Partnership agreement in Canada: what it must include, LLP/LP rules, and the tax notes nobody explains

The three partnership types in Canada

The three types differ in one decisive dimension: how much of a partner's personal assets are exposed. A general partnership is the default — two or more people carrying on business together with a view to profit. Every partner is liable jointly with the others for all debts incurred while a partner, and liability for the firm's wrongs is joint and several: your partner's mistake can reach your house and savings. Cheap, flexible, and the most common choice for two founders who trust each other.

• Limited partnership (LP): one or more general partners manage the business and carry unlimited liability; one or more limited partners contribute capital and share profits but must stay out of management — their liability is capped at what they contributed. A limited partner who starts running the business can be treated as a general partner. In Ontario an LP must be registered by filing a Declaration (Form 3) with a government fee of about $210, and the name must end in "Limited Partnership" or "LP".
• Limited liability partnership (LLP): available ONLY to regulated professionals. Ontario permits LLPs for lawyers and licensed paralegals (Law Society of Ontario) and chartered/general accountants (CPA Ontario), with mandatory professional liability insurance. Alberta permits LLPs for practising lawyers and CPA firms registered with CPA Alberta (certificate, Corporate Registry registration, client notice; minimum insurance $2M–$2.5M per incident). BC likewise restricts LLPs to prescribed regulated professions.
• The LLP shield is partial: a partner is not liable for debts arising from another partner's negligence, but stays personally liable for their own negligence, for anyone under their direct supervision, and where they knew or should have known about a partner's criminal or fraudulent act. The partnership's assets and each partner's interest in partnership property remain exposed, and all partners stay liable for ordinary business debts.

Naming note: if the partnership trades under a name other than the partnership's own name, that business name must be registered. In Ontario it costs about $60, is valid for five years, and can be renewed up to 60 days after expiry. Plan the GST/HST account (mandatory once taxable revenues pass $30,000) and payroll accounts in the same setup week.

Why a written agreement matters: the defaults you're overriding

Partnerships legislation exists for the case where nobody wrote anything down. Ontario's Partnerships Act, section 24, provides the model most provinces mirror — your agreement is essentially a list of replacements for these rules:

• Profits and losses are shared equally — regardless of capital contributed or hours worked
• No interest on subscribed capital before profits are ascertained; 5% per annum by default on advances beyond agreed capital
• No partner is entitled to remuneration for acting in the partnership business
• Every partner may take part in management — there is no silent-partner concept in a general partnership
• No new partner admitted without the consent of all existing partners
• Ordinary matters decided by majority; no change in the nature of the business without unanimous consent
• Partnership books kept at the place of business, open to every partner's inspection

Then the dissolution defaults: a partnership for an undefined time is dissolved by any partner giving notice (Ontario s. 32); it also dissolves on a partner's death or insolvency unless the agreement says otherwise; and no majority can expel a partner without an express agreement term. Without a written agreement, either of you can walk away and end the firm, neither of you can force the other out, and a death dissolves the business the survivors are left holding. A written agreement replaces all of this with mechanics chosen in advance, while everyone is still on good terms.

Capital contributions: get specific

This is where most disputes start, so it deserves more than a single sentence. For each partner, spell out the amount and type of contribution (cash, property, equipment, IP, or sweat equity), the deadline for contributing it, and how non-cash contributions are valued — who appraises the truck or the codebase, and what happens if the valuation is disputed.

Also cover additional capital: can the partnership call for more, on what notice, up to what limit, and what happens to a partner who doesn't pay — dilution of their share, interest charged, or a right for others to cover the shortfall? Partners often lend the partnership money beyond their capital — decide in advance whether those loans earn interest, at what rate, and where they rank on a wind-up. An informal "I'll pay you back from profits" is the seed of the two most expensive partnership disputes: was it a loan or an extra capital contribution, and who gets paid first.

Profit and loss splits: never leave this to default

Answer four questions: the ratio (or a tiered structure — a preferred return on capital first, then a split of the remainder), how often profits are calculated and distributed, whether profits can be retained in the business without distribution (and who decides), and how losses and unexpected liabilities are shared — the loss ratio need not mirror the profit ratio.

Two traps to avoid. First, draws: if a partner receives a monthly draw treated as an advance against their profit share, say so explicitly — otherwise a "guaranteed" payment looks like the salary the legislation says partners don't get, and it will be re-characterized in a dispute. Second, the tax trap (full section below): under CRA flow-through rules you are taxed on your allocated share of partnership income whether or not it was distributed to you. A 50/50 partner whose agreement retains $100,000 for expansion still pays personal tax on their $50,000 share that year. Plan distributions around tax reality, not just cash flow.

Decision-making and authority: who can sign what

Split decisions into tiers: day-to-day operations to the managing partner; ordinary business matters to a majority vote; and a defined list of fundamental decisions to unanimity — admitting a new partner, selling all or substantially all assets, borrowing above a threshold, changing the business's nature, dissolving. Set voting weights (per-capita vs. per-percentage), quorum, and how votes are recorded.

Two legal facts shape this clause. First, every partner is an agent of the firm: a partner acting in the usual course of the firm's business binds the firm and the other partners, and an outsider dealing in good faith is generally protected even if your agreement quietly limits that partner's authority. Internal limits work against your partners; they rarely work against the public. Second, mirror your limits in the real world — the bank mandate, CRA authorization, and licences should reflect who can actually sign, because the agreement alone won't stop a cheque from clearing.

Partner duties: loyalty, accounts, and competition

Partners owe each other fiduciary duties, and the legislation hard-wires three of them: the duty to render true accounts and full information on anything affecting the partnership (Ontario s. 28), accountability for any private profit made from partnership transactions or the use of partnership property (s. 29), and a duty not to carry on a competing business without the other partners' consent — with breach profits held for the firm (s. 30). Restate and extend these in your agreement: full disclosure of conflicts of interest, no self-dealing, and a process for approving side ventures.

Two adjacent clauses belong here. Confidentiality: protect client lists, pricing, and trade secrets — and if employees or contractors will see them, use a standalone NDA. Non-competition: because the statutory no-compete duty ends with the partnership, add your own post-exit restraint — but keep it narrow and enforceable. Note that Ontario has banned most post-employment non-competes since October 2021 (with narrow executive and sale-of-business exceptions), so an overbroad restraint may be worthless where a tightly drawn non-solicitation clause would hold.

New partners, transfers, and partner loans

Admission of a new partner requires unanimous consent by default — most agreements keep it that way, then add mechanics: a buy-in formula (paying into capital vs. buying from existing partners), vesting if paid over time, and how the newcomer's profit share is calculated. For transfers, distinguish a transfer of economic interest (the right to receive profits) from admission as a partner with management rights — most agreements allow the former only with consent and forbid the latter without it, with a right of first refusal so the remaining partners can buy the interest first.

When partners finance the partnership with loans rather than capital — a common bridge between contributions — document it with a proper promissory note: principal, interest rate, repayment terms, and default consequences. That written note is also what answers the wind-up question of who gets paid first: lenders before capital contributors.

Dispute resolution: a ladder, not a cliff

Write the disagreement procedure while partners still agree. The standard ladder: (1) mandatory good-faith negotiation within a set period; (2) mediation with a neutral mediator, costs shared; (3) binding arbitration or court as the final forum — pick one, name the seat, and state who pays. For 50/50 partnerships, which the majority-vote default cannot save from deadlock, add a deadlock breaker such as a shotgun clause: one partner names a price for the whole business, and the other must buy at that price or sell at it. It forces fair pricing because the partner naming the price doesn't know which side of the trade they'll end up on.

Also plan now for involuntary exits: death, disability, insolvency, or a partner simply wanting out. Life-insurance-funded buyouts are the classic answer to death and disability — the proceeds fund the purchase of the deceased partner's interest at a pre-agreed valuation formula, so the survivors don't face a family demanding cash the business doesn't have. Without this clause, the default rule dissolves the partnership on a partner's death — about the worst possible outcome for the survivors.

Exit, buyout, and dissolution: the ending you write in advance

The section founders skip and lawyers bill the most hours on. Cover: voluntary withdrawal (notice period, typically 3–12 months), valuation of the departing partner's interest (book value, earnings multiple, or independent appraisal — and who pays), payment terms (lump sum vs. instalments, security, interest), post-exit non-compete and non-solicitation, and what happens to the partnership name, goodwill, and client relationships.

On final dissolution, Ontario's section 44 ordering is instructive and most agreements mirror it: pay outside creditors first, then repay partners' advances and capital, then divide the surplus by profit ratios. Add the practical machinery: who winds up, authority to complete in-progress transactions (the legislation preserves partners' authority for winding up — s. 38), notice to creditors and clients, deregistration of the business name, final CRA filings including the final T5013, and GST/HST account closure. And remember the public-notice right: any partner may publicly give notice of dissolution (s. 37), which protects a departing partner from liability for post-departure debts — advertise the departure, don't just shake hands on it.

CRA tax notes: the flow-through reality

Partnership taxation is the least intuitive part of the structure, and it turns directly on your agreement. A partnership is not a separate legal person for tax purposes: it computes its net income under section 96(1) of the Income Tax Act as if it were a separate person, then allocates it to the partners — each of whom reports their share on their own T1, T2, or T3 return. The partnership itself pays no tax and files no income tax return, though certain partnerships must file the T5013 partnership information return.

Three consequences follow. First, you are taxed on your allocated share whether or not you received it — retained earnings still show up on your personal return, which is why distribution clauses must account for partners' tax bills. Second, losses flow through too: a partner can generally use their share of partnership business losses against other income (loss-making startups take note), though loss allocation and at-risk rules are technical — confirm with an accountant. Third, your agreement's allocation ratios are the tax ratios: special allocations (a preferred return, or different splits for capital gains vs. business income) are respected by the CRA only if they're real — document them properly and get professional sign-off before relying on them.

Mistakes that sink partnerships

Almost every partnership blowup that reaches a lawyer traces back to one of these avoidable failures:

• No written agreement — the equal-split, no-salary, dissolve-at-will defaults govern by surprise
• Vague contributions — "we both put in what we can" with no valuation of sweat equity or property
• Profit splits that ignore the tax reality — partners taxed on retained earnings they never received
• A managing partner doing everything while the agreement pays them nothing — the silent partner's equal default share breeds resentment
• Signing authority left to the agency default — one partner binds the firm to obligations the other never approved
• No buyout formula — the departing partner's interest becomes a negotiation with no anchor
• No death/disability plan — a partner's death dissolves the firm by default and leaves the family holding an illiquid interest
• Limited partners meddling in management — one "helpful" operational decision can cost an LP investor their liability cap
• Claiming LLP status without registration — LLP is a registered designation, not a label you can adopt
• Forgetting the wind-up paperwork — business name deregistration, final T5013, GST/HST closure, and public notice of dissolution left undone