When two or more people start a business together, they often say they are “partners.”
But in legal terms, a partnership is a distinct structure – and many business owners asking for a partnership agreement actually need a shareholders agreement or joint venture agreement instead.
This article, by our partnership agreement lawyers, explains what a Partnership Agreement is, when it applies, and how to tell if it’s the right contract for your business.
Key Takeaways
A Partnership Agreement is a legally binding contract between individuals carrying on business together as partners under a partnership structure.
It is not typically suitable for businesses operating through a company – those businesses need a Shareholders Agreement.
A written agreement helps prevent disputes by clearly defining each partner’s rights, obligations, and profit-sharing arrangements.
If you are unsure which structure applies, seek advice from a partnership agreement lawyer or commercial contract lawyer.
What is a Partnership Agreement?
A Partnership Agreement is a legal document that governs the relationship between two or more people or entities conducting business together as a partnership (not a company).
It sets out how profits and losses are shared, how decisions are made, and what happens if a partner leaves the business.
Usually, under a partnership structure, the business is not a separate legal entity – meaning each partner can be personally liable for the debts and obligations of the business. This is one of the most important differences between a partnership and a company.
To understand the responsibilities of company leadership, you may also wish to read our article on General Duties as a Director.
When Should You Use a Partnership Agreement?
You should use a Partnership Agreement when:
Two or more individuals are operating a business together that is not registered as a company.
You want clear rules about profit sharing, decision-making, and dispute resolution.
You are working with trusted partners but still want to protect your legal and financial interests.
Legal Tip: If your business operates through a company, you most likely need a Shareholders Agreement. If you are collaborating on a one-off project, a Joint Venture Agreement may be more appropriate.
If you’re launching a new business and need ongoing legal support, our article A Startup Lawyer Can Help Your New Startup explains how legal guidance can add value from day one.
Why a Partnership Agreement Matters
Even if you don’t have a written agreement, your partnership will still be subject to the Partnership Act in your state or territory. However, those default laws may not reflect how you want to run your business.
A well-drafted partnership agreement in Australia provides certainty and helps avoid common problems such as:
Disputes about how profits or losses are divided.
A partner incurring debts without the others’ consent.
No clear process for admitting new partners or dealing with an exit.
By setting out clear rules, you can minimise conflict and protect the future of your business.
Key Clauses in a Partnership Agreement
A well-drafted Partnership Agreement should include the following key clauses to clearly define each partner’s rights, responsibilities, and obligations:
1. Partnership Details: Identifies each partner, the business name, and the partnership’s purpose.
2. Capital Contributions: Specifies what each partner contributes – whether that’s money, property, or services.
3. Profit and Loss Distribution: Outlines how profits and losses will be allocated among partners.
4. Management and Decision-Making: Describes voting rights, management duties, and how business decisions are made.
5. Partner Responsibilities: Clarifies authority to enter contracts and sets limits on spending or borrowing.
6. Dispute Resolution: Provides a process (e.g. mediation or arbitration) for resolving disagreements.
7. Exit and Dissolution: Covers retirement, death, sale of interest, or winding up the partnership.
8. Confidentiality and Restraint of Trade: Protects business information and prevents partners from competing after leaving.
Common Misunderstandings: Partnership vs Shareholders Agreement
At Prosper Law, we often receive enquiries from business owners requesting a partnership agreement, when in fact, their business operates through a company.
If your business is registered with ASIC as a company, you don’t have partners – you have shareholders. The correct document in that case is more likely to be a Shareholders Agreement, which governs ownership, voting rights, and share transfers.
If you’re not sure which agreement is right for you, our commercial contract and M&A lawyers can advise you on the best legal structure for your situation.
Real-Life Examples
When a Partnership Agreement Is More Suitable
Consider two consultants, Emma and Jack, who decide to start a marketing business together. They don’t plan to register a company – instead, they agree to operate under a business name and split the profits evenly.
Because Emma and Jack are carrying on business together as individuals, they have formed a partnership, not a company. This means they share profits, losses, and liabilities personally.
In their case, a Partnership Agreement is the right choice. It sets out:
How each partner contributes to the business (money, skills, or clients)
How decisions are made and profits divided
What happens if one partner wants to leave or new partners are added
If Emma and Jack had instead registered a company in the first instance, they would need likely need a Shareholders Agreement, not a Partnership Agreement.
When a Shareholders Agreement Is More Suitable
Now imagine two other business owners, Priya and Tom, who decide to launch a tech start-up. They register a proprietary limited company (Pty Ltd) with ASIC, each holding 50% of the company’s shares.
Although Priya and Tom refer to each other as “partners,” they are not in a partnership, they are shareholders in a company. The business itself is a separate legal entity, meaning their personal assets are generally protected from the company’s liabilities.
In this case, a Shareholders Agreement is the appropriate document. It sets out:
How shares can be issued, transferred, or sold
Each shareholder’s voting rights and decision-making powers
How dividends are distributed
Procedures for resolving disputes or a shareholder exit
While a Partnership Agreement governs the relationship between individuals in a non-corporate business, a Shareholders Agreement governs the relationship between owners of a company.
Frequently Asked Questions (FAQs)
What is the purpose of a Partnership Agreement?
A Partnership Agreement clearly outlines each partner’s rights and obligations, helping to prevent disputes about profits, responsibilities, and decision-making.
Is a Partnership Agreement legally binding in Australia?
Yes. When properly drafted and signed by all partners, it is a legally enforceable contract under Australian law.
Do I need a lawyer to draft a Partnership Agreement?
While you can draft one yourself, it’s highly recommended to engage a partnership agreement lawyer to ensure it reflects your intentions and complies with Australian partnership laws.
For businesses exploring equity-based incentive schemes rather than traditional ownership, see our guide on Understanding Phantom Share Option Plans for how these arrangements work.
What’s the difference between a Partnership Agreement and a Shareholders Agreement?
A Partnership Agreement applies to a partnership structure, while a Shareholders Agreement applies to a company. If your business is incorporated, you need a Shareholders Agreement instead.
Can I convert my partnership into a company later?
Yes. Many small partnerships later transition to company structures as they grow. When that happens, your Partnership Agreement should be replaced with a Shareholders Agreement.
