Legal comment by Mark Illidge of Hinterland Lawyers

April 2005

A partnership is a legal relationship between persons carrying on a business in common with a view to profit.  Partnerships are not recognised as a single legal entity and therefore it is the individual partners who will jointly and individually take responsibility for the actions and liabilities of a partnership. They can be entered into between natural persons or between legal entities such as companies or trusts.

The terms of the partners' relationship are set out in a Partnership Agreement.  This agreement can be oral or written. Obviously, it is preferable to have a written agreement to ensure that the terms are properly understood, have been clearly set out, and can be enforced. 

It is not uncommon for me to hear a client say that they trust their partners and there is therefore no need for a written agreement but unfortunately experience shows that mutual trust can break down particularly when parties are uncertain as to the terms of the original oral agreement.

Where the parties do not have a written agreement and are in dispute there is antiquated legislation which provides rules which govern the partnership. The rules prescribed by this act are not comprehensive and really only provide a basic level of protection.

The greatest concern with a partnership is that one partner has the ability to legally bind their partner without their partners consent. One means of minimising the potential risks associated with this is to create two new separate legal entities, such as companies, to hold each of the partners interests in the business.  If their respective interests are the only assets held by the entities, then the partners other assets can be protected.

If you are considering going into business utilising a partnership it may serve you well to have a well-drafted Partnership Agreement.

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