What a Partnership Agreement Should Cover in Ontario

Starting a business with someone you trust can feel like you do not need a formal document — but that instinct is one of the most expensive mistakes partners make. In Ontario, a partnership agreement is the contract that governs how your business runs, how profits are split, and what happens when things go wrong. Without one, Ontario's Partnerships Act fills in the gaps with default rules that almost certainly do not reflect what you actually intended.

This article walks through the key provisions every Ontario partnership agreement should address — so that when you sit down with a lawyer to draft or review one, you know exactly what questions to ask and why each clause matters.

Why the Default Rules Are Rarely What You Want

Ontario's Partnerships Act contains default provisions that apply whenever partners have not agreed otherwise. These defaults are designed for a generic scenario, not yours. A few examples that surprise many partners:

• Equal profit sharing: absent agreement, profits and losses are shared equally — regardless of how much capital each partner invested or how many hours they work.
• No salary for partners: a partner who manages the business full-time receives no salary from the partnership unless the agreement says otherwise.
• Unanimous consent for major decisions: adding a new partner, changing the business nature, or assigning a partner's interest all require unanimity by default.
• Any partner can dissolve the partnership: in a partnership with no fixed term, any partner can dissolve the firm simply by giving notice.

These defaults are not wrong — they are just generic. Your agreement replaces them with rules tailored to your actual deal.

Core Provisions Every Agreement Needs

1. Identity and Capital Contributions

Name the partners, describe what each is contributing (cash, property, intellectual property, sweat equity), and set out how contributions are valued. Capital accounts track each partner's stake over time. This section becomes critical during buyouts or dissolution.

2. Profit and Loss Sharing

Specify the exact ratio — 50/50, 60/40, or something more complex that accounts for different capital contributions or roles. Also clarify:

• When profits are distributed (monthly draw vs. annual distribution).
• Whether partners take a management fee or salary before profit is divided.
• How losses are allocated.

3. Decision-Making and Voting

Define which decisions require unanimous consent versus a simple majority versus just one managing partner. Common categories:

• Day-to-day operations: often delegated to one partner acting alone.
• Major contracts or expenditures above a threshold: majority or unanimity.
• Adding new partners, admitting investors, changing the business: typically unanimity.
• Taking on debt above a set amount: often requires consent of all partners.

4. Duties of Partners

Set out each partner's time commitment and responsibilities. Can partners engage in outside businesses or compete with the partnership? A non-compete or non-solicitation clause during and after the partnership term protects the business and prevents a departing partner from immediately poaching clients.

5. Partner Accounts and Banking

Describe how the partnership bank account operates, who has signing authority, and what limits apply to individual partners' spending.

Dealing With Partner Changes

Admitting New Partners

The agreement should state the process and criteria: Who decides? What must a new partner contribute? Does their admission require unanimous consent? What interest do they receive?

Voluntary Withdrawal

A partner who wants to leave should give written notice within a defined period (e.g., 90 days). The agreement should specify how the withdrawing partner's interest is valued, how it is paid out (lump sum vs. instalments), and whether remaining partners have a right of first refusal on the departing partner's interest.

Death, Disability, or Bankruptcy of a Partner

Without a buy-sell mechanism, the death of a partner can trigger dissolution and significant disruption. A well-drafted agreement includes:

• A buy-sell clause (sometimes funded by life insurance) giving surviving partners the right to purchase the deceased partner's interest.
• Valuation mechanics — agreed formula vs. independent appraisal.
• A timeline for completing the purchase.

Expulsion of a Partner

Can partners be removed against their will? The Act's default rules make this very difficult. A specific expulsion clause — triggered by defined events like fraud, criminal conviction, or serious breach of the agreement — gives the partnership a practical tool without forcing dissolution.

Financial Records and Reporting

The agreement should require:

• Proper books of account maintained at the partnership's principal office.
• Each partner's right to inspect the books at any time.
• Annual financial statements prepared by an agreed-upon accountant.
• A defined fiscal year end.

Dispute Resolution

Partner disputes are common. Rather than heading straight to court, consider a tiered resolution clause:

1. Direct negotiation — partners attempt to resolve in good faith within 30 days.
2. Mediation — an independent mediator assists if negotiation fails.
3. Arbitration or litigation — the last resort, with the agreement specifying jurisdiction (Ontario).

A dispute resolution clause does not prevent all conflict, but it creates a structured path that is faster and cheaper than going to court immediately.

Term and Dissolution

State whether the partnership has a fixed term or is indefinite. Describe the circumstances under which the partnership dissolves:

• Expiry of the term.
• Agreement of all partners.
• Achievement (or abandonment) of the partnership's business purpose.
• Court order.

Also include a winding-up process: how assets are liquidated, debts are paid, and the remaining value is distributed among partners.

Frequently asked questions