Partnership Firm

Partnership agreement in Canada: An overview

Whenever people plan to enter into a partnership in Canada, they need to form a partnership agreement to legally formalise the formation of their partnership. A partnership agreement in Canada provides a road map to the partners to deal with situations before they arise in future and make the day-to-day operations of the business smoother. It further prevents small disagreements turn into full-blown crises.

This piece of writing discusses the meaning of a partnership agreement in Canada and the important aspects to be incorporated while drafting a partnership agreement.  

What is a partnership agreement in Canada?

A partnership agreement in Canada is a document that formalises the creation of a partnership among the partners coming together to organise a business and undertake profit-making activities. Generally, a partnership agreement in Canada outlines the partners’ powers, ownership share, capital contribution, profit distribution, operating procedures, dispute resolution, exit strategy and winding up of the firm.

What are the different types of partnerships in Canada?

According to Canadian law, the following are the three kinds of partnerships in Canada:

1. General Partnerships
2. Limited Partnerships
3. Limited Liability Partnerships^[1]     

Important aspects to be covered in a partnership agreement in Canada

Following are the important aspects that a good partnership agreement in Canada must cover:

1. The financial contribution of each partner 

A partnership agreement should always mention the financial contribution that each partner in the firm contributes to the partnership in case any disagreements arise in future. It is very much possible that some partners contribute more start-up capital than other partners. Other partners also have the option to contribute in the form of sweat equity, which should be valued and clearly specified in the agreement.  

2. The division of work among the partners

The partnership agreement must clearly specify the division of work among the partners so that every partner understands his/her scope of work and that nobody transgresses on each other’s area of work. Every partner must be aware of what he/she is supposed to do and what kind of decisions a partner is responsible for.   

3. Profits to be drawn from the partnership

The essential element of a partnership agreement in Canada is to specify how much profit and what percentage of the profit each partner shall draw from the profits generated by the partnership firm. It should also specify how often the partners can draw a salary from the partnership and what amount of profit will be reinvested in the partnership again.  

4. The property is included in the partnership.

Partners often contribute property in different forms. The property contributed can be both tangible such as a building or a piece of land, machinery etc. and intangibles such as goodwill, intellectual property, software, client lists etc. This property needs to be itemised, properly valued and clearly mentioned in the partnership against each partner. This helps in drawing the extent of profits and in the settlement at the time of exit. 

5. Usage of property by the partners

Another thing to be clarified in the partnership agreement is the manner of usage of the property contributed to the partnership by the members. It is highly possible that a partner may not want its property to be used in the course of the partnership in a certain manner and may object to its use otherwise. Therefore, to avoid any disagreements in future, it is important that the manner of usage of property contributes to the partnership is properly delineated in the agreement.

6. Handling of accounting and taxation matters of the partnership

There are various aspects related to the accounting and taxation matters of the partnership, such opening of a bank account for the partnership, the associated privileges related to the signing of cheques on the firm’s behalf, the line of credit for the partnership, collective consent of the partners for making purchases on behalf of the firm, decision-related to accounting and bookkeeping, i.e. whether it will be outsourced or one of the partners will take care of it etc.

7. Method of resolution of disputes 

Disputes among partners are bound to arise when working in close proximity to a partnership firm, and it becomes very difficult to resolve the disputes. It is advised that the partnership agreement must mention the mode of resolution of disputes in case they arise in future. It is advised that partners should agree upon a mediator beforehand to break the deadlock. Another way suggested having the business advisory board resolve the disputes. No matter what mode is chosen by the partners, it should be enshrined in the partnership agreement.

8. Arrangements when an individual ceases to be the partner 

It is natural that the partners may die or become incapacitated or become disabled and may not be in a position to carry on the business of the partnership. This necessitates that the partnership makes arrangements beforehand so that the partnership continues to go on and prevents the business from possible collapse. The general practice is to have a buyout clause or a separate agreement which provides the course of action to be taken by the remaining partners in case one of the partners of the firm is not in a position to fulfil the duties of the partnership.

9. Planning in case a partner wants to leave the partnership

This segment forms the buyout clause, which answers the questions such as whether the departing partner has to be bought out, the price at which such buyout will take place, the mode of payment and which of the partners can buy the share.

10. Sale of business or the ‘Exit strategy.’

Every partnership business should have an ‘exit strategy’ right from the beginning of the formation of a partnership. If the partners have a plan to sell the business in the future, they should agree in advance on the acceptable terms, processes and the price at which such an exit plan will be executed. This takes care of the most contended issues among the partners, such as business valuation and profit sharing. 

Conclusion 

The discussion above clearly marks the necessity of having a partnership agreement in Canada to avoid disputes and costly litigation. It is advised that no matter how great your understanding with your partners, it is always advised that you should never enter into a partnership arrangement without a formally drawn-up partnership agreement. The problems related to disagreements and misunderstandings and their management are all incorporated in the partnership agreement. It is advisable to take assistance from experts such as law professionals in the drafting of your partnership agreement in Canada. You can take assistance from experts at Enterslice.

Read our Article: Setting up a Partnership in Canada