What Is a Partnership Agreement?
A Partnership Agreement is a written contract between two or more persons who agree to carry on a business together with a view of profit.
It sets out:
- Capital contributions by each partner
- Profit and loss sharing ratio
- Roles and responsibilities
- Management powers
- Dispute resolution process
- Exit and termination terms
Although a partnership can legally exist without a written agreement, having one protects the partners’ investments and reduces misunderstandings.
In Malaysia, partnerships are primarily governed by the Partnership Act 1961.
What Happens If There Is No Partnership Agreement?
If partners do not create their own agreement, the default rules under the Partnership Act 1961 will apply.
Under the Act:
- All partners contribute equally to capital
- Profits and losses are shared equally
- No partner is entitled to a salary
- No partner is entitled to interest on capital before profits are determined
- No change in the nature of business without consent of all partners
- Majority cannot expel a partner unless expressly agreed
- A partner who loans money to the partnership is entitled to 8% interest per annum
These default provisions may not reflect what the partners actually intended. That is why a written agreement is strongly recommended.
Registration of a Partnership in Malaysia
Partnerships in Malaysia must be registered with the Companies Commission of Malaysia (SSM) under the Registration of Businesses Act 1956.
To register, you must complete Form A with the following details:
- Business name
- Commencement date
- Principal place of business
- Branch address (if any)
- Information of all partners
- Nature of business
- Copy of Partnership Agreement (if available)
Unlike companies, partnerships are not separate legal entities from their partners.
Termination of a Partnership
A partnership may terminate due to:
- Bankruptcy of a partner
- Death of a partner
- Mutual agreement
- Completion of project (if formed for specific purpose)
- Court order
- Dissolution as provided in the agreement
Without a written agreement, dissolution rules under the Partnership Act will apply.
Taxation of Partnerships in Malaysia
A partnership is considered a pass-through entity for tax purposes.
This means:
- The partnership must file an income tax return
- The partnership itself does not pay income tax
- Profits are distributed to partners
- Each partner reports their share of income in their personal tax return
Partners are not employees, so:
- Form EA should NOT be issued
- The partnership must issue Form CP30 to partners
The Inland Revenue Board of Malaysia issued Public Ruling No. 7/2021 – Partnerships Taxation Part I on 29 December 2021 to clarify the determination of the existence of a partnership for income tax purposes.
It explains:
- Legal characteristics of a partnership
- Types of partners
- Partnership accounts
- Filing obligations
This ruling should be read together with Public Ruling No. 8/2021 (Computation and Allocation of Income).
Accounting and Audit Requirements
Unlike companies, partnerships:
- Are not required to appoint an auditor (unless contractually agreed)
- Do not need to file audited financial statements with SSM
Accounting is similar to sole proprietorships, except:
- Each partner has a separate capital account
- Each partner has a current account for drawings and profit share
Proper bookkeeping is essential to prevent disputes over profit allocation.
Penny Lim , Legal Consulting
Ms. Penny is responsible for identifying possible legal issues and implementing solutions in the areas of government regulation, customer protection, and fair employment. Legal Counsel. Ms. Penny can advise on legal issues such as government and business permits, review legal documents before signing them, and complete legal research as needed by the company
Need Assistance for Partnership Agreement?
Starting a business partnership without a written agreement is like building a house without a foundation. A properly drafted Partnership Agreement ensures clarity, protects investments, and prevents costly disputes.
Partnership Agreement in Malaysia: Complete Legal Guide for Business Owners