What Should Be Included in a Partnership Agreement in Ontario?
Starting a business with another person can allow the partners to combine their money, experience, professional skills, and industry relationships.
However, even a strong business relationship can be tested when the partners disagree about money, responsibilities, growth, or the future of the business.
A partnership agreement establishes the rules governing that relationship. It can clarify what each person is expected to contribute, how decisions will be made, how profits and losses will be allocated, and what happens if a partner wants to leave.
Without a written agreement, the partners may have to rely on Ontario’s default partnership laws. Those default rules may not reflect what the partners discussed or how they intend to operate their particular business.
What Is a Partnership?
The Canada Revenue Agency describes a partnership as an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business.
A partnership can sometimes exist even when the parties have not signed a formal partnership agreement.
The conduct of the parties may indicate that they are carrying on business together with a view to profit. This can create uncertainty if the parties believed they were only collaborating informally or participating in a limited project.
A partnership is different from a corporation. A corporation has a separate legal existence from its shareholders. A general partnership generally does not provide the same separation between the business and the individual partners.
Each partner should understand the legal structure before signing contracts, accepting customers, borrowing money, hiring workers, or contributing significant assets to the business.
Why Is a Written Partnership Agreement Important?
Ontario’s Partnerships Act provides default rules that may apply when the partners have not agreed otherwise.
For example, the legislation generally provides that partners share equally in the capital and profits of the business and contribute equally toward losses, subject to any agreement between them.
That default result may be unsuitable where:
One partner contributed more money
One partner works full time and another works part time
One partner provided valuable intellectual property
One partner brought existing clients into the business
The partners intend to divide profits unequally
One partner is responsible for most day-to-day management
Certain partners will not be responsible for particular expenses
The partners expect their ownership percentages to change
One partner is providing property or equipment
A written partnership agreement allows the partners to establish terms that reflect their actual arrangement.
It also gives the parties a document they can consult when their memories of an earlier conversation differ.
1. The Partners and the Business
The agreement should identify each partner by their full legal name.
If a corporation, trust, or other entity will be a partner, the agreement should identify that entity and the individual authorized to act on its behalf.
The agreement should also describe:
The legal name of the partnership
The business name used publicly
The principal place of business
The nature of the business
The date the partnership begins
The partnership’s fiscal year
The geographic area in which it will operate
Any restrictions on the scope of the business
Defining the partnership’s business can help determine which opportunities belong to the partnership and which activities the partners may pursue independently.
If the partnership operates under a business name, registration requirements should also be reviewed. Ontario’s business name legislation generally requires persons associated in a partnership to register the partnership’s firm name before carrying on business or identifying themselves to the public under that name.
2. Each Partner’s Initial Contribution
The agreement should record what each partner is contributing when the business begins.
Contributions may include:
Cash
Equipment
Inventory
Vehicles
Real estate
Intellectual property
Customer relationships
Existing contracts
Technology
Professional expertise
Labour or services
A licence or permit
Access to business premises
The agreement should establish whether each contribution is:
A capital contribution
A loan to the partnership
Property that remains personally owned by the partner
Property transferred permanently to the partnership
Property licensed to the partnership
A contribution that affects the partner’s ownership or profit share
If a partner contributes an asset, the agreement should address its agreed value, legal ownership, permitted use, maintenance, insurance, and what happens to the asset when the partnership ends.
3. Future Capital Contributions
A business may need additional money after it begins operating.
The agreement should establish whether partners can be required to make further contributions and how those decisions will be made.
Questions to address include:
Can a majority require additional funding?
Is unanimous approval required?
Is there a maximum amount a partner can be required to contribute?
How much notice must be provided?
What happens if a partner cannot contribute?
Can another partner contribute more?
Will additional funding change the partners’ percentages?
Will the additional amount be treated as a loan?
Will interest be paid?
Can the partnership borrow from a third party instead?
Without clear rules, one partner may believe everyone must contribute equally while another believes additional funding is optional.
The agreement should avoid giving one partner an unrestricted ability to demand capital and then penalize another partner for failing to provide it.
4. Ownership and Partnership Percentages
The agreement should state each partner’s interest in the partnership.
That percentage may affect:
Voting rights
Profit distributions
Loss allocations
Capital accounts
Sale proceeds
Buyout payments
Responsibility for funding
Entitlement to partnership property when the business ends
The partners should not assume that their economic percentages and voting rights must always be identical.
For example, one partner may be entitled to a greater percentage of profits because of a larger capital contribution, while specified management decisions may still require equal approval.
The agreement should explain how percentages can change and whether a new partner can be admitted.
5. Profit and Loss Allocation
The agreement should clearly establish how profits and losses will be divided.
Possible approaches include:
Equal division
Division according to partnership percentages
Division based on capital contributions
Division based on hours worked
A fixed allocation followed by a percentage division
A formula based on performance or revenue generation
Different allocations for different business activities
The agreement should distinguish between the allocation of accounting profits and the actual distribution of cash.
A partner may be allocated taxable income even if the partnership retains the corresponding cash for working capital.
The Canada Revenue Agency generally requires each partner to report their share of the partnership’s net income or loss, whether the amount was received in cash or credited to the partner’s capital account.
The partners should obtain accounting and tax advice when determining how profits, losses, and distributions will be handled.
6. Draws and Distributions
The agreement should establish when partners can withdraw money from the business.
It may address:
Regular partner draws
Reimbursement of business expenses
Profit distributions
Tax distributions
Emergency withdrawals
Repayment of partner loans
Restrictions on withdrawals
Minimum working-capital requirements
Approval requirements for large payments
If one partner works full time while another is primarily an investor, the agreement should distinguish compensation for services from distributions based on ownership.
Without this distinction, disputes may arise over whether the active partner is being paid fairly or taking an excessive share of the partnership’s money.
7. Roles and Responsibilities
One of the most important sections of a partnership agreement is the division of responsibilities.
The agreement should identify who is responsible for areas such as:
Sales
Marketing
Operations
Customer relationships
Finance
Bookkeeping
Hiring
Human resources
Supplier management
Contract negotiation
Regulatory compliance
Quality control
Technology
Strategic planning
The responsibilities should be specific enough to create clear expectations.
A general statement that each partner will use their “best efforts” may not resolve a disagreement about how many hours each person must work, which tasks they must complete, or what level of performance is expected.
The agreement may also establish:
Minimum time commitments
Availability requirements
Performance expectations
Reporting obligations
Vacation or leave procedures
Consequences of repeated non-performance
Procedures for changing responsibilities
If the partnership wants to use a performance-management process, it should define how expectations will be documented and what happens if a partner fails to improve.
However, the agreement must also address whether poor performance can trigger a mandatory buyout. A performance plan alone does not necessarily give the other partners the right to confiscate a partner’s ownership interest.
8. Authority to Bind the Partnership
Partners may have authority to enter contracts and make commitments on behalf of the business.
The agreement should clarify which decisions a partner may make independently and which require approval.
It may establish financial limits for:
Signing customer contracts
Purchasing inventory
Hiring employees or contractors
Borrowing money
Opening or closing bank accounts
Leasing premises
Buying equipment
Settling legal claims
Making refunds
Changing prices
Engaging professional advisers
Internal restrictions are important, but the partners should also understand how their actions may affect third parties dealing with the partnership.
The agreement should require each partner to comply with approval limits and indemnify the partnership for unauthorized commitments, where appropriate.
9. Decision-Making and Voting
The agreement should establish how ordinary and major decisions will be made.
Routine decisions may be assigned to the partner responsible for that area. More important decisions may require majority, supermajority, or unanimous approval.
Decisions requiring enhanced approval may include:
Admitting a new partner
Changing the nature of the business
Borrowing above a specified amount
Signing a major contract
Leasing or purchasing property
Selling substantial business assets
Hiring or terminating senior personnel
Changing partner compensation
Commencing significant litigation
Settling a major claim
Transferring intellectual property
Entering a related-party transaction
Amending the partnership agreement
Selling or closing the business
The agreement should specify whether voting rights are equal or based on partnership percentages.
Requiring unanimous approval for every decision can make the business difficult to operate. At the same time, allowing one partner to control every major decision may leave the others inadequately protected.
10. Banking and Financial Controls
The agreement should establish how partnership money will be handled.
Provisions may address:
Where bank accounts will be maintained
Who can access online banking
Who may sign cheques
Whether two approvals are required above a threshold
Who can use business credit cards
Spending limits
Expense reimbursement
Cash handling
Bookkeeping responsibilities
Financial reporting
Record retention
Access to financial information
Selection of the partnership’s accountant
Financial transparency is particularly important when one partner controls the books or has primary access to the partnership’s accounts.
Each partner should receive regular information about revenue, expenses, debt, taxes, and cash flow.
11. Partnership Property
The agreement should distinguish partnership property from property owned individually by a partner.
This may include:
Equipment
Vehicles
Customer lists
Websites
Domain names
Social media accounts
Phone numbers
Software
Trademarks
Copyrighted materials
Confidential information
Inventory
Leasehold improvements
Business records
The agreement should explain who owns property created or acquired during the partnership and what happens to that property if a partner leaves.
If an asset is personally owned but used by the business, a separate lease or licence may be appropriate.
12. Intellectual Property
A partnership may depend heavily on its brand, processes, designs, content, technology, or other intellectual property.
The agreement should address:
Intellectual property contributed by a partner
Intellectual property created for the business
Ownership of improvements
Registration of trademarks or other rights
Use of the business name
Ownership of websites and domain names
Access to social media accounts
Confidential business methods
Rights after a partner leaves
Assignment of intellectual property when the partnership ends
If employees or independent contractors create intellectual property, separate written agreements may be needed to ensure that the business receives the intended ownership rights.
13. Confidentiality
Partners will generally have access to sensitive information about the business.
The agreement should protect information such as:
Pricing
Financial results
Customer lists
Supplier terms
Business plans
Marketing strategies
Product information
Trade secrets
Employee information
Technical processes
Login credentials
The confidentiality obligations should explain what information is protected, how it may be used, who may receive it, and how long the obligations continue.
The agreement should also require a departing partner to return or delete partnership information, subject to any legally required record retention.
14. Conflicts of Interest and Outside Activities
Partners may have other businesses, investments, or professional activities.
The agreement should establish:
Whether partners may operate other businesses
Whether prior approval is required
How conflicts of interest must be disclosed
Whether partners can provide services to competitors
How business opportunities must be handled
Whether related-party transactions are permitted
What approval is required for a conflicted transaction
The restrictions should be appropriate to the nature of the business and the partners’ legitimate expectations.
A partner who already operates another business should ensure that the agreement does not unintentionally prevent that existing activity.
15. Non-Solicitation and Competition
The agreement may address what a departing partner can do after leaving.
Possible restrictions include:
Soliciting customers
Soliciting employees
Using confidential information
Representing an ongoing connection to the partnership
Competing within a defined area or market
Using a confusingly similar business name
Restrictive covenants must be carefully drafted. Overly broad restrictions may be difficult to enforce.
The agreement should focus on protecting legitimate business interests and should be reasonable in its duration, scope, and geographic application.
Delta Law’s contract law services include drafting and reviewing partnership agreements, service agreements, confidentiality agreements, and other commercial contracts for Ontario businesses.
16. Admission of New Partners
The agreement should establish whether new partners can be admitted and what approval is required.
It should also address:
The required capital contribution
The new partner’s percentage interest
Voting rights
Profit and loss allocation
Assumption of existing obligations
Whether existing partners’ interests will be reduced
Required background, licensing, or professional qualifications
Execution of the existing partnership agreement
Access to confidential information
Treatment of existing goodwill
Existing partners should not assume that they will always agree on whether a proposed person should join the business.
17. Restrictions on Transferring a Partnership Interest
A partner should not be able to introduce an unwanted person into the business without an agreed process.
The agreement may prohibit transfers unless specified approval is obtained.
It may also include:
A right of first refusal
A right of first offer
Permitted transfers to a holding company or trust
Restrictions on transfers to competitors
Notice requirements
Valuation procedures
Closing requirements
Consequences of an unauthorized transfer
Any permitted transferee should be required to agree to the partnership agreement and its continuing obligations.
18. Voluntary Withdrawal and Retirement
The agreement should explain how a partner can leave voluntarily.
It may require:
Written notice
A minimum notice period
Continued performance during the transition
Cooperation in transferring customer relationships
Return of partnership property
Completion of outstanding work
A mandatory sale of the departing partner’s interest
Compliance with confidentiality and non-solicitation obligations
The agreement should avoid leaving the remaining partners responsible for unfinished commitments without a reasonable transition process.
19. Death or Disability of a Partner
A partner’s death or long-term disability can create immediate operational and financial challenges.
The agreement should address:
Whether the partnership continues
Whether the interest must be purchased
Who will purchase the interest
How the interest will be valued
How disability is defined
When payment must be made
Whether insurance will fund the purchase
Who controls the interest before closing
Whether family members can become partners
What happens to personal guarantees
How unfinished responsibilities will be transferred
These provisions should be coordinated with the partners’ wills, insurance, tax planning, and powers of attorney.
20. Expulsion of a Partner
The partners may want the ability to expel someone for serious misconduct.
Possible grounds may include:
Fraud
Theft or misappropriation
Material breach of the partnership agreement
Loss of a required professional licence
Bankruptcy
Criminal conduct affecting the business
Repeated unauthorized commitments
Serious confidentiality breaches
Competition with the partnership
Persistent failure to perform agreed duties
Conduct causing material harm to the business
The agreement should establish:
Who decides whether grounds exist
The required voting threshold
Whether the affected partner can vote
Whether notice must be provided
Whether there is an opportunity to cure the breach
The effective date of expulsion
Whether the interest must be purchased
How the purchase price will be calculated
Whether a valuation discount applies
How disputes about the expulsion will be resolved
An expulsion clause should not allow the majority to unfairly take a partner’s interest at an artificially low price.
21. Valuing a Departing Partner’s Interest
The agreement should establish a method for valuing a partner’s interest.
Possible approaches include:
A fixed value updated annually
A formula based on earnings
A formula based on revenue
Net asset value
Fair market value
An independent valuation
A combination of methods
The agreement should also address:
The valuation date
Selection of the valuator
Access to financial records
Treatment of goodwill
Treatment of partnership debt
Treatment of partner loans
Whether discounts apply
Who pays valuation costs
Whether the valuation is binding
The procedure for challenging errors
A fixed value that is never updated can produce an unfair result. If that approach is used, the agreement should explain what happens when the partners fail to update it.
22. Payment Terms for a Buyout
The partnership may not have enough cash to pay the departing partner immediately.
The agreement should establish whether the purchase price can be paid:
In full at closing
Through instalments
Under a promissory note
Using insurance proceeds
Through a combination of payment methods
If payment is deferred, the agreement should address:
Interest
Security
Payment dates
Default
Acceleration
Early repayment
Personal guarantees
Financial reporting
Restrictions on distributions
What happens if the business is sold
The partners should consider the financial effect of a buyout before agreeing to an unrealistically short payment period.
23. Partner Default
The agreement should define events of default and the available remedies.
A default may include:
Failure to make a required contribution
Unauthorized withdrawal of funds
Material breach of the agreement
Refusal to provide financial information
Misuse of confidential information
Unauthorized competition
Failure to perform agreed responsibilities
Insolvency or bankruptcy
Conduct causing significant reputational harm
Possible remedies may include:
Notice and a cure period
Suspension of specified authority
Indemnification for losses
Mediation or arbitration
A mandatory buyout
Termination of employment or management responsibilities
Injunctive relief
Dissolution in serious cases
The remedy should be proportionate and clearly connected to the breach.
24. Deadlock Resolution
A deadlock occurs when the partners cannot obtain the approval required to make a decision.
This is particularly common in a partnership with two equal owners.
The agreement can establish a staged deadlock process involving:
Written notice describing the disputed issue
A meeting between the partners
Exchange of written proposals
Mediation
Arbitration for specified disputes
A buy-sell process
Sale or dissolution of the business as a last resort
A shotgun or buy-sell clause should be considered carefully. It may favour the partner with greater financial resources because that person is more likely to have the financing needed to purchase the other’s interest.
25. Dispute Resolution
Not every dispute should result in litigation.
The agreement may require:
Good-faith negotiation
Mediation
Arbitration
Court proceedings
Different processes for different categories of disputes
The clause should address:
Where the process will occur
How a mediator or arbitrator will be selected
Who pays the costs
Whether the result is binding
Whether urgent court relief remains available
How confidential information will be protected
Whether the partnership must continue operating during the dispute
A vague requirement to “work things out” may not provide enough direction when the partners are no longer communicating effectively.
26. Books, Records, and Information Rights
Each partner should understand what financial and operational information they are entitled to receive.
The agreement may require:
Monthly or quarterly financial reports
Annual financial statements
Budgets
Bank statements
Tax filings
Copies of material contracts
Access to accounting software
Notice of legal claims
Notice of significant customer losses
Inspection of business records
It should also identify who is responsible for maintaining the records and where they will be kept.
27. Insurance and Risk Management
The agreement may require the partnership to maintain appropriate insurance, such as:
Commercial general liability insurance
Professional liability insurance
Property insurance
Cybersecurity or privacy insurance
Business interruption insurance
Key-person insurance
Life or disability insurance supporting a buyout
Employment practices coverage
Insurance requirements should reflect the business’s actual operations and risks.
The partners should also decide who is responsible for reviewing and renewing coverage.
28. Indemnification
An indemnity may require one partner to compensate the partnership or the other partners for losses caused by specified conduct.
An indemnity may apply where a partner:
Acts outside their authority
Breaches the agreement
Misuses partnership property
Makes an unauthorized commitment
Violates applicable law
Diverts a partnership opportunity
Causes a loss through fraud or wilful misconduct
The agreement should define the scope of the indemnity and the process for making a claim.
29. Dissolution and Winding Up
The agreement should explain when and how the partnership will end.
Dissolution events may include:
Unanimous agreement
Expiry of a fixed term
Completion of a specific project
Insolvency
Prolonged deadlock
Loss of a required licence
An event making the business unlawful
A specified number of partners leaving
A court order
The agreement should establish how the partnership’s affairs will be wound up, including:
Completing existing work
Collecting outstanding accounts
Paying creditors
Terminating contracts
Selling assets
Handling leases
Paying taxes
Repaying partner loans
Returning capital
Distributing remaining property
Retaining required records
Communicating with customers and employees
Without an agreed process, the end of the partnership may create disputes over assets, liabilities, clients, and unfinished business.
30. Amendments and Ongoing Review
The agreement should explain how it can be amended.
Major changes should generally be recorded in writing and signed by the required partners.
The partners should review the agreement when:
A new partner joins
A partner’s role changes
Ownership percentages change
The business enters a new market
The partnership takes on significant financing
Important property or intellectual property is acquired
The business becomes substantially more valuable
A partner retires or reduces their involvement
The partners decide to incorporate
Tax or succession planning changes
An agreement drafted when the business is first created may not remain suitable as the business grows.
Should the Partners Incorporate Instead?
A partnership may not always be the most appropriate long-term structure.
The partners may consider incorporation where they want:
A separate legal entity
A corporate ownership structure
Different classes of shares
More formal governance
Easier transfer of ownership
Potential tax-planning opportunities
A clearer structure for investors
Continued existence despite ownership changes
Incorporation does not eliminate the need for an agreement between the owners. If the business is incorporated, the owners will generally need a shareholders’ agreement rather than a partnership agreement.
The appropriate structure depends on the business’s risks, tax circumstances, financing plans, regulatory requirements, and long-term goals.
Delta Law’s corporate law services can assist business owners with evaluating and documenting their ownership structure.
Avoid Generic Partnership Agreement Templates
A template may identify common topics, but it may not address the partners’ actual arrangement.
A generic document may overlook:
Unequal financial contributions
Different working commitments
Industry-specific requirements
Personally owned intellectual property
Professional licensing obligations
Personal guarantees
Existing customers or contracts
Partner loans
Tax planning
Disability or succession concerns
The practical effect of a forced buyout
A partnership agreement should reflect how the business will actually operate and how the partners want difficult situations to be resolved.
For additional guidance about commercial agreements and protecting an Ontario business, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal, tax, or accounting advice. The appropriate partnership terms depend on the structure of the business, the partners’ circumstances, and the specific arrangement being documented.
Put the Partnership Terms in Writing
A detailed partnership agreement can establish clear responsibilities, protect each partner’s contributions, and provide a practical process for managing exits, disputes, disability, and dissolution.
Delta Law assists Ontario business owners with customized partnership agreements, business contracts, ownership arrangements, and related commercial matters.
