Your Partnership Agreement Playbook

Key Takeaways

• A Partnership Agreement outlines roles, responsibilities, and profit-sharing between business partners.
• Having a Partnership Agreement helps prevent misunderstandings and disputes.
• There are three main types of partnerships: General, Limited, and Limited Liability Partnerships.
• Key elements to include: capital contributions, profit and loss distribution, and decision-making rules.
• Use NotaryPro’s free customizable Partnership Agreement template to get started.

Whether you’re going into business with a friend, family member, or colleague, launching a partnership can be an exciting venture! However, it’s also a significant commitment, which is why having a Partnership Agreement in place is a good idea. 

While not legally required in Canada, having one can save you headaches down the road. A Partnership Agreement helps you and your partner(s) get on the same page about who does what, how profits are split, and more.

Here, we’ll walk you through what a Partnership Agreement is and what to include in yours to keep things running smoothly.

What is a Partnership Agreement?

A Partnership Agreement is a legal document that dictates how two or more individuals (or entities) run a for-profit business. It outlines each partner’s rights, roles, responsibilities, and contributions. It also establishes important guidelines for the business, such as its profit and loss distribution. 

In Canada, there are three main types of Partnership Agreements: 

• General Partnership Agreement
• Limited Partnership Agreement
• Limited Liability Partnership Agreement

How Does a Partnership Agreement Work in Canada?

A partnership is an association or relationship between two or more individuals, trusts, corporations or partnerships that come together to conduct business. Each partner contributes labour, money, property, or skills to the partnership. As such, each partner receives a share of the profits or losses of the business. 

The business profits (or losses) are typically divided among the partners based on a Partnership Agreement. Partnership Agreements feature a set of rules regarding partners entering or leaving the partnership, the division of partnership income, and other critical matters.

In Canada, partnership business structures are governed by provincial law, so each province follows its own legislation. For instance, in Ontario, General Partnerships are governed by the Partnerships Act, R.S.O. 1990. 

Purpose of a Partnership Agreement

An official Partnership Agreement can prevent misunderstandings and ensure all partners agree on critical business matters. It provides a legal framework to navigate disputes or unforeseen events, like a partner’s withdrawal.

As a business develops, all owners should be aligned on their respective roles, decision-making processes, and profit-sharing expectations. Essentially, this Agreement details practical expectations and protects each partner from potential risk. Having one helps to ensure that all owners get the most out of the partnership with minimal disruption or risk.

Who Needs a Partnership Agreement?

In Canada, everyone involved in a partnership should create a Partnership Agreement. A Partnership Agreement empowers all partners to clearly define their obligations, rights, and roles within their company. It also establishes a clear understanding of how partners will operate and govern a business. 

Commissioning Your Partnership Agreement

While not legally required across Canada, having your Partnership Agreement commissioned is highly recommended. Commissioning your Partnership Agreement adds credibility and authenticity to the document, making it easier to enforce in court. If you’re using your Partnership Agreement for international purposes, having it commissioned may be mandatory. 

You can meet with a notary public online to have your Partnership Agreement commissioned in less than 7 minutes. Complete the process from anywhere with a Wi-Fi connection, even if your partner(s) are across the globe.

Main Types of Partnerships in Canada 

Three main types of partnerships exist in Canada, including General Partnerships, Limited Partnerships, and Limited Liability Partnerships. See further details on each of these below. 

General Partnerships

A General Partnership is a business structure consisting of two or more owners. In Canada, it’s the default business structure for multiple owners. Each partner in a General Partnership is equally liable for the actions, debts, and obligations of the partnership and the other partner(s).

The owners of a General Partnership can be individuals, corporations, or both. Partners determine their respective authority, ownership shares, capital contribution, profit distribution and operating procedures for their business. General Partnerships are less expensive to create and run than Limited Liability Partnerships, and they have less complex taxation requirements. 

Limited Liability Partnerships

Limited Liability Partnerships have features of both a corporation and a partnership. Despite their name, Limited Liability Partnerships are not a subset of Limited Partnerships. They’re intended to enable partners to pool their resources, while not being liable for one another’s professional negligence. Partners in a Limited Liability Partnership are still liable for most partnership obligations, but wouldn’t be liable for one partner’s wrongful actions. 

Limited Liability Partnerships are usually heavily regulated and limited to accountants, lawyers, and medical professionals.

Limited Partnerships

Limited Partnerships consist of one or more general partner(s) and one or more limited partner(s). Like in a general partnership, the general partner remains liable for all the debts and obligations of the partnership. However, Limited Partnerships are “limited” because their liability for the partnership debt is capped at their investment in the business. For instance, if you invest $5,000 in a partnership, you’d only need to pay $5,000 if creditors request payment. In exchange for limited liability, limited partners cannot take part in the management or daily operations of the business.

Details to Include in a Partnership Agreement

In Canada, a Partnership Agreement should include some basic information in order for it to be valid. This information is outlined below:

Basic Business Details

• Your business name and address
• A business description (type of product or service)
• The date the partnership will begin
• The date the partnership will end, if applicable
• Each partner’s legal name and address
• The partnership’s fiscal year-end date

New Partner Arrangements

Having a plan regarding new partnerships can eliminate confusion and conflict down the road. Outline whether new partners can join, when, and whether voting is required for admittance. 

Length of the Partnership

It’s common for partnerships to operate for an indeterminate length of time, with no predetermined end date. However, sometimes owners expect the business to dissolve after reaching a specific milestone or a certain number of years. If known, include your corporation’s official termination date.

Capital Contributions and Ownership Percentage 

Clearly outline each partner’s capital contributions so everyone is on the same page. Capital contributions include time, effort, and funds spent to manage the business. This can include contributing cash, equipment, property, services, and more. These contributions typically determine each partner’s ownership percentage.

Day-to-Day Responsibilities

Clearly defining each partner’s roles and responsibilities helps owners manage expectations and stay organized. Outline who is responsible for daily tasks and other notable responsibilities to avoid confusion.

Withdrawal Requirements

To ensure everyone is protected, your Agreement should include a mandatory notice period before a partner can withdraw from the business. This gives the other partner(s) sufficient notice to make critical decisions and ensure they’re prepared.

Dissolution Details

Outlining the circumstances related to the potential dissolution sets clear expectations into motion. You can note whether the business would dissolve upon a partner’s withdrawal or not. 

You can also establish steps that must be taken to facilitate the dissolution of your business. For example, some Partnerships require a unanimous or majority vote to dissolve the partnership. Another common rule to include is how assets will be distributed upon the dissolution of the partnership. 

Decision-Making Rules

Since decision-making disputes can create significant conflict between partners, it’s best to implement rules around decision-making. 

These regulations can include a voting system for certain decisions or another method to enforce checks and balances among partners. You may require all partners to agree on a particular matter, or the majority vote to make a decision.

Consider whether each partner’s vote holds the same weight, or if voting power is proportionate to capital contributions or profit share. 

Authority Provisions (Binding Power)

You should define partner authority, also known as binding power, within your agreement. Binding power is the authority to make decisions and enter into agreements that bind the partnership. This helps prevent misunderstandings and conflicts, and clarifies responsibilities. By specifying who has binding power, you reduce the risk of certain partners incurring liabilities or entering into unfavourable agreements.

Dispute Resolution

Your Partnership Agreement should include instructions on how to resolve disputes among partners. You can add a mediation clause to it, meaning you will resolve disagreements among partners, without court intervention.

Division of Profit and Loss

You’ll want to establish how profits and losses will be distributed among partners. You can distribute them equally, by percentage of ownership, or in proportion to capital contributions.

These terms need to be carefully described in the Agreement to prevent conflicts throughout the life of the business. The document should also dictate when profit can be withdrawn from the business and by whom.

Ownership Percentage

Ownership percentage is typically determined by each partner’s financial, asset, or property contributions to the business, but it can include other factors too. Some partnership arrangements consider expertise, time spent, and commitment when determining ownership percentage as well.

That said, some partnerships allocate ownership equally, regardless of the contributions each partner offers.

Are Partnership Agreements Legally Required? 

Having a Partnership Agreement is not a legal requirement in Canada. In fact, a simple verbal agreement is sufficient to form a partnership. If two or more people or entities begin working together for profit, partnership law will apply to them by default. If they don’t have a written Partnership Agreement, the partnership will be governed by provincial partnership law. 

Nonetheless, most partnerships leverage a Partnership Agreement to ensure everyone is aligned on critical issues, like division of partnership income.

Dissolving a Partnership Agreement 

Dissolving a partnership means you are formally terminating the business arrangement and ceasing business activities. It’s important to review your Partnership Agreement for any rules regarding when you can leave or dissolve the partnership. 

Typically, closing a general partnership is a fairly straightforward process in Canada. Although you and your partner(s) will want to divide profits and losses, you don’t have many legal obligations to manage.

You simply need to report that you are no longer in business on your Canadian tax return. The T2125 Statement of Business Activities of your tax return asks if this was the last year you were in business. If you select “yes”, you are reporting that your partnership is no longer intact. 

You may also need to file specific forms related to GST/HST or payroll to close or deregister certain accounts.”

Below are a few additional considerations to keep in mind when dissolving a partnership: 

• Review the Partnership Agreement for any obligations related to dissolution.
• Notify all stakeholders about the partnership’s impending closure (i.e., vendors, suppliers).
• Consult with your partner(s) to discuss dissolution.
• Assess your partnership’s assets, obligations, and liabilities.
• Determine how you will liquidate partnership assets and settle outstanding debts.
• Shut down or transfer business bank accounts.

Draft a Partnership Agreement Today

Starting a business with someone is a big step. While everything might be smooth sailing at first, it’s smart to prepare for the “what ifs.” Not only does a Partnership Agreement protect your business, but it also protects your relationships.

Having a Partnership Agreement in writing can make a huge difference when disputes or disagreements arise. Whether you’re deciding how to split profits or divide responsibilities, it’s always easier when the terms are clearly defined.

Get started on your Partnership Agreement today with our free Partnership Agreement template! Simply fill in the required fields, and you’re off to the races!