Olivia is the Head of Legal at Lawpath, where she helps Australian businesses navigate complex legal challenges with practical, commercially minded advice. She specialises in employment matters, contract drafting, pre-litigation strategy, dispute resolution, commercial law and startup compliance, and has supported clients across technology, healthcare, professional services and retail. Olivia is passionate about making legal services accessible, personable and effective for every client.
Starting a business with a friend in Australia means agreeing, in writing, who owns what, who makes which decisions and what happens if one of you wants out. The documents you need depend on your structure: a Partnership Agreement if you trade together as a partnership, or a Shareholders Agreement plus an IP assignment if you set up a company.
Here’s the awkward bit. Most friends skip the paperwork because asking for it feels like saying “I don’t trust you”. That’s backwards. The agreement is what lets you keep trusting each other when money gets tight, someone gets a job offer or you disagree about where the business is going.
- No agreement doesn’t mean no rules. If you and a friend run a business together for profit without a company, the law already treats you as partners, with equal profit shares and shared liability for debts.
- Your structure decides your documents. Partnerships need a Partnership Agreement. Companies need a Shareholders Agreement, and usually an IP assignment and vesting terms.
- A 50/50 split needs a tie-breaker. With two equal owners, every big decision needs both of you. Without a deadlock clause, one disagreement can freeze the business.
- Plan the exit on day one. Agree how shares are valued and bought back if a friend leaves, and give the company power to complete the transfer if they won’t sign.
- A Co-Founder Agreement is a starting point. Lawpath’s version is non-binding, so treat it as your term sheet and follow it with a binding agreement once you’ve set up your structure.
What legal documents do you need when starting a business with a friend?
You need one core ownership agreement that matches your structure, plus a couple of supporting documents. That’s it. Founders often assume they need a stack of contracts. What they actually need is the right one, filled in properly.
| Document | Use it when | What it sorts out |
|---|---|---|
| Co-Founder Agreement | You’re still testing the idea and haven’t set up a structure | Who’s doing what, rough equity split and early contributions. Non-binding, so it’s a starting point. |
| Partnership Agreement | You’re trading together as a partnership (no company) | Profit shares, capital, decision-making, what happens if a partner leaves or dies |
| Shareholders Agreement | You’ve registered a company and both own shares | Share transfers, leaver rules, deadlock, buyouts, restraints |
| Assignment of Intellectual Property | Either of you built anything (code, brand, designs, recipes) before the company existed | Moves ownership of that IP from you personally to the business |
| Share Vesting Agreement | Shares are already issued but you want them earned over time | Lets the company claw back unvested shares if someone leaves early |
The old version of this guide recommended an NDA between co-founders. In practice, you rarely need a standalone one. Confidentiality belongs as a clause inside your Shareholders or Partnership Agreement, so it sits alongside the restraint and exit terms it works with.
Partnership or company: which structure suits two friends?
Planning to grow, hire or bring in an investor one day? Set up a company. A partnership is cheaper and faster to start. It also leaves your house exposed to your mate’s decisions.
The partnership you didn’t know you’d formed
This is the one that catches people out. Under state partnership laws (for example, the Partnership Act 1892 (NSW)), a partnership exists whenever two or more people carry on a business in common with a view to profit. You don’t register it. You don’t sign anything. It just happens.
Once it exists, default rules fill the gaps. Partners share profits and capital equally, regardless of who put in more. Each partner can bind the business to contracts. And you’re both on the hook for the business’s debts, including ones your friend signed up for without asking you.
So if you and a friend have been “just testing the idea” by selling products or invoicing clients together, you may already be partners. Better to find that out now than when the first big bill arrives.
Why most friends with growth plans pick a company
Legally, a proprietary company is its own person. It signs contracts, owns IP and carries its own debts, which protects your personal assets in most situations. You can register a company with ASIC in a day.
The trade-off is compliance. You’ll have annual ASIC obligations, company tax returns and directors’ duties under the Corporations Act 2001 (Cth). And if you don’t adopt your own constitution or sign a Shareholders Agreement, the Act’s replaceable rules govern your company by default. Those rules say nothing about vesting, leaver terms or what happens when two equal shareholders disagree.
| Partnership | Company (Pty Ltd) | |
|---|---|---|
| Set-up | Happens automatically, no registration | Registered with ASIC |
| Personal liability | Each partner liable for the business’s debts | Limited, except for personal guarantees or director breaches |
| Default profit split | Equal, unless agreed otherwise | By shareholding |
| Bringing in an investor | Awkward, usually means restructuring | Issue new shares |
| Core document | Partnership Agreement | Shareholders Agreement |
What should a contract with a friend actually cover?
A good agreement answers the questions you’d rather not ask out loud. If you’re searching for a “starting a business with a friend contract”, these are the clauses that matter most.
Ownership and what each of you is putting in
Write down who owns what percentage, and why. Cash is easy to count. Time, skills and an existing customer list are not.
Where this goes wrong: friends split 50/50 because it feels fair on day one, even when one friend is going full-time and the other is keeping their day job. Six months later, the full-timer resents doing most of the work for half the business. Agree what each person is contributing, in hours and dollars, before you agree on the split.
Who decides what (and what happens when you can’t agree)
Split decisions into two buckets. Day-to-day calls that either of you can make alone, and big decisions (taking on debt, hiring, selling the business, issuing shares) that need both of you.
Then add a deadlock clause. With two equal owners, every big decision effectively needs unanimous approval. If you disagree, nothing moves. A deadlock clause sets out the next step: a cooling-off period, then mediation, then a binding decision by an independent expert or a buyout option.
Vesting, so equity is earned over time
Vesting means your shares are earned gradually instead of all at once. A common setup is four years, with a one-year cliff. Leave in month eight and you walk away with nothing. Leave in year three and you keep what’s vested.
When you’re starting a business with a friend, vesting protects whichever of you stays. Without vesting, a co-founder who leaves after three months can keep half the company forever. If your shares are already issued, a Share Vesting Agreement adds vesting conditions after the fact. Our guide to how share vesting works covers the mechanics.
Intellectual property
Anything one of you created before the company existed belongs to that person, not the business. The logo you designed, the code your friend wrote on weekends, the product formula. All of it.
Fix this with an Assignment of Intellectual Property from each founder to the company. It matters most if you ever want to sell, raise money, or stop your friend walking out with the thing that makes the business valuable.
Leaving: good leaver, bad leaver and valuation
Decide now what happens to a friend’s shares if they leave. Most agreements separate “good leavers” (illness, mutual agreement, leaving after a set period) from “bad leavers” (breaching the agreement, competing, misconduct). Good leavers usually get fair market value for their shares. Bad leavers often get much less.
Pick the valuation method up front. An independent valuer, or a formula you both sign off on now, beats arguing about what the business is worth when you’re no longer speaking.
One detail founders miss: give a director the power to sign a share transfer on behalf of a departing shareholder who refuses to sign. Without it, a buyout you’ve both agreed to on paper can stall indefinitely.
Restraints and confidentiality
Without a restraint clause, a friend who sells out can generally set up next door the following week. Add a reasonable restraint (limited by time, area and activity) plus a confidentiality clause covering clients, pricing and know-how. Courts won’t enforce restraints that go further than needed to protect the business, so keep them proportionate.
Disputes
Set out a staged process: talk first, then mediation, then arbitration or court. Name the specific mediation body in the agreement. If the clause just says “a mediator”, you can end up arguing about who the mediator should be, which defeats the point.
Where does a Co-Founder Agreement fit in?
A Co-Founder Agreement is the right first document when you’re starting a business with a friend and haven’t picked a structure yet. It gets your roles, rough equity split and early contributions on paper while the idea is still taking shape.
Know its limits, though. Lawpath’s Co-Founder Agreement is non-binding. Treat it like a term sheet. It records what you’ve agreed in principle, and it gives you a ready-made outline for the binding Partnership or Shareholders Agreement you sign once the business is real.
The conversations to have before you sign anything
Research by Harvard Business School professor Noam Wasserman, published in The Founder’s Dilemmas, found co-founder conflict behind around 65% of failures among high-potential startups. Teams of friends and family were among the most exposed, largely because they avoid hard conversations.
If you’re starting a business with a friend, have them early. Grab a coffee, block out an afternoon and work through these:
- How many hours a week will each of us put in, and for how long?
- Who’s quitting their job, and when? What if only one of us does?
- When do we start paying ourselves, and how much?
- What does success look like? A lifestyle business, or something we sell in five years?
- What happens if one of us wants out, gets sick, moves interstate or has a baby?
- Who has the final say on product, money and hiring?
- How will we raise a problem with each other before it turns into resentment?
If any answer surprises you, good. Better now than two years in.
What we see in Lawpath consultations
Our lawyers review co-founder and shareholder arrangements every week. A few patterns come up again and again.
Two equal owners, no agreement, and a messy exit. A consistent pattern is a 50/50 company with no Shareholders Agreement where one director decides to leave and expects to take a large share of the clients, staff or equipment with them. Without agreed exit terms, the only path forward is negotiation, often with lawyers on both sides. Clients are contestable, and employees can choose to follow the departing founder.
Resigning doesn’t wipe the slate clean. Founders often assume that once a friend resigns as a director, their obligations end. Directors’ duties stop applying to future conduct, but resignation doesn’t remove liability for breaches committed while they were a director. A friend who stays on only as a shareholder has no directors’ duties at all, and without a restraint clause they’re generally free to compete.
DIY agreements that create the deadlock they’re meant to prevent. We regularly see self-drafted Shareholders Agreements where big decisions need 75% approval between two equal shareholders. That makes every reserved matter unanimous with no tie-breaker. Another common gap: meeting rules that let one shareholder pass resolutions alone if the other doesn’t turn up to an adjourned meeting.
Half-finished vesting clauses. Vesting provisions get copied in without being completed (vesting periods left at zero, for example), or added to shares that were always meant to be held outright. Vesting only works if it’s deliberate. Decide whether you want it, then fill in every number.
IP that still belongs to a founder personally. Advisors frequently recommend an IP assignment from each founder to the company, especially where one friend built the product or brand before the business was set up. It’s a short document that saves a long argument.
Get a free legal document when you sign up to Lawpath
When should you bring in a startup lawyer?
Use templates for the standard parts and bring in a lawyer for anything unusual. That covers uneven contributions, sweat equity, a third founder joining later, or plans to raise money. A startup lawyer can review your draft and flag the gaps above before you sign, which costs far less than untangling a dispute later.
Lawpath makes this easy to do in one place. You can draft from 550+ legal document templates, register your company and get a fixed-fee quote from a lawyer to check it, without juggling five different providers.
Frequently asked questions about starting a business with a friend
Do I need a contract to start a business with a friend?
Legally, no. Practically, yes. Without a written agreement, default partnership or company rules decide how profits are split, who’s liable and what happens if one of you leaves. Those defaults rarely match what friends actually intended.
Is a verbal agreement with a friend legally binding?
It can be, but proving what you agreed is hard. Memories differ, especially once money is involved. A partnership can even form without any agreement at all. Put the key terms in writing and both sign it.
Should friends split a business 50/50?
Only if you’re contributing equally in time, money and risk, and you’ve agreed how to break a tie. A 50/50 split with no deadlock clause means one disagreement can stop the business. Vesting helps keep an equal split fair over time.
What happens if my friend wants to leave the business?
It depends on your agreement. A good one sets out whether the remaining owners can buy the shares, how they’re valued, and how payment works. Without one, you’ll need to negotiate from scratch, and they may be able to keep their shares indefinitely.
Is a Co-Founder Agreement legally binding?
Lawpath’s Co-Founder Agreement is designed to be non-binding. It records what you’ve agreed in principle while you’re getting started. Once you’ve chosen a structure, replace it with a binding Partnership Agreement or Shareholders Agreement.
Do co-founders need an NDA?
Usually not as a separate document. A confidentiality clause in your Shareholders or Partnership Agreement does the same job and links to your restraint and exit terms. A standalone NDA makes more sense with outsiders, like suppliers or potential investors.
Can my friend start a competing business if they leave?
Generally yes, unless your agreement includes a restraint. Former directors still owe duties for what they did while in the role, but a restraint clause is what limits future competition. Keep it reasonable in time and area, or a court may not enforce it.
Should two friends set up a partnership or a company?
A partnership suits a small, low-risk side business. A company suits anything you want to grow, hire for or raise money for, because it limits personal liability and makes ownership changes simpler. Most friends with real growth plans choose a company.
Starting a business with a friend: your next step
If you’ve already started trading without any of this in place, you’re not behind. Most friends start exactly this way. You’ve just reached the point where getting it on paper protects both the business and the friendship.
Pick a time this week, have the hard conversations from the list above, then put your answers into a binding agreement. If you’ve set up a company, that means one document. Start your Shareholders Agreement today.
