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A partnership can exist in Ontario without anyone signing anything, and if it does, the Partnerships Act writes your terms for you. A written agreement replaces those defaults with the deal you actually intended.
Book My 15-Minute Assessment →Under the Partnerships Act (Ontario), partners share profits equally regardless of capital contributed, no partner is entitled to a salary, and any partner in a partnership at will can dissolve the firm on notice. Every one of those defaults can be changed, only in writing.
Yes, if you want terms other than the statutory defaults. Under the Partnerships Act (Ontario), partners share profits equally no matter who contributed the capital, no partner is entitled to a salary, admitting a new partner requires unanimous consent, a majority cannot expel a partner, and any partner in a partnership at will can dissolve the entire firm by giving notice. Only a written agreement displaces those rules.
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The Partnerships Act (Ontario), R.S.O. 1990, c. P.5, defines a partnership as the relation between persons carrying on business in common with a view to profit. Nothing has to be filed, signed or announced. Two people who start selling something together, share the costs and divide the proceeds are in a partnership whether or not they intended to create one, and each of them becomes liable for obligations the other incurs in the ordinary course of the business. Receiving a share of profits is evidence of partnership, though the Act sets out situations, such as repayment of a debt out of profits, that do not by themselves create one.
That accidental quality is why partnership disputes are so often about facts rather than documents. Was the arrangement a partnership or an employment relationship? Was the third participant a partner or a contractor entitled only to a commission? Did the parties agree to share losses as well as profits? A written agreement removes that entire category of argument, and it is the only way to displace default terms that almost never reflect what commercial partners actually intend.
Lexaltico LLP prepares partnership agreements, limited partnership agreements, limited liability partnership agreements and joint venture agreements, and acts for partners on admission, retirement, expulsion and dissolution. Where a business has outgrown the partnership form, we also advise on converting it into a corporation.
| Issue | Default under the Partnerships Act | What agreements usually provide instead |
|---|---|---|
| Profit sharing | Equal shares, regardless of capital contributed | Split by capital, by billings, by units, or a hybrid |
| Losses | Shared in the same proportion as profits | Same, or capped for junior partners |
| Salary for working in the business | No partner is entitled to remuneration | Draws, guaranteed payments or a base allocation |
| Admitting a new partner | Requires the consent of all existing partners | Approval by a defined supermajority |
| Ordinary business decisions | Decided by a majority of partners | Reserved matters list requiring higher thresholds |
| Changing the nature of the business | Requires unanimous consent | Often retained as unanimous |
| Expelling a partner | A majority cannot expel a partner unless expressly agreed in writing | Defined cause events and a written expulsion process |
| Ending the partnership | A partnership at will dissolves when any partner gives notice | Fixed term, exit notice period, buy-out of the departing partner interest |
The last row is the one that ends businesses. In a partnership at will, meaning one with no fixed term, any partner can dissolve the whole firm by giving notice to the others. The assets are then realised, creditors paid, advances repaid and capital returned, with any surplus divided in the profit-sharing ratio. A partner who wants leverage in a negotiation can therefore threaten the existence of the business itself. A written agreement replaces dissolution with an orderly buy-out.
In a general partnership, every partner is liable for the debts and obligations of the firm incurred while they are a partner, and each partner is an agent of the firm with authority to bind it in the ordinary course of business. A partner is also liable for loss caused by a co-partner's wrongful act or omission in the ordinary course of the firm's business. There is no internal agreement that can limit that liability as against outside creditors; an indemnity between partners allocates the loss among them but does not stop the creditor from suing any of them.
A limited partnership, formed under the Limited Partnerships Act (Ontario) by filing a declaration, has at least one general partner with unlimited liability and limited partners whose liability is capped at their contribution. The critical restriction is that a limited partner who takes part in the control of the business loses that protection and becomes liable as a general partner to persons who dealt with the partnership. Limited partnerships are the standard vehicle for real estate syndications and investment funds, usually with a single-purpose corporation as general partner so that no individual carries unlimited exposure.
A limited liability partnership under Part III of the Partnerships Act is available in Ontario only to professions whose governing statutes permit it, notably lawyers and chartered professional accountants. In an Ontario LLP a partner is not personally liable for the negligent acts of another partner or of an employee not under their supervision, but remains fully liable for their own negligence and for the ordinary debts of the firm. An LLP is not a general-purpose alternative to incorporation.
What each partner contributes in cash, property, clients or labour, how capital accounts are maintained, and whether further contributions can be required.
The formula for allocating profits and losses, the timing and size of draws, and how allocations are trued up at year end.
Who runs day-to-day operations, spending authority limits, and the decisions that require a supermajority or unanimity.
The process for admitting a partner, notice required to retire, cause events permitting expulsion, and the consequences of each.
How a departing partner interest is valued, over what period it is paid, whether interest accrues, and whether goodwill is included.
Non-solicitation of clients and staff, confidentiality, ownership of work product and client files, and a mediation-then-arbitration clause.
Two administrative points are easy to miss. A partnership carrying on business in Ontario under a name other than the names of all its partners must register that business name under the Business Names Act, and the registration must be renewed every five years. A partnership that fails to register cannot maintain a proceeding in an Ontario court in connection with the business except with leave of the court, which is a real problem the first time you need to sue a customer for unpaid invoices.
Partnerships are transparent for tax purposes: income is computed at the partnership level and allocated to the partners, who report their share on their own returns. That is an advantage where the business expects early losses that partners can apply against other income, and a disadvantage once the business is profitable, since a corporation carrying on an active business in Canada may access the small business deduction and defer personal tax on retained earnings.
Liability usually decides the question. Unlimited joint liability for the acts of a co-partner is a serious exposure for any business with employees, inventory, premises or credit. Where partners want the flexibility of partnership economics with corporate liability protection, a common structure is a joint venture between corporations, each partner incorporating and the corporations contracting with each other, so the participants get contractual profit-sharing without becoming personally liable for each other's obligations.
Converting a partnership into a corporation is a taxable disposition of the partnership interests unless a rollover applies. Section 85 of the Income Tax Act permits a tax-deferred transfer of eligible property to a corporation on an elected basis, and there are specific rules for winding up a partnership into a corporation. This is planning that must be done with your accountant before any transfer occurs, not documented afterwards.
Partners owe each other fiduciary duties. They must render true accounts and full information on all things affecting the partnership, account for any benefit derived without consent from any transaction concerning the partnership or its property or business connection, and must not compete with the firm without consent, failing which they account for the profits of the competing business. Those duties exist independently of any written agreement and are frequently the strongest claim available where a partner has diverted an opportunity.
On dissolution, the Act sets an order of application for the assets: paying the debts and liabilities of the firm to outside creditors first, then repaying partner advances, then returning capital, with any residue divided in the profit-sharing ratio. Where the partners cannot agree, the Superior Court of Justice can order dissolution and appoint a receiver to wind up the business. That process is slow and consumes the value it is dividing, which is precisely the outcome a buy-out clause is designed to avoid.
If you are entering a partnership, get the agreement in place before the business starts trading. If you are already in one and there is no written agreement, an agreement can still be signed at any time and will govern from then on. And if a dispute has already started, the Limitations Act, 2002 two-year basic limitation period applies to most claims between partners, so delay costs options. Contact our corporate group to draft, review or unwind a partnership.
Businesses that want to collaborate on a single project often prefer a contractual joint venture to a partnership. In a contractual joint venture the participants agree to contribute defined resources to a defined undertaking, share revenue or output according to a formula, and remain separate businesses with separate liabilities. Because there is no partnership, no participant is automatically an agent of the others and none is exposed to unlimited liability for obligations another incurs. The trade-off is that the arrangement depends entirely on the drafting: there is no default statutory framework to fall back on.
Whether an arrangement is a joint venture or a partnership is determined by substance, not by the label the parties choose. If the participants are in fact carrying on business in common with a view to profit, sharing net profits, holding out as a single business and jointly making operational decisions, a court can find a partnership regardless of a clause saying nothing in the agreement creates one. That clause is still worth including as evidence of intention, but it must be supported by how the venture actually operates: separate accounting, separate invoicing to customers, and decision-making that respects the boundary between the participants.
Co-ownership of property is another area where partnership is often assumed and often absent. Simply owning property jointly, or sharing gross returns from it, does not by itself create a partnership under the Act. Two people who buy a rental property together are co-owners; whether they are also partners depends on whether they are carrying on a business together. The distinction has real consequences for liability, for how income is reported, and for what happens when one of them wants out, so it is worth documenting deliberately at the time of purchase.
Professional practices raise a similar question. Practitioners who share premises, staff and overhead but bill their own clients separately are usually in a cost-sharing arrangement rather than a partnership, and that distinction affects liability for each other's professional negligence and for the obligations of the shared operation. Because the difference can turn on details such as how the practice presents itself to clients and whether fees are pooled, cost-sharing arrangements should be documented in writing, with express provisions on the ownership of client files, staff employment, and what happens when one practitioner leaves.
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