General information, not legal adviceThis page describes what official sources say a partnership agreement can cover. It can’t tell you what yours should say. business.gov.au’s partnership page is the place to check, and it suggests having a lawyer review the agreement.
If there’s nothing in writing
A partnership can exist without a written agreement. The ATO says a written one isn’t required, but it can help prevent misunderstandings and disputes about what each partner brings, set out how income and losses are shared (equally or not), and set out how the business is to be managed.
The default matters. In the ATO’s words: “If there is no written agreement, income and losses are equally distributed between partners.” If two partners mean to share in some other proportion, the agreement is where that gets said.
The cutting list
business.gov.au lists nine things to include. Here they are in its order, with the questions it asks under each. Think of them as the parts you cut before anything is glued.
Business and partner details
Who the partners are, the date the partnership starts and the purpose of the business.
Ownership and contributions
How much each partner will contribute, and what percentage of the business each partner owns.
Profit and loss sharing
How profit and losses are split, and whether the split follows each partner’s ownership share. The tax guide works one split through three years.
Roles and responsibilities
What each partner does in the business.
Intellectual property
Who owns any IP a partner brings in, and who owns IP created during the partnership.
Making decisions
Who can make decisions, how joint decisions are made, and whether major decisions need everyone to agree.
Dispute resolution
The process to follow if partners have a major disagreement, and what happens if that process fails.
Adding or removing partners
How a new partner can be admitted, and what follows if a partner dies or leaves the business.
Ending the partnership
The timing and method for winding the partnership up, and how leftover assets are divided. business.gov.au has a separate page on dissolving a partnership.
Two clauses the tax rules reach into
The profit split
The partnership itself doesn’t pay income tax. Instead, each partner puts their part of the partnership’s net income or loss into their own tax return, and any tax due on it is their personal liability. So the split you write down decides more than who gets paid: it decides whose return each dollar lands in.
A “salary” for a working partner
Partners sometimes agree that one of them, perhaps the one who runs the business day to day, draws a fixed amount before the rest of the profit is divided. The ATO’s ruling on these arrangements, TR 2005/7, says a “partnership salary” is not truly a salary or an expense of the partnership, but a distribution of partnership profits to the partner who receives it. It can’t be deducted, and it can’t create or increase a partnership loss.
Timing matters too. The ruling says an agreement to vary the partners’ interests this way must be entered into before the end of the income year for it to be effective for tax in that year. A clause written after the year is over is too late for that year.
When one partner only invests
Not every partner has to run the business. In business.gov.au’s description, a limited partnership needs a minimum of one general partner and one limited partner. The general partners run the business, and their liability for its debts has no limit. The limited partners are passive investors who don’t run the business day to day, and the most they can lose is what they contributed. A limited partnership must be registered with your state or territory government.
In a general partnership, the most common type, all partners are responsible for managing the business and each has unlimited liability for the partnership’s debts and obligations. That is the reason the clauses on decisions and on adding partners carry so much weight: a decision one partner makes can reach every partner’s own assets.
Ideas and inventions
If the partners are working on something new, the intellectual property clause deserves more than a line. business.gov.au points businesses that collaborate on research to IP Australia, which offers a checklist of key issues and templates for a contract, a confidentiality agreement and a term sheet.
Keeping it true
An agreement is only useful while it matches how the business actually runs. When roles change, when a partner puts in more money, or when the split changes, the agreement is the place to record it. And if the change is a new partnership salary, the ATO ruling above says it must be agreed before the end of the income year it is meant to apply to.