Entering Into a Partnership Agreement in Canada

Author: David Siksay

After considerable deliberation, you and your colleagues have decided to carry on business in partnership in Canada.

You have carefully considered the various forms of business association sole proprietorship, incorporation, and partnership - and you have decided that the partnership model best fits with your needs. You have determined that you and your partners fit the three required criteria. First, your proposal is for a Canadian business, which includes "every trade, occupation, or profession". Second, you have a view to profit, which means that your goals cannot be social, charitable, or cultural. And third, you intend to carry on business in Canada and share the profits.

You are aware that, unlike a corporation, a partnership in Canada is not a separate legal entity and that the partners will actually carry on the business directly. You are also aware that, in a general partnership, each of the partners can bind the partnership when acting in what appears to be business of the firm, and that each partner in a general partnership in Canada is liable for partnership debts to the full extent of his or her personal assets. These facets of partnership law have not deterred you.

You have also determined that you do not wish the constitution of your partnership relationship to languish in the vagaries of a verbal agreement, or to be defined only by the strict constraints of the Partnerships Act. Instead, you have wisely decided to define your partnership and the rights and obligations of the partners, in a well crafted and all-inclusive partnership agreement.

You have decided to retain a business lawyer who has had significant experience drafting partnership agreements in Canada and she has asked you to prepare for your initial meeting, at which time you will provide instructions on the preparation of a formal partnership agreement, by considering, and being prepared to discuss, the following issues:

Name, Identity of Partners and Business Activities

What will your partnership name be? Who will be the partners? Have you already registered your partnership under the Business Names Act? Exactly what business will the partnership be involved in? Do you foresee that the identity of the partners will be relatively fixed over time, or will some partners be allowed to exit or will new partners be admitted?

Management of and Contribution to the Partnership in Canada

Will the partnership be managed by the partners as a group, a managing partner, or a committee of partners, or a combination thereof? What types of decisions are to be made by unanimous vote (like changes in the nature of the partnership business) and what types of decisions might be made by majority vote? Are initial capital contributions to be made, equally, by each partner? If later capital contributions are required, are they to be equal as well? What happens if a partner is unable to make a capital contribution - is the amount to be deducted from future profit shares with interest (at what factor) and are partnership rights to be suspended until the contribution is paid?

Division of Profits

Are profits to be divided equally amongst the partners (as the Partnerships Act presumes, barring agreement to the contrary), and how and when are profits to be paid? Is there to be a minimum monthly draw set up for partners? If profits are not to be divided equally, what factors are to be used to determine the division? Are unpaid invoices and work-in-progress to be included or excluded when considering the division of profits?

Retirement, Death, Disability and Other Fundamental Changes

The Canadian Partnerships Act provides that, except where there is agreement to the contrary, a partnership in Canada is dissolved by the death or insolvency of any partner. Is this your desired outcome on death or insolvency? Should there be cross life insurance to fund the buy-out from your partner's estate on death? If not, how is a partnership interest to be "paid" to the estate of a deceased partner and what are the rights of the heirs? What are the buy-out provisions on retirement of a partner? Given the potential drain on a Canadian partnership, should retirements be limited to a certain number within a certain time period? What happens on the insolvency or incapacity of a partner and what are the buy-out rights of the other partners in such circumstances? Can a partner be ejected from the Canadian partnership and, if so, on what grounds and how is compensation for the ejected partner's interest paid? Will spouses of partners be expected to sign a marriage contract in which they agree that they will not attempt to exercise any ownership rights over Canadian partnership interests of their spouse?

In addressing these issues and being in a position to discuss them thoroughly with your business lawyer, you will be in the best position to provide detailed instructions for the initial draft of your partnership agreement. It is wise to remember, though, that as with many other forms of business association agreement, the parties really are writing the agreement for when they are not getting along - chances are, when things are going well, very little reference will be made to the partnership agreement. Most frequently, you are drafting a "handbook for the bad times" and a healthy recognition of this will help you determine the things that need to be included in your agreement.

Siksay Fraser Law Offices
Whitby and Port Perry, Ontario
tel: (905) 666 - 4772

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