No Partnership Agreement? NZ Partnership Act Defaults Can Risk Your Business

Starting a business with a friend, spouse, family member, or trusted colleague can feel like the easiest way to grow quickly. You split the workload, combine skills, and (hopefully) share the rewards.

But here’s the tricky part: if you’re operating as a partnership and you don’t have a written partnership agreement in place, you’re not operating “without rules”.

You’re operating under the default rules in New Zealand’s partnership law (including the Partnership Act 1908). And those defaults can be a poor fit for how most small businesses actually run.

Note: this article provides general information only and isn’t legal advice. Partnerships can be fact-specific, so it’s worth getting advice for your situation.

Below, we’ll break down what the Partnership Act default rules can mean in practice, why they can create real risk for your business, and what you can do (now) to protect yourself and your co-owners.

What Counts As A Partnership In New Zealand?

A lot of business owners don’t “choose” a partnership structure - they simply start working together, sharing income, and building something. Legally, that can be enough.

In general terms, a partnership exists when two or more people carry on business together with a view to profit. That can happen even if:

• you never registered a formal entity
• you don’t have a written agreement
• you’re using a trading name
• only one person’s name is on the invoices or bank account

This is why it’s so important to understand the legal consequences early. If you’re unsure whether you’re in a partnership (or heading towards one), it’s worth getting clear on what a partnership is before issues pop up.

Once you’re in a partnership, the law can impose obligations and risks - even if your “deal” has only ever been verbal or assumed.

Why Not Having A Partnership Agreement Can Be Risky

When things are going well, it’s easy to assume you’ll “sort the paperwork later”. The problem is that later usually arrives when:

• someone wants to leave the business
• someone wants more money (or believes they deserve more)
• a new opportunity comes up and you disagree on what to do
• the business hits a rough patch and you need to cut costs
• you take on debt and the lender (or supplier) wants personal guarantees
• one partner makes a decision the other partner didn’t approve

Without a written partnership agreement, you may have no clear, enforceable process to manage these situations.

Instead, you may be pushed into the Partnership Act default rules - which can be surprisingly blunt, and often don’t reflect what you thought was “fair”.

Putting a tailored Partnership Agreement in place is one of the most practical ways to reduce the chance of a costly dispute and protect the business you’re building.

Key Partnership Act Default Rules You Might Not Expect

The Partnership Act contains default rules that apply where you haven’t agreed otherwise (usually in writing). The exact legal position can depend on your circumstances, but below are some of the most common defaults that catch small businesses off guard.

1) Profits (And Losses) Can Be Split Equally - Even If You Don’t Contribute Equally

A big misconception is: “I put in more money / work more hours, so I’ll automatically get more.” That’s not necessarily how the default rules operate.

Under the Partnership Act’s default position, partners generally share equally in:

• profits, and
• losses (including losses of capital)

So if you’re doing 80% of the work, or you invested the start-up funds, the default rules may still point to a 50/50 split unless you can show a different agreement existed.

In a proper partnership agreement, you can set clear rules on:

• profit share percentages
• whether profits are distributed or retained in the business
• how losses are funded
• whether extra capital contributions change ownership or are treated as a loan

2) Partners Aren’t Automatically Paid A “Salary”

Many partnerships operate like this: one partner does the day-to-day work and expects regular pay, while the other partner is more “behind the scenes”.

But legally, a partner is not automatically entitled to be paid for working in the business. In many partnerships, what people call a “wage” is actually just drawings from expected profits.

This can lead to major conflict if the business isn’t profitable yet, or if one partner believes the other has taken “too much”.

A partnership agreement can spell out:

• whether partners can take drawings
• limits on drawings
• whether there is a fixed remuneration component (and when it changes)
• what happens if cash flow is tight

3) Every Partner Can Bind The Business (And Create Liability)

One of the biggest risks in a partnership is that each partner can potentially act as an agent of the partnership.

That means one partner may be able to enter into contracts on behalf of the business - and the other partner(s) could still be on the hook.

In practice, the position can depend on whether the contract is within the usual scope of the partnership business, and whether the other party knew (or ought to have known) the partner lacked authority.

This is especially risky where one partner:

• signs a supplier agreement with tough repayment terms
• hires staff without authority
• commits to a lease or long-term service contract
• takes on debt or financing
• offers refunds, warranties, or “guarantees” to customers that the business can’t honour

It’s also why you should be careful about any security arrangements. If you’re granting security over business assets (or signing lender paperwork), a General Security Agreement can have serious implications for the partnership and the individuals behind it.

A well-drafted partnership agreement can set internal controls, such as:

• spending limits (eg one partner can approve up to $2,000)
• which decisions require joint approval
• who is authorised to sign contracts, and how
• approval processes for hiring, borrowing, and major purchases

4) Decision-Making Might Not Work How You Think

Many co-founders assume they can “just vote” if they disagree.

But partnerships can be tricky. Day-to-day matters are typically decided by majority, while changes to the nature of the business (and certain other fundamental decisions) generally require unanimous consent. In a two-person partnership, “majority” often means deadlock.

Deadlock can freeze a business at exactly the moment you need to act quickly - for example, when a key customer leaves, a landlord proposes a rent increase, or a competitor pops up.

A partnership agreement can include a practical deadlock process, like:

• a requirement to meet and negotiate in good faith
• mediation as a first step
• a casting vote mechanism (only in specific circumstances)
• a buy-sell clause (where one partner can offer to buy the other out at a set price mechanism)

5) The Partnership Can End Suddenly (And Not Always On Your Terms)

Another common surprise is how easily a partnership can be dissolved if there’s no agreed term or exit process.

Depending on the structure of the partnership and how it was formed, events that can trigger dissolution may include:

• one partner giving notice (in some “partnership at will” scenarios)
• death of a partner
• bankruptcy or insolvency of a partner
• a court order in serious dispute situations

In some cases, dissolution is the start of a “winding up” process rather than the business instantly stopping - and if you haven’t planned for it, the practical fallout can still be significant, including:

• bank accounts being frozen or disputed
• uncertainty about who “owns” customers and goodwill
• unfinished work and unpaid invoices
• disputes about business equipment, stock, or IP

And if a split does happen, it’s common to need a formal separation document to record the exit terms and reduce future disputes, such as a Deed of Settlement (particularly where there are disagreements about money, restraints, or who keeps what).

6) Partners Owe Each Other Duties (Including Good Faith And Disclosure)

Partnerships rely heavily on trust - and the law reflects that.

Partners generally owe duties to each other, which can include obligations around acting in good faith, accounting to the partnership for benefits, and being transparent about partnership matters.

These obligations can become a flashpoint if one partner starts:

• doing side deals
• using partnership property for personal gain
• poaching customers for a new venture
• withholding financial information

It can help to understand how these obligations overlap with broader principles like fiduciary duty, because breaches can lead to serious disputes and financial consequences.

What Should A Partnership Agreement Include?

A partnership agreement isn’t just a “nice to have” document. Think of it as your business’s operating rulebook - written while you’re on good terms, so you’ve got clarity when things get stressful.

The right partnership agreement will depend on your business and goals, but in most NZ small businesses, we commonly recommend covering the points below.

Ownership, Contributions, And Profit Share

• Who the partners are (and whether any trusts or companies are involved)
• Capital contributions (cash, assets, IP, equipment)
• Whether contributions are repayable loans or buy equity
• Profit and loss sharing ratios
• Whether partner drawings are allowed, and limits

Roles, Responsibilities, And Authority

• Who does what (operations, sales, finance, admin)
• Time commitments (especially if one partner is part-time)
• Decision-making powers and delegations
• Contract signing authority and spending limits

Banking, Accounting, And Records

• Bank account rules (who can authorise payments)
• Accounting software access and record-keeping
• Financial reporting cadence (monthly, quarterly)
• How tax obligations and accountant instructions are handled

Dispute Resolution And Deadlock

• How disagreements are escalated internally
• Mediation requirements before court action
• Deadlock “tie-break” options for 50/50 partnerships
• Buy-sell or forced sale mechanisms (in defined circumstances)

Exit Rules (The Part Everyone Avoids - But Needs)

This is usually the section that saves partnerships when things change.

• What happens if a partner wants to leave
• Valuation methods (how you calculate the buyout price)
• Payment terms (lump sum vs instalments)
• What happens in death, incapacity, bankruptcy, or serious misconduct
• Restraints (non-solicitation / non-compete) where appropriate

And if you do end up needing to split, having a clear agreement can make the process of ending a business partnership far more predictable (and far less expensive).

Changes To The Partnership Over Time

Most businesses evolve. You may want to bring in a new partner, change profit shares, or change decision-making as the business grows.

Your agreement should explain how changes can be made, and when you should document them formally - sometimes through a written amendment, and in some cases a Deed of Variation to avoid misunderstandings about what’s been updated.

Common Scenarios Where The Default Rules Cause Real Problems

To make this more concrete, here are a few situations we commonly see in small businesses.

Scenario 1: One Partner Invests More Money

You start 50/50. One partner funds fit-out, equipment, or marketing, expecting to “get it back later”. Without a written agreement, it can be unclear whether that money is:

• a loan to the partnership,
• an additional capital contribution changing the ownership position, or
• just an unrecoverable cost of doing business.

That uncertainty usually shows up during a breakup, when both partners remember the “deal” differently.

Scenario 2: One Partner Wants Out (But The Business Can’t Afford A Buyout)

Even successful businesses can be cash-flow tight. If a partner wants to leave and demands their “share”, the business might not have the cash to pay out immediately.

Without a clear mechanism (valuation and payment terms), your options may be limited - and you could be forced into a rushed sale or an ugly dispute.

Scenario 3: One Partner Takes On A Contract Without The Other Knowing

This is more common than most people think, especially in fast-moving service businesses. If your partner signs a contract or debt arrangement, the partnership (and potentially each partner personally) may be liable.

A partnership agreement can’t stop a third party from relying on apparent authority in every case, but it can:

• set clear internal rules (which can support a breach claim against the partner who went rogue)
• reduce the chance of “informal” sign-offs happening in the first place
• help you show lenders/suppliers that your business has governance processes

Scenario 4: You’re Growing And Want To Bring In A New Partner

Growth is great - but new partners change everything.

If you don’t have a partnership agreement, you may have no clear process for:

• how someone becomes a partner
• how much they pay (or what they contribute)
• how profits change
• what happens if they don’t work out

When the “new person” is a key hire you want to incentivise, it’s even more important to get the structure right before you promise anything.

Key Takeaways

• If you don’t have a written partnership agreement, your business may default to the Partnership Act rules - which can be a poor fit for modern small business arrangements.
• Default rules can mean equal profit sharing, unclear “salary” entitlements, and decision-making deadlocks, even where contributions are unequal.
• Each partner may be able to bind the partnership to contracts, creating real financial risk if authority and spending limits aren’t agreed upfront.
• Without an exit mechanism (valuation + buyout terms), a partner leaving can trigger major disruption, disputes, or even dissolution.
• A tailored partnership agreement can clearly set roles, profit shares, decision-making rules, dispute resolution, and exit pathways so you’re protected from day one.
• If your partnership circumstances change over time, it’s important to document updates properly to avoid confusion later.

If you’d like help putting a partnership agreement in place (or reviewing what you already have), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.