Partnership Liability in Ontario: What Partners Are On the Hook For

Liability is arguably the single most important thing to understand before entering a partnership in Ontario. Under the Partnerships Act, partners in a general partnership are generally personally liable, alongside the other partners, for the debts and obligations the partnership incurs. This liability isn’t limited to whatever a partner invested in the business — it can reach their personal assets as well.

This default rule exists because a general partnership isn’t a separate legal entity the way a corporation is. The business and the partners are, in important legal respects, treated as one and the same, which means the risks the business takes on are ultimately the partners’ own risks too. Our overview of partnership agreements in Ontario covers how partners can structure their relationship, but it’s worth being clear that even the most carefully drafted agreement generally can’t eliminate this exposure to outside creditors — it only governs the relationship between the partners themselves.

This can come as a genuine surprise to people entering their first partnership, particularly if they’re used to thinking of a business as something separate from its owners, the way a corporation works. In a general partnership, there is no such separation in the eyes of the law — the business’s success and its risks both flow directly through to the people who make it up.

Partnership debts are generally subject to joint and several liability. In practical terms, this means a creditor owed money by the partnership can generally pursue any individual partner for the full amount of the debt — not simply that partner’s proportional share — leaving that partner to seek reimbursement, or “contribution,” from the other partners afterward.

This matters a great deal in practice, because it means a creditor will often target whichever partner appears easiest to collect from, regardless of who was actually responsible for the underlying obligation. A partner with more visible personal assets can end up absorbing a disproportionate share of a claim up front, even if they later have a valid claim against their co-partners for a fair contribution.

Contribution between partners — the right of a partner who paid more than their fair share to recover from the others — is a separate claim from the original creditor’s claim, and it depends on the other partners actually having the means to pay. If a co-partner is judgment-proof or has disappeared, a partner who was pursued for the full debt may be left absorbing a disproportionate share with no realistic way to collect on their right of contribution.

One of the more surprising aspects of partnership liability for people new to the structure is how far it extends to actions taken by other partners. Under the Partnerships Act, each partner can generally bind the partnership — and therefore the other partners — to obligations entered into within the ordinary course of partnership business, even if the other partners never knew about or approved the specific transaction.

This authority is generally based on what’s reasonable for a third party to assume. If a partner enters into a contract that looks like the kind of thing the business normally does, a third party dealing with that partner in good faith can generally rely on it binding the partnership, whether or not the other partners actually consented internally. A partnership agreement can impose internal limits on a partner’s authority — for example, requiring consent above a certain dollar value — but those limits mainly affect the partners’ rights against each other, rather than automatically protecting the partnership from a third party who had no notice of the restriction.

This is one of the strongest practical reasons disputes arise between partners, a topic covered further in our guide to common partnership disputes in Ontario. Being bound by a partner’s judgment — good or bad — is simply part of what it means to be in a general partnership.

It’s also worth distinguishing between a partner’s authorized conduct and conduct that falls clearly outside the partnership’s business altogether. A partner who commits a personal act entirely unconnected to the business — unrelated to anything the partnership does or holds itself out as doing — is less likely to bind the other partners than one acting, even carelessly, within the scope of what the business actually does. Where exactly that line falls is often the central question in disputes over partnership liability, and it tends to turn heavily on the specific facts.

Because partnership liability isn’t capped at the business’s assets, a partner facing a partnership debt they can’t satisfy from business funds can be pursued for the balance out of their personal assets — savings, real property, investments, and other personal belongings. This stands in sharp contrast to a corporation, where shareholders are generally only at risk of losing what they invested in the company.

This exposure is a key reason some businesses choose a limited partnership structure, or incorporate entirely, once the risk profile of the business grows — see our guide to partnerships versus corporations for a fuller comparison. It’s also a reason partners sometimes carry liability or errors and omissions insurance, which can help absorb certain claims without reaching personal assets directly, though insurance coverage and its limits vary by policy and situation.

A limited partnership, governed by Ontario’s Limited Partnerships Act, changes this picture for a specific category of partner. A limited partner generally has liability capped at the amount they contributed (or agreed to contribute) to the partnership, rather than facing the unlimited exposure a general partner carries.

That protection comes with a condition: a limited partner who takes part in controlling or managing the business risks losing it, becoming liable in the same way as a general partner, at least with respect to the obligations connected to that involvement. The general partner in a limited partnership — sometimes an individual, often a corporation formed specifically for the role — continues to carry unlimited liability, much like a partner in an ordinary general partnership.

A partner joining an existing partnership is generally not automatically liable for debts the partnership incurred before they became a partner, unless they specifically agree to assume that liability as part of joining. This is worth confirming explicitly when joining an established partnership, since assumptions on this point can create real confusion later.

Leaving a partnership doesn’t work quite as cleanly in the other direction. An outgoing partner generally remains liable for debts incurred while they were a partner, unless creditors specifically agree to release them — something that often comes up during a partner buyout. An outgoing partner can also remain exposed to new debts incurred after their departure until adequate notice of that departure has been given to existing clients and, in some cases, the wider public.

Given how far partnership liability can reach, it’s generally worth understanding your specific exposure before entering a partnership, and before leaving one. Visit our partnerships hub for related guidance, or contact us with questions about your situation.