Partnership Agreement vs. Shareholders’ Agreement in Ontario: Which One Does Your Business Need?
Business owners frequently refer to one another as “partners.”
Two friends may start a company together and call each other business partners. Four individuals may each own 25 percent of a corporation but sign a document titled “Partnership Agreement.” A family business may operate informally for years without determining whether the owners are legally partners or shareholders.
Although the word partner is commonly used in conversation, a partnership and a corporation are different legal structures.
If the business is incorporated, the owners are generally shareholders and usually require a shareholders’ agreement. If the business is carried on as a partnership, the owners are partners and generally require a partnership agreement.
Using the wrong agreement can create uncertainty about ownership, decision-making, liability, compensation, exits, and what happens when one owner stops contributing to the business.
Before preparing an agreement, the owners should first confirm the legal structure through which the business operates.
The Main Difference
The difference between a partnership agreement and a shareholders’ agreement begins with the business structure.
A partnership agreement governs the relationship among partners who carry on business together through a partnership.
A shareholders’ agreement governs the relationship among shareholders who own shares of a corporation.
The question is not simply what the owners call themselves. The question is whether they are operating through a partnership or a corporation.
Ontario businesses that need assistance confirming or reorganizing their ownership structure can learn more about Delta Law’s corporate law services.
What Is a Partnership?
Ontario’s Partnerships Act defines a partnership as the relationship between persons carrying on a business in common with a view to profit.
A general partnership can arise when two or more people or entities conduct a business together for profit. A partnership may exist even if the parties never signed a written partnership agreement.
The existence of a partnership depends on the substance of the relationship, not only on whether the parties use the word partnership.
Factors that may indicate a partnership include:
carrying on a business together;
sharing profits;
jointly making business decisions;
contributing money, property, or services;
presenting themselves as business owners;
maintaining common business accounts;
sharing business expenses; and
acting on behalf of the business.
Not every collaboration creates a partnership. For example, co-ownership of an asset, sharing expenses, or receiving revenue from the same project does not necessarily create a legal partnership.
However, business owners should not assume that a partnership does not exist simply because they never registered one or signed a formal agreement.
What Is a Corporation?
A corporation is a separate legal entity from its shareholders.
The corporation can:
enter contracts;
own property;
employ workers;
engage contractors;
borrow money;
incur debts;
commence or defend legal proceedings; and
continue operating despite changes in ownership.
Shareholders own shares of the corporation. They do not directly own the corporation’s individual assets.
For example, if a corporation owns equipment, intellectual property, inventory, or a commercial lease, those assets belong to the corporation rather than personally to the shareholders.
The Canada Revenue Agency similarly describes a corporation as a legal entity that can enter contracts and own property separately from its owners.
A corporation also has directors and officers.
Subject to a valid unanimous shareholders’ agreement, the directors manage or supervise the management of an Ontario corporation’s business and affairs. Shareholders exercise rights attached to their shares, such as voting rights, dividend rights, and rights relating to the transfer or sale of those shares.
Comparison of Partnerships and Corporations
Issue | Partnership | Corporation |
Owners | Partners | Shareholders |
Governing agreement | Partnership agreement | Shareholders’ agreement |
Legal framework | Partnerships Act | Business Corporations Act or Canada Business Corporations Act |
Separate legal entity | Generally not separate from the partners in the same manner as a corporation | Separate legal entity |
Ownership interest | Partnership interest | Shares |
Management | Partners, subject to the partnership agreement | Directors and officers, subject to corporate documents and any unanimous shareholders’ agreement |
Business property | Used and held for the partnership business | Owned by the corporation |
Liability | General partners may face personal liability for partnership obligations | Shareholders generally benefit from limited liability, subject to exceptions |
Taxation | Profits and losses generally flow through to partners | Corporation generally files and pays corporate income tax |
Owner departure | Governed by the partnership agreement and applicable law | Governed by share rights, corporate law, and the shareholders’ agreement |
Transfer of ownership | Transfer of partnership interest | Transfer or sale of shares |
Continuity | Changes in partners can materially affect the partnership | Corporation continues despite shareholder changes |
The appropriate structure depends on liability, tax, financing, ownership, succession, professional regulation, and the nature of the business.
Legal and accounting advice should be coordinated before selecting or changing the structure.
What Is a Partnership Agreement?
A partnership agreement is a contract governing the relationship among the partners.
A properly drafted partnership agreement may address:
the name and purpose of the partnership;
each partner’s initial contribution;
ownership or partnership interests;
allocation of profits and losses;
responsibility for expenses;
management roles;
decision-making authority;
signing authority;
banking;
partner compensation or draws;
additional capital contributions;
admission of new partners;
restrictions on transferring partnership interests;
retirement or withdrawal;
death or disability;
misconduct or material breach;
valuation of a departing partner’s interest;
buyout payment terms;
dissolution;
confidentiality;
intellectual property;
non-solicitation obligations; and
dispute resolution.
Without a written agreement, the partners may be subject to default rules that do not reflect what they intended.
For example, the partners may assume that profits will be divided according to the amount each person invested. Another partner may believe that profits will be divided equally. A properly drafted agreement addresses that issue before distributions begin.
What Is a Shareholders’ Agreement?
A shareholders’ agreement is a contract governing the relationship among some or all of the shareholders of a corporation.
The corporation itself is also commonly made a party.
A shareholders’ agreement may address:
ownership and share classes;
voting rights;
appointment and removal of directors;
responsibilities of active shareholders;
shareholder employment;
salaries, bonuses, and dividends;
approval requirements for major decisions;
additional financing;
shareholder loans;
restrictions on transferring shares;
rights of first refusal;
admission of new shareholders;
voluntary and compulsory buyouts;
death or disability;
loss of a professional licence;
shareholder default or misconduct;
valuation of shares;
tag-along rights;
drag-along rights;
shotgun provisions;
deadlock resolution;
confidentiality;
intellectual property;
non-solicitation obligations;
sale of the corporation; and
dispute resolution.
A shareholders’ agreement should be coordinated with the corporation’s:
articles of incorporation;
share rights;
bylaws;
securities register;
share certificates;
directors’ resolutions;
shareholders’ resolutions;
employment agreements;
intellectual property assignments; and
other corporate records.
Why Business Owners Confuse the Two Agreements
The confusion usually results from the informal use of the word partner.
A person may say:
“My business partner owns 50 percent.”
“We incorporated our partnership.”
“There are four partners in the corporation.”
“My partner is also the president.”
“We want to remove one of the partners from the company.”
If the business is incorporated, these individuals may legally be shareholders rather than partners.
Their rights will depend on:
the corporation’s articles;
the class and number of shares they own;
the corporation’s bylaws;
the existing shareholders’ agreement, if any;
directors’ and shareholders’ resolutions;
employment agreements;
Ontario or federal corporate legislation; and
other contracts among the parties.
Calling a shareholder a partner does not automatically convert the corporation into a partnership.
Similarly, titling a document “Partnership Agreement” does not necessarily make it the correct agreement for an incorporated company.
How to Confirm Your Business Structure
Before deciding which agreement is required, review the documents under which the business operates.
Signs the Business Is Incorporated
The business is likely incorporated if it has:
articles or a certificate of incorporation;
an Ontario or federal corporation number;
a corporate name ending in Inc., Ltd., or Corp.;
directors and officers;
issued shares;
shareholders;
a corporate minute book;
a securities register; and
a corporate income tax account.
Signs the Business Is a Partnership
The business may be a partnership if:
two or more people carry on the business together;
no corporation was formed to operate the business;
the owners share profits and losses;
the business is registered as a partnership;
the owners file tax information as partners;
the business assets are owned by the partners or held for the partnership; and
the parties represent themselves as partners.
A business name registration does not create a corporation. Similarly, registering a trade name for a corporation does not turn the shareholders into partners.
Can a Corporation Have a Partnership Agreement?
A corporation can enter a partnership with another person or entity.
For example, two corporations can form a partnership to carry on a particular business. In that situation, the corporations are the partners, and a partnership agreement may be appropriate.
However, when individuals own shares of the same corporation, their relationship as owners is generally governed through a shareholders’ agreement rather than a partnership agreement.
The ownership structure matters:
Two individuals own one corporation
The individuals are shareholders. They generally need a shareholders’ agreement.
Two corporations operate a joint business as partners
The corporations may require a partnership agreement.
Two individuals operate a business without incorporating
They may be partners and generally need a partnership agreement.
Two individuals jointly own a corporation that participates in a partnership
The individuals may need a shareholders’ agreement for their corporation, while the corporation may also be a party to a partnership agreement.
A business can therefore be connected to both types of agreements, but each agreement governs a different legal relationship.
What If an Incorporated Business Signed a Partnership Agreement?
This problem occurs more frequently than business owners expect.
Several shareholders may form a corporation and then sign an agreement titled “Partnership Agreement.” The agreement may refer to:
partners instead of shareholders;
partnership interests instead of shares;
partnership property instead of corporate property;
dissolution of a partnership rather than dissolution of the corporation;
partner withdrawal rather than share transfers; and
management arrangements inconsistent with the corporation’s records.
The fact that the title is wrong does not automatically mean the entire agreement has no legal effect.
A court may examine the substance of the document, the parties’ intentions, their conduct, and the surrounding circumstances. Some contractual provisions may still be enforceable between the signatories.
However, relying on that uncertainty is risky.
A partnership agreement used for an incorporated business may fail to address:
the corporation as a separate legal entity;
the number and class of shares owned;
voting rights attached to the shares;
appointment and removal of directors;
corporate decision-making;
dividend rights;
restrictions on transferring shares;
corporate purchase or redemption of shares;
tag-along and drag-along rights;
compliance with corporate legislation;
treatment of shareholder loans;
directors’ duties;
unanimous shareholder agreement considerations; and
coordination with the articles and bylaws.
It may also create uncertainty about whether the owners intended to establish a separate partnership outside the corporation.
Does a Partnership Agreement Change Share Ownership?
A partnership agreement does not ordinarily change the shares recorded as issued by a corporation.
If the corporation’s securities register states that each of four shareholders owns 25 common shares, describing them as partners in a separate agreement does not automatically cancel or alter those shares.
Share ownership should be determined by reviewing:
the articles;
share subscription documents;
directors’ resolutions authorizing issuance;
the securities register;
share certificates;
transfer documents;
shareholder resolutions;
tax records; and
any existing agreement affecting the shares.
If the shareholders’ understanding differs from the corporate records, the inconsistency should be investigated and corrected properly.
An agreement alone should not be used to rewrite the ownership history without considering corporate and tax consequences.
Can a Partnership Agreement Be Converted into a Shareholders’ Agreement?
The parties can replace an inappropriate partnership agreement with a properly drafted shareholders’ agreement.
This should not be treated as a simple change of title.
The replacement process may involve:
reviewing the articles, bylaws, minute book, and securities register;
confirming the number and class of shares each shareholder owns;
reviewing the existing partnership agreement;
determining whether any partnership exists outside the corporation;
identifying rights or obligations that should be preserved;
preparing a shareholders’ agreement that reflects the corporation;
terminating or superseding the old agreement;
obtaining necessary corporate approvals;
updating employment or contractor agreements;
documenting shareholder loans and financial contributions; and
addressing any inconsistencies in the corporate records.
The new agreement should state clearly which previous arrangements are being replaced and whether any obligations survive.
Can Owners Simply Rename the Agreement?
Changing the heading from “Partnership Agreement” to “Shareholders’ Agreement” is not sufficient.
The underlying provisions must also be reviewed.
A shareholders’ agreement should use corporate concepts, including:
shares;
shareholders;
directors;
officers;
voting rights;
dividends;
corporate assets;
directors’ and shareholders’ resolutions;
share transfers;
share redemptions or purchases;
corporate decision-making; and
compliance with the corporation’s governing legislation.
A document designed for a partnership may not contain these provisions.
It may also contain clauses that do not make sense for a corporation, such as provisions treating individual owners as direct owners of business property.
Liability Differences
Liability is one of the most significant differences between a general partnership and a corporation.
Partnership Liability
In a general partnership, partners may be personally exposed to partnership debts and obligations.
Each partner may also have authority to act as an agent of the partnership in the ordinary course of the partnership’s business. This can create exposure where one partner enters a contract or incurs an obligation that affects the other partners.
A partnership agreement can allocate responsibility internally, but it may not prevent a third party from enforcing legal rights against a partner.
Corporate Liability
A corporation is a separate legal entity. Shareholders generally benefit from limited liability and are not personally responsible for every corporate obligation merely because they own shares.
However, limited liability is not absolute.
Personal exposure may arise through:
personal guarantees;
directors’ statutory liabilities;
unpaid share subscriptions;
personal wrongdoing;
fraudulent or oppressive conduct;
professional liability;
trust obligations;
tax liabilities;
employment-related liabilities; or
improperly separating personal and corporate affairs.
The choice between partnership and corporate structures should not be based on an assumption that signing an agreement will eliminate all liability.
Management and Decision-Making Differences
A partnership agreement usually establishes how partners manage the partnership.
It may give each partner equal authority, allocate specific responsibilities, or require certain decisions to be approved by a particular percentage of the partners.
A shareholders’ agreement operates within a corporate structure.
The agreement must account for the roles of:
shareholders;
directors;
officers;
employees; and
the corporation itself.
The shareholders may establish approval rights over major decisions, but ordinary management responsibility generally rests with the directors unless a unanimous shareholders’ agreement validly restricts their powers.
A generic partnership agreement may not reflect these corporate roles.
Ownership Exit Differences
A partner leaving a partnership is not the same as a shareholder leaving a corporation.
Partnership Exit
A partnership agreement may address:
partner withdrawal;
retirement;
expulsion;
death;
disability;
purchase of the partnership interest;
valuation;
continuing liability;
distribution of partnership property; and
dissolution or continuation of the partnership.
Shareholder Exit
A shareholders’ agreement may address:
voluntary share sales;
rights of first refusal;
compulsory buyouts;
death or disability;
employee-shareholder departure;
valuation of shares;
corporate redemption or purchase;
sales to third parties;
tag-along rights;
drag-along rights;
shotgun provisions; and
release of personal guarantees.
The legal interest being transferred is different. One involves a partnership interest, while the other involves shares of a corporation.
Can a Partner or Shareholder Be Removed for Not Working?
Neither a partner nor a shareholder can necessarily be removed from ownership simply because the other owners believe that person is not contributing enough.
In a Partnership
The partnership agreement may permit expulsion or a compulsory buyout in defined circumstances. Without an express power, removing a partner can be difficult and may affect the continuation of the partnership.
In a Corporation
A shareholder may potentially be removed as an employee, officer, or director while continuing to own shares.
Terminating employment does not automatically cancel share ownership.
A compulsory share purchase generally requires:
a contractual buyout right;
a right attached to the shares;
a voluntary agreement;
a deadlock mechanism;
a court order; or
another legally available process.
This is one of the strongest reasons to use the correct agreement from the beginning.
Tax Differences
Partnerships and corporations are treated differently for tax purposes.
Partnership income and losses generally flow through to the partners. A corporation is a separate taxpayer and generally files its own corporate income tax return.
Changing from a partnership to a corporation may require:
a new business number;
new tax accounts;
transfer of assets;
new contracts;
updated payroll or GST/HST registrations;
valuation of property;
tax elections; and
closure or amendment of old accounts.
The Canada Revenue Agency confirms that changing from a partnership to a corporation changes the legal status of the business and can require new registration and tax accounts.
Business owners should obtain accounting advice before transferring partnership assets or operations to a corporation.
Partnership Agreement or Shareholders’ Agreement: Which One Do You Need?
You will generally need a partnership agreement if:
the business is not incorporated;
two or more persons carry on the business together;
the parties share profits or losses as partners;
the owners hold partnership interests rather than shares; and
the relationship is governed under partnership law.
You will generally need a shareholders’ agreement if:
the business operates through a corporation;
two or more persons own shares;
the corporation has directors and officers;
the owners need rules for voting and corporate decision-making;
restrictions are required on share transfers;
shareholder buyout rights are needed; and
the agreement must coordinate with articles, bylaws, and corporate records.
The structure should be confirmed before the agreement is drafted.
What Documents May Be Needed in Addition to the Main Agreement?
A partnership agreement or shareholders’ agreement may not address every aspect of the business relationship.
Additional documents may include:
employment agreements;
independent contractor agreements;
intellectual property assignments;
confidentiality agreements;
shareholder loan agreements;
promissory notes;
management services agreements;
commercial leases;
personal guarantee arrangements;
insurance agreements;
share subscription agreements;
share transfer documents;
corporate resolutions; and
buyout or settlement agreements.
Delta Law provides customized contract drafting and review services for Ontario businesses, including partnership agreements, shareholders’ agreements, employment agreements, service agreements, and related commercial contracts.
Questions to Ask Before Choosing the Agreement
Business owners should consider:
Has a corporation been formed?
Who legally owns the business?
Have shares been issued?
What do the corporate records show?
Is the business registered as a partnership?
How is business income reported?
Who owns the business assets?
Who signs contracts with customers and suppliers?
Who is responsible for business debts?
Do the owners work as employees?
Are there directors and officers?
Does an existing agreement use partnership or corporate terminology?
What happens if an owner leaves?
How will the ownership interest be valued?
Can the business continue after an owner’s departure?
Are personal guarantees in place?
Does anyone own intellectual property used by the business?
Are there regulated professionals or ownership restrictions involved?
If the documents, tax filings, and actual operations point to different structures, legal and accounting advice may be required to clarify the relationship.
Do Not Wait Until an Owner Wants to Leave
It is much easier to agree on ownership, responsibilities, valuation, and exit procedures while the business relationship is healthy.
Once an owner wants to leave or the parties are in conflict, every proposed term may affect negotiating leverage.
At that stage, the owners may disagree about:
whether the existing agreement applies;
whether someone is a partner or shareholder;
who owns the business assets;
whether an owner can be removed;
whether shares or partnership interests must be purchased;
how the business should be valued;
whether a discount applies;
how the buyout will be paid; and
whether the business should continue or be dissolved.
A properly structured agreement cannot prevent every disagreement, but it can provide a defined process for resolving one.
Legal Support for Ontario Business Owners
Delta Law assists Ontario businesses with:
partnership agreements;
shareholders’ agreements;
unanimous shareholders’ agreements;
business incorporations;
corporate reorganizations;
shareholder and partner buyouts;
ownership transitions;
commercial contracts; and
corporate governance.
We review the business structure and underlying records before preparing the agreement so that the document reflects the parties’ actual legal relationship.
For more information about business contracts, corporate ownership, and protecting a growing company, explore Delta Law’s Resources and Articles.
This article provides general information and does not constitute legal, tax, or accounting advice. The appropriate agreement depends on the legal structure, governing documents, and circumstances of the business.
Make Sure Your Ownership Agreement Matches Your Business
Whether you are starting a business with another person, operating through an existing corporation, or concerned that your current agreement does not match your legal structure, Delta Law can help you determine which agreement your business requires.
