Partnership Agreements in Ontario: What Every Business Partnership Should Cover

Under Ontario’s Partnerships Act, a partnership exists whenever two or more people carry on business together with a view to profit. Importantly, this can happen without anyone ever intending to form a formal legal partnership, and without any written agreement at all — if the relationship looks like a partnership in substance, the law can treat it as one, regardless of what the people involved call it.

It’s also worth distinguishing a partnership from other common business structures. A corporation with two shareholders is not a partnership — it’s a separate legal entity, and the relationship between its owners is governed by corporate law and any shareholder agreement rather than the Partnerships Act. Similarly, an independent contractor arrangement, even one involving revenue sharing, isn’t automatically a partnership unless the underlying relationship genuinely reflects carrying on business together, rather than one party simply performing services for another.

This matters because a partnership carries legal consequences the moment it exists. Each partner can generally bind the partnership to certain obligations, each partner can be personally liable for partnership debts, and the default rules in the Partnerships Act apply automatically unless the partners have agreed otherwise in writing. Two friends splitting revenue from a side project, without ever discussing “partnership” as a legal concept, may already be partners in the eyes of the law.

Where partners haven’t agreed otherwise, Ontario’s Partnerships Act supplies a set of default rules. Among the most significant: profits and losses are generally shared equally between partners, regardless of how much money, time, or effort each person actually contributed. A partner who put in ten times the capital, or worked ten times the hours, has no automatic claim to a larger share simply because that seems fair.

The default rules also generally allow any partner to participate in management, require unanimous consent for certain significant decisions, and treat the partnership as dissolved on the death or withdrawal of any partner, unless the partners agreed otherwise. For many businesses, these default outcomes don’t reflect what the partners actually intended, which is precisely why writing a partnership agreement that overrides the defaults where appropriate is so valuable.

The Act also provides default rules about liability. In a general partnership, each partner is generally personally liable, jointly with the other partners, for partnership debts and obligations — including obligations another partner created without your knowledge, provided they were acting within the scope of partnership business. This joint liability exposure is one of the strongest reasons to think carefully about who you partner with, and to consider whether an alternative structure, such as a limited partnership or a corporation, might better suit the business and its risk profile.

A written partnership agreement should clearly state what each partner is contributing — capital, equipment, intellectual property, or ongoing labour — and how those contributions translate into an ownership or profit share. Being specific here avoids one of the most common sources of partnership conflict: a gradual sense, on one side or the other, that the actual balance of contribution and reward has become unfair over time.

It’s also worth addressing how future capital needs will be handled. If the business needs an infusion of cash, does every partner need to contribute proportionally? What happens if one partner can’t or won’t contribute their share? Agreeing on a process for this in advance — rather than negotiating it for the first time under financial pressure — tends to produce a far more measured outcome.

Profit-sharing arrangements can also be structured in tiers rather than a single fixed percentage — for example, a base allocation reflecting capital contributed, plus an additional share tied to revenue generated or hours worked by each partner. These more nuanced structures take more upfront effort to negotiate, but they can better reflect the actual dynamics of a business where partners contribute in genuinely different ways.

Partnership agreements typically set out how day-to-day decisions get made, which decisions require unanimous or supermajority consent, and who has authority to sign contracts, incur debt, or hire and fire on behalf of the partnership. Without clear terms, partners can find themselves in a position where one person’s unilateral decision binds the whole partnership, even if the others strongly disagreed with it.

Consider also whether every partner needs an equal voice in every decision, or whether different categories of decisions should require different levels of consent. Day-to-day operational choices might reasonably sit with whichever partner manages that area of the business, while decisions like taking on significant debt or admitting a new partner might reasonably require unanimous agreement from everyone involved.

It’s particularly worth addressing deadlock — what happens when partners are evenly split and can’t agree on an important decision. Some agreements designate a tie-breaking mechanism, others require mandatory mediation before any deadlock can trigger a buyout or dissolution process. Whatever the mechanism, having one in place before a real deadlock occurs is far better than improvising a solution in the middle of an active disagreement.

It’s also worth defining what happens if a partner becomes unable to participate in the business — due to illness, a change in personal circumstances, or simply reduced engagement over time. Agreements sometimes include provisions reducing a partner’s profit share, or triggering a buyout process, if agreed minimum contribution levels aren’t being met. Addressing this scenario in advance avoids a difficult, ad hoc negotiation about fairness after the fact.

Partners generally owe each other fiduciary duties — obligations of good faith, loyalty, and honest disclosure in the conduct of partnership business. This means a partner generally can’t secretly divert a business opportunity that belongs to the partnership, use partnership assets for personal benefit without disclosure, or compete directly with the partnership while still a partner, without running into potential liability for breaching these duties.

A partnership agreement can clarify how these duties apply in specific situations relevant to the business — for example, permitting partners to hold specific outside interests that might otherwise raise a conflict, provided they’re disclosed. Being explicit about what’s permitted and what isn’t reduces the ambiguity that often turns a grey-area business decision into an accusation of bad faith.

These duties generally continue for some time even after a partner gives notice of intent to leave, and can extend to restricting use of confidential partnership information after departure. A well-drafted agreement will address how long certain obligations — like confidentiality or a limited non-compete — continue to apply after a partner exits, since the default statutory rules don’t always spell this out with the specificity a departing partnership might want.

One of the most valuable things a partnership agreement can do is describe, in advance, how a partner can leave — voluntarily, involuntarily, or due to death or incapacity — and how their share will be valued and paid out. This is often called a buy-sell provision, and it can prevent an exit from turning into a prolonged, expensive dispute about valuation and process at exactly the point when the relationship is already under strain.

It’s also worth including a defined process for resolving disputes between partners before they escalate — a requirement to attempt mediation, for example, before either partner can pursue litigation or trigger a forced buyout. Our guide to common partnership disputes covers the issues that most often arise between partners in more detail.

Valuation methodology deserves particular attention in a buy-sell provision. Agreements might specify a fixed formula (such as a multiple of average annual earnings), require an independent appraisal, or allow the partners to agree on a value annually so it stays current. Leaving valuation entirely undefined until the moment it’s needed is one of the most common ways an otherwise amicable exit turns into a contested, expensive dispute.

Even partners who trust each other completely benefit from a written agreement, precisely because it removes ambiguity about what happens in scenarios nobody wants to think about at the start of a business relationship — a partner wanting out, a serious disagreement, a partner’s death. Trust reduces the odds of bad faith; it doesn’t prevent honest disagreements about what was originally understood.

If your business is already operating as a partnership without a written agreement, it’s not too late to create one. Partners can formalize their arrangement at any point, reflecting how the business has actually operated while also addressing gaps the original, informal understanding never covered. Our guide to ending a business partnership in Ontario covers what happens when that relationship eventually comes to a close.

Whichever stage your partnership is at, revisiting the agreement periodically — not just at formation — is worth building into how the business operates. As a partnership grows, takes on new obligations, or brings in new partners, the original agreement may no longer reflect the realities of the business, and updating it proactively is far less disruptive than discovering the gap only once a dispute has already begun.