10 Key Provisions to Include in Partnership Agreement in Canada

Prabhat Nigam

10 Sep, 2022

Most people who do not wish to form a company to save themselves from the elaborate scheme of compliances; enter into partnerships to carry out their business venture. Once the partners have decided to form a partnership, the next step is to prepare a partnership agreement to govern their relationship and to manage their issues relating to the said partnership as they arise in future. This article lists the 10 key provisions to be included in a partnership agreement in Canada for the smooth working of the partnership.

What is a partnership agreement in Canada?  

A partnership agreement in Canada is similar to all the agreements governing the functioning of a company, such as articles of association, bye-laws, shareholders agreements^[1] of corporation etc. A partnership agreement governs all the important aspects of a partnership, such as rights, responsibilities and legal liabilities of the partners, contributions of the partners in the partnership, management of the business affairs of the partnership, distribution of profits, management of disputes, dissolution and winding up of the partnership.    

10 Key Provisions in a Partnership Agreement in Canada  

Following are the 10 key provisions in a partnership agreement in Canada: 

• Management of the partnership: A partnership agreement in Canada must state clearly how the day-to-day business affairs of the partnership will be managed. The law states that any partner can act on behalf of the partnership, and any action taken by a partner is binding on all the partners. This makes it necessary that there exists clarity with respect to the role of each partner.

• Duties of the partners: In order to avoid the risk of unclear authority, it is necessary that a partnership agreement should clearly lay down the duties of each partner. It should specify the level of authority of each partner, the extent of decision-making power, major management duties and other associated responsibilities. 

• Capital contributions of the partners:  A partnership agreement in Canada should explicitly mention the amount of capital contributions made by every partner in the agreement and the percentage of ownership interest each partner takes. Usually, it is the capital contribution in the form of cash invested in a partnership. However, other kinds of capital contributions include real assets, securities, property and, in some cases, skills too.  

• Sharing of profits and losses: The general practice followed is the profits and losses are shared in the partnership in proportion to the capital contribution and ownership interest of each partner in the partnership in Canada. An ideal partnership agreement in Canada should clearly lay down whether the partners will be able to take a regular “draw,” i.e. a withdrawal from his/her allocated profits. This will depend on the financial needs of the partners. 

• Resolution of Disputes: Disputes are bound to arise in a partnership arrangement. Therefore, it becomes necessary that the partnership agreement should contain a clause of dispute resolution which lays down the framework to resolve dispute deadlocks. A dispute resolution clause usually mentions the alternate dispute resolution options such as negotiations, mediations, and arbitration instead of opting for the mode of litigation and taking every dispute to court for its resolution.    

• Extent of legal liabilities: No matter what type of partnership one enters into, each partner can be personally held liable for the business obligations arising in the course of the partnership. In the absence of a clause limiting the extent of liability of the partners in case of insolvency, it is very much important to add this clause to save the personal assets of the partners.

• Dissolution and winding up of partnership: The partnership agreement in Canada should specifically list down the events which may automatically lead to the dissolution and winding up of a partnership. It should also list down the circumstances which entitle the partners to terminate the partnership. Further, this clause should also mention the procedure for the payment of liabilities of a partnership and the distribution of the remaining assets of the partnership among the partners.

• Non-Compete and Non-solicitation clause: Partners come in and go out of the partnership. In order to make sure that the outgoing partner should not work for your competitor or poach your clients, it is necessary to put in a non-compete and non-solicitation clause. The outgoing partner should be prohibited from participating in a business competing with the partnership business and hiring personnel from a competing business.

• Inclusion of new partners: A partnership should also mention the criteria for admission of a new partner in the partnership. An ideal partnership agreement in Canada mandates the incoming partner to be bound by the partnership agreement. Other requirements to be included in the partnership agreement are capital contribution by the incoming partner, the system of calculation of profits after the incoming of the new partner etc.

• Expulsion of partners: A partnership agreement in Canada should explicitly mention all the circumstances where the partners can be expelled or forcibly removed from the partnership. Some of the instances can be when the partner commits a default under the partnership agreement, perform acts damaging the partnership business, refuses to make contributions, discloses the partnership business confidential information etc.            

Conclusion 

From the above mentioned information, it is advised that before working in a partnership, it is very important to prepare a partnership agreement. A partnership agreement in Canada spells out the duties, financial obligations and the extent of legal liability of the partners entering into a partnership. It allows all the partners to agree in advance to manage the relationship in the partnership and how each of them will handle the issues that may arise in due course of the partnership. In most Canadian jurisdictions, it is not necessary to have a partnership agreement to form a business partnership. However, it is not advised to not form a partnership agreement in Canada when forming a limited partnership or limited liability partnership as a written partnership agreement will allow all the partners clarity relating to all the important aspects of the partnership.    

Read our Article: Setting up a Partnership in Canada