business Acquisition (and How to Avoid Them).
4. How a Partner Can Exit the Business (Termination Clause)
Every partnership will eventually change – whether through retirement, disputes, illness, or new opportunities.
Your agreement must include:
Duration of Partnership
The agreement must specify how long the partnership agreement is to be in effect. It may specify that the agreement is for a fixed term or the duration of the partnership itself. But, the partners may also agree on a shorter period.
Exit Procedure
The agreement must provide a procedure to dissolve the partnership. For example, it may state the leaving partner to give other partners 30 days’ written notice of his intention to leave.
The agreement must specify when the partnership ends. It may end upon receipt of the notice or provide a specific date.
What the Exiting Partner Receives
The agreement should cover what is to be done with the business’s assets (if any). And it should talk about the obligations of each partner in such a case. The agreement should specify what a partner will receive – or not receive – if he no longer wants to be part of the business.
In most cases, the partner is entitled to his share of the value of the business, including the partnership’s assets and profits, less the partnership’s expenses and debts.
Buy-Sell (Buy-Out) Clause
The agreement should include a plan to buy out the partner’s share of the business. This means that the partner who wants to leave the business must offer his shares to the remaining partners.
The other partners have the option not to buy out the share. If all partners do so, the leaving partner can offer the share to a third party.
A proper buy-sell clause:
Requires exiting partners to offer their share internally first
Allows remaining partners the first right of refusal
Prevents unwanted third parties entering the partnership
5. Restraint of Trade & Non-Compete Clauses
When a partner leaves, the business must be protected from immediate competition.
A legally enforceable non-compete clause should define:
What activities are prohibited
The geographic area restricted
The duration of the restraint
Examples of Restricted Activities
Prohibited competitive activities can include, but are not limited to:
- Working for a competing business or person;
- Starting a business that provides the same services or products;
- Recruiting former colleagues to work with a non-solicitation agreement;
- Working in a specific geographic region in a specific industry;
- Conducting business in a particular market;
- Developing competing products;
- Serving as a manager or director of a competitor.
Reasonable Timeframes
In Australia, non-compete clauses must be reasonable to be enforceable. Most commonly, courts accept restraints of:
6 months
12 months
Up to 24 months in high-value partnerships
For insight into upcoming changes to Australian non-compete laws, read Australia to Ban Most Non-Competes by 2027.
Why a Proper Partnership Agreement Is Essential
Without a properly drafted partnership agreement:
Partners can unintentionally bind each other to debts
Profit disputes escalate quickly
Business exits become messy and expensive
Litigation becomes far more likely
A professionally drafted agreement protects your:
- income
- business assets
- reputation
- future opportunities
Need a Partnership Agreement Drafted or Reviewed?
If you’re starting a business with a partner (or need help fixing an existing agreement) speak with our experienced Australian business lawyers today.
Before you acquire or merge a business, make sure you follow the steps in How to Do Due Diligence for a Business Transaction – it’s your best safeguard against hidden risks.
Frequently Asked Questions
Is a partnership agreement legally required in Australia?
No, a partnership agreement is not legally mandatory, but operating without one is extremely risky. Without a written agreement, your partnership will be governed by default state legislation, which may not reflect your intentions and can expose you to serious financial risk.
Can a partnership agreement be changed later?
Yes. A partnership agreement can be amended at any time, but only if all partners agree in writing. Verbal changes are difficult to enforce and often lead to disputes.
What happens if there is no partnership agreement?
If no agreement exists, Australian partnership laws apply automatically. This usually means:
Profits and losses are split equally
All partners have equal authority
Any partner can dissolve the partnership at any time
This often leads to major legal and financial disputes.
Are non-compete clauses enforceable in Australian partnership agreements?
Yes – but only if they are reasonable in time, location, and scope. If a restraint is too broad or lasts too long, it may be unenforceable under Australian law.
Want a comprehensive legal overview of non-compete clauses today? Check out Non-Compete Clause Australia: A Legal Guide.
Should a lawyer draft a partnership agreement?
Absolutely. DIY templates often fail to protect profits, disputes, exits, and intellectual property properly. A business lawyer ensures:
- Your agreement is legally enforceable
- Legal risks are addressed
- Exit strategies are properly protected
- Disputes are minimised
