Do You Need a Partnership Agreement in Ontario?

Many businesses start with two or more people working together toward a common goal.

At the beginning, there is often a shared understanding of how the business will operate.

Because of this, formal agreements are sometimes delayed or overlooked.

In practice, issues between partners often arise when expectations are not clearly defined.

A partnership agreement is designed to address this.

What Is a Partnership Agreement

A partnership agreement is a contract between two or more individuals who are operating a business together.

It sets out:

• how the business is run

• how profits and losses are shared

• roles and responsibilities of each partner

• what happens if circumstances change

It governs the relationship between the partners.

What Happens If You Don’t Have One

In Ontario, if there is no written partnership agreement, the relationship is governed by the Partnerships Act (Ontario).

This legislation provides default rules, which may not reflect what the partners actually intend.

For example:

• profits may be shared equally, regardless of contribution

• all partners may have equal decision-making authority

• there may be no clear exit mechanism

These default rules can create unintended outcomes.

When You Should Have a Partnership Agreement

A partnership agreement is important where:

• two or more people are operating a business together

• contributions differ between partners

• roles are not identical

• the business is expected to grow

It is most effective when put in place at the beginning.

Common Issues Between Business Partners

Without a partnership agreement, partners may face:

• disagreements over decision-making

• disputes over profit sharing

• confusion around roles and responsibilities

• challenges when one partner wants to leave

These issues can affect the business and the relationship.

Key Areas a Partnership Agreement Addresses

1. Profit and Loss Sharing

The agreement should define:

• how profits are distributed

• how losses are allocated

This may not always be equal.

2. Roles and Responsibilities

Partners should clearly understand:

• who is responsible for what

• level of involvement

• decision-making authority

3. Decision-Making

The agreement can set out:

• what decisions require unanimous approval

• what can be decided by majority

This helps avoid disputes.

4. Capital Contributions

The agreement may address:

• initial contributions

• future funding obligations

• ownership of assets

5. Exit and Dissolution

Partners should consider:

• what happens if someone wants to leave

• how the partnership can be dissolved

• how assets are distributed

Why Trust Alone Is Not Enough

Many partnerships begin with trust.

However:

• circumstances change

• business pressures increase

• expectations evolve

A written agreement helps ensure that the business can continue to operate effectively even when challenges arise.

Why This Matters for Business Owners

A partnership agreement helps:

• define expectations

• reduce the risk of disputes

• provide structure for decision-making

• support long-term stability

It is easier to address these issues at the beginning than after problems arise.

Speak With a Lawyer About Your Partnership Agreement

If you are starting a business with a partner or already operating without a partnership agreement, it may be time to review your structure.

If you want to put a partnership agreement in place, you can Book a Consultation to discuss your situation and next steps.