Do I need a partnership agreement or a shareholders' agreement for my Ontario business?

Whether you need a partnership agreement or a shareholders' agreement depends on the legal structure you choose for your business in Ontario.

If your business operates as a partnership — a general partnership or limited partnership — you need a partnership agreement. Without one, Ontario's Partnerships Act governs the relationship among partners by default. The default rules include equal sharing of profits and management regardless of contribution, which is rarely what business partners actually want. A partnership agreement overrides those defaults and sets the real deal among the parties.

If you have incorporated under the Ontario Business Corporations Act or Canada Business Corporations Act and have more than one shareholder, you need a shareholders' agreement. The corporation has its own legal personality and is governed by its articles of incorporation and by-laws, but the shareholders' agreement supplements those with private arrangements about control, transfers, exits, and disputes.

A key practical difference: general partnership carries unlimited personal liability for each partner for the partnership's debts. A corporation provides limited liability to its shareholders (subject to exceptions). Many business owners choose to incorporate precisely to achieve that protection, which is why shareholders' agreements are more common than partnership agreements for active businesses.