Partnership Agreements in Ontario: Protecting the Partners

Starting a business with someone you trust feels simple enough that many people skip the paperwork. A handshake, a shared bank account, and an understanding that you will each put in equal effort — what else do you need?

The answer: a partnership agreement. In Ontario, if you and another person carry on business together with a view to profit, you are likely already partners under the Partnerships Act — whether you know it or not and whether you want to be or not. And if you have not written down how that relationship works, the Act fills in the blanks with default rules that almost certainly do not reflect what you actually intend.

This article explains the types of partnerships in Ontario, what the Partnerships Act defaults say, what a well-drafted partnership agreement should cover, and the liability exposure that comes with the territory.

Types of Partnership in Ontario

Ontario law recognizes two primary forms of partnership:

General Partnership

A general partnership is the default form. It arises automatically when two or more people carry on business together for profit — no registration is required to create one, though a business name registration is typically required under the Business Names Act if the partnership operates under a name other than the partners' full legal names.

The defining feature of a general partnership is unlimited joint and several liability. Each partner is personally liable for the debts and obligations of the partnership — including obligations incurred by the other partners in the course of the partnership business — without limit. If the partnership cannot pay, creditors can pursue any partner personally for the full amount.

Limited Partnership

A limited partnership has two classes of partners:

• General partners — who manage the business and bear unlimited personal liability, just as in a general partnership
• Limited partners — who contribute capital and share in profits but do not participate in management, and whose liability is limited to their capital contribution

To create a limited partnership in Ontario, a Declaration of Limited Partnership must be filed with the Ontario government. Limited partnerships are commonly used for investment funds, real estate projects, and other structures where passive investors want liability protection.

Note: a limited partner who takes an active role in managing the limited partnership risks losing their limited liability protection and being treated as a general partner.

What the Partnerships Act Says (and Why It May Not Be What You Want)

The Partnerships Act (Ontario) governs partnerships that do not have a written agreement, and it also applies to fill gaps in agreements that do not address every issue. The Act's defaults include:

• Equal sharing of profits and losses — regardless of how much capital each partner contributed or how much time they put in
• Equal say in management — each partner has an equal voice, and ordinary business decisions require majority consent; fundamental changes require unanimous consent
• No partner is entitled to a salary — remuneration comes from the profit share only, unless the agreement says otherwise
• Any partner can dissolve the partnership at any time by giving notice — there is no guaranteed continuation
• A partner's interest cannot be assigned to a third party without the consent of all partners
• A partner's death, bankruptcy, or mental incapacity dissolves the partnership unless the agreement provides otherwise

Read that list again. If you put in 80% of the capital and do most of the work, the Act says profits are split equally. If your partner dies, the partnership is dissolved by law. If a partner wants out and you have no buy-sell mechanism, the partnership can be wound up.

These defaults are workable in some situations, but they fit most real partnerships poorly. A written agreement overrides them.

What a Partnership Agreement Should Cover

A well-drafted Ontario partnership agreement is the governing document of the business relationship. It should address, at minimum:

Capital Contributions

Who is putting in what, and in what form (cash, property, services, intellectual property)? Is there an obligation to make further contributions? What happens if one partner cannot contribute?

Profit and Loss Allocation

How are profits and losses divided? The default is equal shares, but most partnerships benefit from an allocation that reflects each partner's actual contribution or role. Is there a mechanism for paying out profits regularly, or do they accumulate in the partnership?

Partner Roles and Decision-Making

Who manages day-to-day operations? What decisions require all partners to agree? Which partner has signing authority for the partnership bank account and contracts above a certain value? Good agreements define management clearly to prevent deadlock.

Partner Salaries and Draws

Partners are not employees, but the agreement can provide for partners to draw a fixed amount against their profit share, or to receive a management fee for active involvement. Getting this right matters for both the relationship and for tax planning.

Dispute Resolution

What happens when partners disagree? A well-drafted agreement builds in a process — negotiation, then mediation, then arbitration — that gives partners a structured path before resorting to litigation.

Admission of New Partners

On what terms can a new partner be brought in? Does it require unanimous consent? How is the new partner's capital contribution and profit share determined?

Exit: Voluntary Withdrawal

If a partner wants to leave, what is the process? How is their interest valued? Can they compete with the partnership after leaving? A non-compete clause in a partnership context has limits — it must be reasonable in scope, geography, and duration — but is a legitimate concern.

Exit: Death, Disability, Bankruptcy

These events trigger partnership dissolution under the Act's default rules. A partnership agreement should instead provide a continuation clause — the partnership continues, and the remaining partners buy out the departing partner's interest at an agreed or formula value.

Buy-Sell Provisions

Sometimes called a "shotgun clause" in Ontario, a buy-sell mechanism allows one partner to set a price at which they offer to either buy the other partner out or sell their own interest at that same price. The other partner must choose which side of the transaction they prefer. It is a blunt instrument but an effective one for breaking deadlock in two-person partnerships.

Non-Competition and Confidentiality

Partners typically owe fiduciary duties to each other and to the partnership, but a written agreement can define those obligations specifically. Confidentiality provisions are especially important in professional and consulting partnerships.

Partnership Liability: What You Need to Understand

In a general partnership, each partner is personally liable for partnership debts. This is not qualified by whether you knew about the transaction. If your partner signs a contract on behalf of the partnership within the ordinary scope of the partnership's business, you are bound by it — and if the partnership cannot pay, a creditor can pursue you personally.

This exposure is one reason many business owners choose to incorporate instead of operating as a partnership. A corporation gives shareholders limited liability protection. But partnerships remain common, particularly among professionals (where law societies and other regulators may impose rules on corporate structure), in smaller collaborations, and in situations where the administrative simplicity and tax flexibility of a partnership is attractive.

If you do operate as a partnership, understand your exposure, carry adequate insurance, and have a written agreement that structures the relationship and its eventual end.

Frequently asked questions