A Partnership Agreement is a written contract between two or more individuals or entities who agree to carry on a business together with a view to profit, sharing ownership of the business and its assets. In Australia, a partnership is one of the most common business structures alongside sole traders and companies. It is a flexible, cost-effective structure that does not require registration with the Australian Securities and Investments Commission (ASIC), although the partnership may need to register a business name and obtain an Australian Business Number (ABN).

Each state and territory in Australia has its own Partnership Act that governs the legal relationship between partners in the absence of a written agreement. These statutes are based on the English Partnership Act 1890 and contain default rules about profit sharing, management authority, partner liability, and dissolution. While a partnership can exist without a written agreement, the default rules of the Partnership Acts are often unsuitable for the specific needs of most businesses.

A Partnership Agreement allows the partners to modify, exclude, or supplement the default rules of the applicable Partnership Act and to create a tailored framework for their specific commercial arrangement. It addresses all of the key aspects of the partnership relationship: how much each partner contributes in capital; how profits and losses are divided; who manages the business and what decisions require all partners to agree; how the partnership bank account is operated; what happens when a partner wants to leave; how new partners are admitted; and how the partnership can be dissolved.

Because partners in a general partnership have unlimited personal liability for all debts and obligations of the partnership, a carefully drafted Partnership Agreement is particularly important for managing the relationship between partners and reducing the risk of disputes that could expose the partners to personal financial liability.

A Partnership Agreement is needed whenever two or more people or entities agree to carry on a business together and share its profits and losses. It is most important in the following circumstances.

New business formation: When founding partners are starting a new business together, a Partnership Agreement established from the outset sets clear expectations about each partner's role, contribution, and entitlements, reducing the risk of disputes in the future.

Professional practices: Many professional practices — including accountants, lawyers, medical practitioners, architects, and engineers — operate as partnerships. In these settings, a Partnership Agreement is essential for managing the complex arrangements that arise between professional partners, including the allocation of client relationships, the treatment of goodwill, and succession planning.

Family businesses: Family partnerships benefit from a written agreement that addresses how profits will be shared between family members, what happens if a family member wants to exit the business, and how disputes between family members will be managed.

Joint ventures: When two businesses agree to collaborate on a specific project or opportunity without forming a new company, they may operate as a partnership. A Partnership Agreement defines the scope of the joint venture, the contribution of each party, and how profits will be shared.

Changes to existing partnerships: When an existing partnership admits a new partner, changes its profit-sharing arrangements, or wants to update its governance arrangements, a new or amended Partnership Agreement should be executed to reflect the changes.

Tax planning: Partnerships are commonly used in Australia as tax planning vehicles because they are flow-through entities for income tax purposes. A Partnership Agreement that clearly defines profit-sharing ratios is important for ensuring that income is properly allocated between partners in their individual tax returns.

A comprehensive Australian Partnership Agreement should address the following key elements to be effective.

ABN and GST: Every Australian business partnership must have an ABN. The agreement should record the ABN and address the partnership's GST registration status under the A New Tax System (Goods and Services Tax) Act 1999 (Cth). Partnerships with an annual GST turnover of AUD $75,000 or more must register for GST.

Capital contributions: The agreement must specify each partner's initial capital contribution to the partnership, whether in cash, property, or other assets. It should also address how additional capital contributions will be made if the business requires more funding, and whether interest is payable on capital balances.

Profit and loss sharing: The default rule under most Australian Partnership Acts is that profits and losses are shared equally regardless of capital contributions or time devoted to the business. A Partnership Agreement can override this to reflect the commercial arrangement between the partners, including different profit shares for different partners.

Management and authority: The agreement should clearly define each partner's role in managing the business and set limits on the financial authority each partner can exercise unilaterally. It should also specify which decisions require the unanimous consent of all partners.

Admission and retirement of partners: The agreement should set out the conditions under which new partners can be admitted and the process by which an existing partner can retire or withdraw. This is particularly important because the Partnership Acts in most states dissolve a partnership on the retirement of a partner unless the agreement provides otherwise.

Dissolution: The agreement should specify the circumstances in which the partnership can be dissolved and the procedure for winding up the partnership's affairs. The winding-up procedure should reflect the order of priority for distributing partnership assets — first to creditors, then to partners.

Governing law: Since each state has its own Partnership Act, the agreement must specify the state whose law governs the partnership, ensuring clarity about the applicable default rules.