A contract between partners in a partnership, which sets out the terms and conditions of the relationship between the partners is called a Partnership Agreement or a Deed of Partnership. A Partnership Agreement is a legally binding document on all partners (members) of a partnership. A Partnership Agreement is not mandatory to to set up a partnership, however, it is the best way to regulate how the business will work and to avoid disputes between the partners of the partnership.
It is very desirable for a partnership to have a Partnership Agreement. If the partnership doesn’t have the agreement, all contentious issues will be settled by The Partnership Act 1890, which is outdated and does not cover all problematic issues of the contemporary business.
A Partnership Agreement should include the following information and regulations:
- Basic information about the partnership such as its business name, business address, the names of its partners and the type of the business activities.
- The amount of capital invested by each partner.
- How to share profits and losses among partners
- Other financial issues such as salaries for partners.
- Description of management and working arrangements. How each partner of the partnership will contribute and how the decisions will be made.
- Structural changes to the partnership, such as how to appoint new partners or what happens if a partner goes out of business.