Partnership Agreement

PARTNERSHIPS

The following guide is intended as a basic overview and not a detailed treatment of the topic of partnership.

1. Overview

It is not necessary to have a written agreement for a partnership to come into existence. The existence of a partnership can be inferred from the facts or the conduct of its members.

2. Relevant law

The law of partnerships is contained in the common law and the various Partnership Acts in each state. The various Partnership Acts listed below are all relatively short and are designed to work together with the common law. The state acts are similar and they are mainly statutory consolidations of the common law and equitable rules. The content of the Acts should be read together with common law principles or equitable rules that have come into existence after the time the various Partnership Acts were passed.

The law of partnership, therefore, is not just what is contained in the Acts. Partnership law in its current form is an amalgamation of statute, common law and equity.

2.1 Business & Profit

Partnership is a relationship that exists between persons carrying on a business in common with a view to profit. The existence of a ‘business’ is an essential element of partnership. ‘Business’ includes a trade or profession.

An important feature of partnerships is that they are essentially contractual. The way in which a partnership business is operated, the rights and responsibilities of the partners and most of the other matters that affect a partnership’s operation can be agreed between the partners themselves. This is often done by way of deed or agreement, however it is not necessary to have a written agreement to have a partnership.

3. Legislation

Each state in Australia has legislation governing partnerships. The Acts are as follows:

• Partnership Act 1892(NSW)  
• Partnership Act 1963(ACT)
• Partnership Act 1958(VIC)
• Partnership Act 1891(QLD)  
• Partnership Act 1891(SA)  
• Partnership Act 1997(NT)  
• Partnership Act 1891(TAS)
• Partnership Act 1895(WA)

Partnerships in the partnership legislation are often referred to as a ‘firm’.

4. Creation of Partnerships

Partnerships can arise in several ways:

1. they can be entered into formally by deed;
   2.   they can be entered into more informally but still in writing;
   3.   they can be entered into as the result of an oral agreement;
   4.   they can be partly written and partly oral; or
   5.   they can be implied from the conduct of the parties.

A partnership is usually formed by agreement between its members. Because partnerships are essentially contracts, the law regarding their formation is much the same generally as it is for contracts. There is no requirement that the parties have a written agreement to evidence their intention to become a partnership but that is the better practice.

Under s 115 the Corporations Act 2001 (Cth), a person must not participate in the formation of a partnership that exceeds 20 members, unless it is incorporated. The regulations may specify a higher number than 20 members for a particular kind of partnership or association.

5. Characteristics of Partnerships

Partnerships are not legal entities separate from their members. All partners are liable for any act relating to the business of the partnership which is done in the firm’s name or in any other manner that shows an intention to bind the firm.

5.1 Liability of partners is unlimited

Liability of partners is unlimited, unless they form a limited liability partnership. Limited liability partnerships are beyond the scope of this guide.

5.2 Acts on behalf of the firm

Every partner is an agent of the firm and of the other partners for the purposes of the business of the partnership. This authority to act as an agent of the firm and of the other partners may be negated or qualified by agreement between the partners. However, such an agreement between the partners does not affect dealings with others where a partner acts with the apparent authority of the firm. Unless otherwise provided in a partnership agreement, every partner is entitled to take part in the management of a partnership’s affairs.

5.3 Dealings with third parties

Generally, the acts of every partner who is carrying on the usual business of the partnership bind the firm and their partners and an act done by any partner within the scope of their actual or implied authority renders the other partners liable to persons dealing with them as representing the firm.

Persons dealing with a partner in unusual circumstances are deemed to know that the partner is not conducting an ‘ordinary business transaction’ and therefore cannot bind their partners.

5.4 Remuneration for management

The active role in the partnership business may be carried on by a partner or by a manager who is an employee and not a partner.

In the absence of an express or implied agreement to the contrary, a partner is not entitled to remuneration for acting in the partnership business. Partners may agree that a partner who is actively engaged in the conduct of the partnership business be paid a retainer or be termed a ‘salaried partner’.

The expression ‘salaried partner’ generally means a person who is paid a fixed remuneration instead of an entitlement to participate in a distribution of partnership profits but who is held out by the partners to the world to be a partner and, as such, will be jointly and severally liable with the equity partners and the other salaried partners for the debts and liabilities of the partnership.  The partnership will be bound by the acts of the salaried partner.  An equity partner may also be paid a salary for performing managerial duties on behalf of the partnership in addition to their share of profit. In the precedent relating to legal practises the term ‘principal’ is used to denote this role.

5.5 (Stamp) Duty

Depending upon the nature and value of assets held by a partnership, capital gains tax, income tax and duty considerations may arise upon each admission, retirement or death of a partner.

Provisions in a partnership agreement amounting to a conveyance of or agreement to convey property, or a declaration of trust, will be likely to attract duty.

Care should be taken to ensure that partnership agreements or dissolution or accession deeds do not contain provisions amounting to an agreement to convey property or a declaration of trust except where and to the extent to which it is intended.

Clauses that suggest property, such as the premises from which a legal practice is operated, is held as a partnership asset and may create tax liabilities. If a group of partners propose acquire ownership of real estate as a partnership asset, each admission, death or retirement may have the effect of a deemed conveyance or transfer of property which would be liable to duty. The option of dealing with this issue by vesting the asset in an entity such as a trust or a company in may go some way to overcoming this issue but it will have its own duty, income tax and capital gains tax implications which must be carefully considered.

5.6 Assignment

A partner may assign their share in the partnership so that the assignee becomes entitled to the financial benefits attached to that share; however, unless the other members of the partnership agree, the assignee does not thereby become a partner with rights of participation in management.

5.7 Fiduciary Duty of Partners

The relationship of partnership gives rise to fiduciary obligations. A partner must act in the interests of the partnership and not in their own interests. If a partner is in breach of their fiduciary duties, that partner may be under a personal liability to account to the partnership for a sum corresponding to any money received in breach of those duties.

5.8 Termination of Partnership

A partnership may be terminated or ‘dissolved’ at any time by a partner. A partnership is automatically dissolved upon the death or bankruptcy of a partner.

5.8.1 Dissolution by notice

Subject to any agreement between the partners, a partnership may be dissolved by any partner giving notice to the other partners of their intention to dissolve the partnership. Notice of termination may be inferred from conduct.

A notice of dissolution must amount to an unambiguous communication of a final intention to dissolve the partnership. It must be given to all the partners unless the partnership agreement provides otherwise. In most jurisdictions notice of dissolution must be given in writing only where the partnership was originally created by deed, however written notice is always the better practice.

The partnership is dissolved from the date stated in the notice or, if no date is mentioned, from the date of service of the notice. Once a notice of dissolution has been served it may not be withdrawn without the consent of the partner receiving it.

5.8.2 Conclusion of fixed term or completion of venture

A partnership for a fixed term or for a single venture is dissolved by the expiration of the term or by the conclusion of the venture. A partnership for a fixed term may only be terminated prior to the expiration of the term by agreement between the partners.

5.8.3 Death

Subject to any agreement to the contrary between the partners, a partnership is dissolved by the death of any partner. The estate of a deceased partner is not liable for partnership debts contracted after the date of death.

5.8.4 Bankruptcy

A partnership is dissolved by the bankruptcy of any partner. This is subject to any agreement between the partners made prior to the relevant bankruptcy. The estate of the bankrupt ceases to be liable for any partnership debts incurred after the bankruptcy. Dissolution is effective from the date of the act of bankruptcy. An agreement that a partner’s interest in the partnership is to cease on bankruptcy may be held to be invalid as an attempt to evade bankruptcy laws.

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