A partnership agreement is an agreement between parties who have entered into a partnership. A partnership is generally defined as a relationship between two or more people carrying out, or intending to carry out, a profit-earning business or venture. The purpose of an established agreement between partners is essentially to build the framework of the partnership, including any rules or responsibilities, conditions and ultimately, how profit is to be distributed.
Why should my business partner and I draft a partnership agreement?
At the start of every new business venture it is important for partners to agree on the terms and conditions of their partnership in writing, especially on issues that they may not want to think about in the early stages.
For example, will you and your partner(s) contribute and profit equally, or will profit be distributed according to the percentage of contribution (e.g., 70/30, 60/40, etc.)? What will happen when you and your business partner disagree on something? What if one of the partners unexpectedly dies or becomes unable to participate in the partnership?
Although unpleasant and at first, seemingly unlikely, these are crucial aspects of a partnership that must be considered before your business or venture hits the ground running.
What is included in a partnership agreement?
Depending on the individual nature of the partnership or profit-earning venture at hand, standard partnership agreements may include (but are not limited to) any of the following aspects:
- How much ($) each partner will contribute and earn
- The duration of the partnership
- The rights and responsibilities of each partner
- Conditions to be satisfied
- What happens if a partner dies or retires during the partnership term
- How disputes will be handled
- What happens if a partner becomes bankrupt
There is no prescribed format for a partnership agreement. Such agreements can be as little as 5 pages long but have been known to exceed hundreds of pages. However, it is important to establish an agreement that covers all bases that may affect your partnership, as such relationships are notoriously unpredictable and are often subject to unforeseen circumstances down the line. For this reason, many people choose to consult an experienced professional to assist with tailoring an agreement unique to the nature of their partnership and business.
If you need help with drafting your own partnership agreement or require advice on partnerships, including any tax implications that may be associated, contact our team of tax accountants and tax lawyers at The Quinn Group on (02) 9223 9166 or submit an online enquiry form today.