Going into business
with a partner?

By Jonathan Kleiman, Barrister & Solicitor · Published June 2026

Most business partnerships in Ontario start the same way: two people who trust each other shake hands, agree to "figure out the details later," and get to work. The energy is good, the relationship is strong, and a written agreement feels like an unnecessary formality — even a sign that you do not really trust each other. So it gets skipped.

Here is what I tell people in that moment. You already have a partnership agreement — you just did not write it. The moment two or more people carry on business together for profit, you have a general partnership, and Ontario's Partnerships Act supplies a complete set of default rules to govern it. The catch is that those defaults were not designed around your deal, and some of them surprise people badly: profits split equally regardless of who contributed what, and full personal liability for the firm's debts.

So the real question is not "do I need a partnership agreement." You are governed by one either way. The question is whether you want your own terms to apply, or the law's. Below I will walk through what a partnership actually is, the risky defaults that kick in when you have nothing in writing, the checklist of what a proper agreement should include, a real example of how this goes wrong, and how to think about partnership versus incorporating. None of this is legal advice for your specific situation — but after years of helping Ontario business owners both set these up and clean up the ones that were never written, this is what I want every prospective partner to understand before they start.

What a partnership actually is — and the danger of going without an agreement

A general partnership is the default structure that arises whenever two or more people carry on business together for profit. You do not file anything to create one — no articles, no certificate, no government approval. If you and another person are running a business together and sharing in its profits, the law treats you as partners, full stop. That informality is the appeal, and it is also the trap.

The crucial thing to understand is that a partnership is not a separate legal entity from the partners. This is the opposite of a corporation. When you incorporate a business in Ontario, you create a distinct legal "person" that owns the business, signs the contracts, and owes the debts — and generally shields you personally. A partnership does none of that. There is no separate entity standing between you and the business. The partners are the business, which means the business's obligations are, ultimately, the partners' obligations.

That is the danger of going without an agreement. People assume that "no contract" means "no rules" — a clean slate where they can sort things out as they go. The reality is the reverse. No contract means the Partnerships Act rules apply in full, and those rules are rigid, occasionally counterintuitive, and almost never tailored to what the partners actually intended. You have not avoided the rulebook by staying silent. You have simply adopted someone else's.

Does a handshake count as a partnership agreement?

A handshake or a verbal understanding can absolutely create a binding partnership and can even form part of your terms. The problem is proof and precision. When the relationship is good, nobody remembers exactly what was said about profit splits or what happens if one of you wants out. When the relationship sours, both partners remember the conversation very differently — and a verbal deal you cannot prove is, in practice, no deal at all on the disputed point. A written agreement is not about distrust; it is about having a record you can both rely on years later.

Why you need a partnership agreement

The short version is this: a partnership agreement lets you replace the law's one-size-fits-all defaults with terms that fit your actual deal. Almost every default rule in the Partnerships Act can be overridden by a written agreement among the partners. That single power is the whole reason the document exists, and it is enormous.

Think about everything the defaults get to decide if you stay silent. How profits are split. Who can sign a contract that binds the firm. Whether the business survives one partner leaving. What a departing partner's share is worth and how it gets paid out. How disputes get resolved when two equal partners disagree. Left to the statute, every one of those questions has a fixed answer — and you may dislike most of them. A partnership agreement is how you take those decisions back.

There is also a quieter benefit, and in my experience it is the most valuable one of all. Drafting the agreement forces the conversation. Sitting down to decide, in advance, what happens if one of you wants to leave, or stops pulling their weight, or dies, surfaces every assumption the two of you were quietly making about the business. I have watched partnerships discover, during that drafting conversation, that they had completely different expectations about money and exit. Far better to find that out across a conference table than across a courtroom three years later.

The default rules that apply if you don't have one (and why they're risky)

Here is what Ontario's Partnerships Act imposes by default when there is no written agreement saying otherwise. Read these carefully, because they are the rules you are actually living under right now if your partnership is unpapered.

• Profits and losses are shared equally. This applies regardless of who contributed more capital, who brought in the clients, or who does most of the work. If you put in seventy per cent of the money and your partner put in thirty, the default still splits the profits — and the losses — fifty-fifty. The same logic applies to effort: a partner who does far less can still claim an equal share. This is the default that surprises people most.
• Every partner is an agent who can bind the whole firm. Each partner can enter contracts, incur debts, and take on obligations that bind the entire partnership and every partner in it. Your partner's signature on a bad deal is, legally, your problem too. You do not get to approve each commitment in advance unless your agreement requires it.
• Partners face joint and several personal liability for the firm's debts. This is the big one. Because the partnership is not a separate legal entity, the partners are personally on the hook for its debts and obligations — and "joint and several" means a creditor can pursue any one partner for the entire amount, not just that partner's proportionate share. If the firm owes money and your partner has none, the creditor can come after you for all of it. Your home, your savings, your personal assets can be exposed.
• The partnership can dissolve when a partner leaves or dies. Under the defaults, the departure, retirement, or death of a partner can trigger the dissolution of the entire firm — unless your agreement says the business carries on. That is rarely what anyone wants, especially the partners who intended to keep going.

Look at that list and the risk becomes obvious. Equal profit sharing can be deeply unfair to the partner who carries the load. Mutual agency means you are exposed to your partner's judgment on every contract. Joint and several liability puts your personal assets behind the whole business. And automatic dissolution can blow up a healthy company the day a partner exits. None of these defaults is malicious — they are just generic, and generic rules rarely fit a specific business. An agreement is how you override the ones that do not work for you.

What a partnership agreement should include — the checklist

When I draft a partnership agreement, I am working through a checklist designed to replace the risky defaults above with terms the partners actually choose. A solid agreement covers, at minimum, the following.

• Capital contributions. What each partner is putting in — cash, equipment, property, intellectual property, or sweat equity — and how it is valued. This is the foundation for ownership percentages and for what each partner gets back on exit.
• Profit, loss, and draw allocation. How profits and losses are split (overriding the equal-shares default), and how and when partners can take draws against their share. If your split is anything other than equal, this clause is essential.
• Roles, authority, and decision-making. Who does what, who has authority to bind the firm and up to what dollar amount, and how decisions and votes are made — including which decisions need unanimity and which can pass on a majority.
• Admitting new partners. The process and approval required to bring someone new into the partnership, so growth does not become a crisis.
• Exit, retirement, death, and disability. This is the heart of the document. What happens when a partner wants out, retires, dies, or becomes disabled — including a clear buy-out mechanism and, critically, how the departing partner's share is valued. Get this right and the business survives a departure intact. Skip it and you are back to the dissolution default.
• Restrictions — non-compete, non-solicitation, and confidentiality. Reasonable limits on a departing partner competing with the firm, poaching its clients or staff, or walking off with confidential information.
• Dispute resolution. How disagreements get resolved — a tie-breaking mechanism for deadlocks, and often a requirement to mediate or arbitrate before litigation. A mediation and arbitration lawyer can help you design a path that keeps disputes out of court.
• Winding up and dissolution. How the partnership is ended if that day comes — how assets are sold, debts are paid, and whatever is left is distributed.

If you have seen our checklist on what to include in a shareholders' agreement, much of this will feel familiar — and that is no accident. A partnership agreement is to a partnership what a shareholders' agreement is to a corporation: the document that governs ownership, control, money, and exit. The legal structure differs, but the questions you have to answer are remarkably similar.

When two partners deadlock — and how the agreement breaks the tie

There is one structural problem that haunts two-person partnerships specifically, and it is worth singling out because it is so common and so dangerous. With two equal partners, every disagreement is a potential deadlock. There is no third vote to break a tie. If one of you wants to expand and the other wants to hold steady, or one wants to take on a risky client and the other refuses, the business can simply freeze. Under the defaults, there is no clean mechanism to resolve that paralysis — and a frozen business can deteriorate fast.

A partnership agreement is where you solve the deadlock problem before it arises. There are several standard tools, and the right one depends on the partners. You can name a neutral third party — an accountant, a mentor, an arbitrator — to break specified ties. You can require certain categories of decision to go to mediation or arbitration rather than stalling. And for the relationship that has truly broken down, you can include a buy-sell or "shotgun" clause, where one partner names a price and the other must either buy at that price or sell at it. None of these is pleasant to negotiate while you are getting along, which is exactly why it has to be done then — once you are deadlocked, you will never agree on the mechanism for resolving deadlocks.

I raise this because the cases I see go worst are almost always two-person partnerships with no tie-breaker. The partners are equal, the relationship has soured, and the law gives them no path forward except dissolution or litigation. A few clauses drafted in advance would have given them an off-ramp. Without them, the only exit is the expensive one.

How partnership profits and liability flow to you personally

Because a partnership is not a separate legal entity, two things flow straight through to the partners in a way that catches people off guard. The first is tax. A general partnership does not pay tax itself; instead, its income is allocated to the partners according to their shares and taxed in their hands. That can be simple and even advantageous for a small venture, but it also means partnership income lands on your personal return whether or not the cash was actually distributed to you — and the split that governs it is, by default, equal. This is another reason the profit-allocation clause matters: it drives not just who gets the money, but who pays the tax.

The second thing that flows through is the one I keep returning to, because it is the one that can hurt the most: liability. There is no corporate veil in a partnership. When the firm owes money, the partners owe money — jointly and severally, meaning each of you can be pursued for the whole debt, not merely your share. A partner who signs a lease, takes a loan, or commits the firm to a contract has bound you to it. And if that partner cannot pay their share when things go wrong, the creditor is entitled to collect the entire amount from whichever partner has assets. That is usually the partner who was most careful with money — which is precisely the unfairness people do not anticipate.

A partnership agreement cannot change any of this as against outside creditors; it cannot rewrite the law that makes partners personally liable. What it can do is govern the relationship among the partners — for instance, an indemnity where a partner who causes a loss agrees to make the others whole. That is real protection between you, but it is only as good as that partner's ability to pay. When the liability exposure genuinely keeps you up at night, the honest answer is not a cleverer agreement — it is a different structure, which is where incorporating comes back into the picture.

Can one partner be liable for the other's mistake?

Yes, and this is the consequence that most surprises new partners. Because every partner is an agent of the firm and the liability is joint and several, a contract your partner signs, a debt they incur, or a wrong they commit in the course of the business can land on you personally. You do not have to have known about it or approved it. An agreement can require sign-off above a certain dollar amount and can give you an indemnity against a partner who causes a loss — useful protection between you, but no help if that partner cannot pay. It is the clearest illustration of why the liability question, not the paperwork question, is often what should drive your choice of structure.

A real example of a partnership gone wrong

Let me give you the kind of story I see more often than I would like — details changed, but the shape is real. Two friends start a small business together. One of them puts up most of the money and runs the back office; the other is the rainmaker who brings in the clients and does most of the hands-on work. They never write anything down, because the business is going well and they trust each other completely. For two years it works beautifully.

Then it stops. The rainmaker decides they want out — maybe a better opportunity, maybe burnout, maybe a falling-out, it does not matter. They want to take "their half" and leave. The partner who put up the capital is stunned: from where they sit, they funded the whole thing and should be entitled to far more than fifty per cent. But there is no agreement. So the Partnerships Act default applies, and the default is an equal split, irrespective of who contributed what.

It gets worse. With no continuation clause, the departure threatens to dissolve the partnership entirely — so the remaining partner is not just arguing about money, they are scrambling to keep the business alive. And because there was never a valuation method agreed in advance, the two of them cannot even agree on what the leaving partner's share is worth. There is no buy-out mechanism, no formula, nothing. What should have been a clean exit becomes a months-long fight, with lawyers on both sides, over questions a two-page schedule in an agreement would have answered in advance.

The painful part is how preventable it was. Every single issue in that dispute — the profit split, the continuation of the business, the valuation, the buy-out — is something a partnership agreement decides up front, while everyone is still friendly and reasonable. The agreement does not prevent the partner from leaving. It just means the leaving is governed by terms both of them chose, instead of by a fight neither of them can afford. I have never once seen a partnership regret having an agreement. I have seen many regret not having one.

Partnership vs. incorporating — which structure?

Once people understand the personal-liability exposure of a general partnership, the natural next question is whether they should incorporate instead. It is a real and important trade-off, and worth weighing honestly rather than defaulting either way.

The case for a partnership is simplicity and flexibility. There is nothing to file to create one, the structure is easy to understand, and a partnership agreement can be tailored to almost any arrangement between the partners. For a relatively low-risk venture between people who trust each other, a partnership with a well-drafted agreement can be perfectly sensible.

The case for incorporating comes down largely to one word: liability. A corporation is a separate legal entity, so its debts and obligations generally belong to the company, not to the owners personally — the opposite of a partnership's joint and several exposure. That limited-liability shield is the single biggest reason businesses incorporate, and as the risk and the dollars grow, it tends to outweigh the simplicity of a partnership. Incorporating also unlocks tax-planning options a partnership does not have. The trade-off is more formality and higher setup and maintenance costs. Our guide on sole proprietorship versus incorporation in Ontario walks through the broader structure decision, and a Toronto business lawyer can help you map your specific risk and goals onto the right form.

If you do incorporate with co-owners, the partnership agreement's role is played by a shareholders' agreement — the same job, different structure. So the lesson is consistent no matter which path you choose: if you are in business with someone else, you need a written agreement that governs ownership, control, money, and exit. The only question is which form of it. For a sense of how all of this fits together at the very start, see our guide on how to start a small business in Ontario.

Can a partnership and a corporation own a business together?

Yes — business structures can be combined in more sophisticated ways, and as ventures grow, the simple two-person partnership is sometimes only the starting point. But for most people reading this, the practical decision is the straightforward one: a general partnership with a strong agreement, or a corporation with a shareholders' agreement. Get that foundational choice right first. The more complex structures are a conversation to have with a lawyer and accountant once the business has grown into needing them — and some of the broader strategy is covered in business advice from a lawyer.

Common mistakes I see

After years of both drafting these agreements and untangling the disputes that arise without them, the same avoidable mistakes come up again and again.

Assuming a handshake is enough. Trust is wonderful and irrelevant to this problem. The partners who trust each other most are often the ones who skip the agreement — and then have the worst fight when the relationship changes, because nothing was ever written down. The agreement is insurance against a future where you do not see eye to eye, which is precisely the future you cannot imagine while things are good.

Leaving out the exit and valuation provisions. Of everything in the checklist, the buy-out mechanism and the valuation method on a partner's departure are the clauses that matter most and get skipped most. Partnerships almost never break at the start, when everyone is optimistic — they break at the exit. An agreement that does not say clearly how a departing partner is bought out, and how their share is valued, has left out the very provision it was most needed for.

Ignoring the personal-liability reality. People go into partnerships without absorbing that they are personally, jointly and severally liable for the firm's debts — including debts their partner runs up. If that exposure genuinely worries you, an agreement alone will not fix it, because it cannot bind outside creditors. That is the moment to seriously weigh incorporating instead.

Using a generic template. A downloaded template is better than nothing, but only just. The provisions that matter most — valuation, buy-out, dispute resolution, the specific overrides of the Partnerships Act defaults — are exactly the ones generic templates handle poorly or omit. A partnership agreement is worth tailoring to your actual deal, by someone who has seen how they fail.

Never updating it. A partnership agreement signed once and forgotten drifts out of step with the business. Roles change, contributions change, partners come and go. Build in an amendment process and revisit the document every few years, so it keeps describing the partnership you actually have rather than the one you had on day one.

Key takeaways

• You are governed by an agreement either way. With no written agreement, Ontario's Partnerships Act defaults apply in full — they are rigid and often surprising, and they are the rules you live under right now if your partnership is unpapered.
• The defaults are risky. Profits and losses are split equally regardless of contribution, and partners face joint and several personal liability for the firm's debts — a creditor can pursue any one partner for the entire amount.
• An agreement overrides the defaults. It lets you set your own profit split, decision-making, restrictions, and — most importantly — what happens when a partner exits, including a buy-out mechanism and how their share is valued.
• The exit clauses matter most. Partnerships break at the departure, not the start; the valuation and buy-out provisions are the ones most needed and most often skipped.
• Weigh partnership against incorporating. A partnership is simple but exposes you personally; a corporation is a separate entity that generally shields your assets. As risk and dollars grow, incorporating often wins.

Frequently asked questions

Do I legally need a partnership agreement in Ontario?

No — there is no law that forces you to have one. A general partnership exists the moment two or more people carry on business together for profit, with or without a written agreement. But "not required" is not the same as "not needed." Without an agreement, Ontario's Partnerships Act fills the gaps with default rules that often surprise people: equal profit sharing regardless of contribution, and full personal liability for partnership debts. In my experience a written agreement is one of the cheapest forms of protection a business owner can buy, and skipping it is a false economy.

What happens if we don't have a partnership agreement?

You still have a partnership — you just have one governed entirely by Ontario's Partnerships Act defaults instead of by your own terms. Those defaults assume things you may never have agreed to: profits and losses split equally, every partner able to bind the firm to contracts, and joint and several personal liability for the partnership's debts. The partnership can also dissolve automatically when a partner leaves or dies. None of that bends to who actually put in the money or did the work. An agreement is how you replace those one-size-fits-all rules with terms that fit your deal.

What should a partnership agreement include?

A good one covers each partner's capital contribution; how profits, losses, and draws are split; each partner's role, authority, and how decisions and votes are made; how new partners are admitted; and — the part people skip — what happens when a partner exits, retires, dies, or becomes disabled, including a buy-out mechanism and how a departing partner's share is valued. It should also address restrictions like non-competition, non-solicitation, and confidentiality; how disputes are resolved; and how the partnership is wound up or dissolved. The exit and valuation provisions are usually the most important, because that is where partnerships actually break.

How are profits split by default in an Ontario partnership?

Equally. Under Ontario's Partnerships Act, if you have no agreement saying otherwise, partners share profits and losses equally — no matter who contributed more capital, brought in the clients, or did the lion's share of the work. This is one of the defaults that surprises people most. If you put in seventy per cent of the money or do most of the heavy lifting and expect to keep more, you need a written agreement that says so. Without it, the law assumes a fifty-fifty split, and a partner who did less can walk away with an equal share.

Are partners personally liable for business debts in Ontario?

Yes — and this is the single most important thing to understand. A general partnership is not a separate legal entity, so partners face joint and several personal liability for the firm's debts and obligations. "Joint and several" means a creditor can pursue any one partner for the entire amount, not just their share. If your partner runs up a debt or signs a bad contract that binds the firm, your personal assets can be on the hook. A partnership agreement cannot erase this liability toward outside creditors — but limited liability is exactly why many people consider incorporating instead.

What happens if a partner wants to leave or dies?

Without an agreement, the answer is often blunt: the partnership can dissolve. Under Ontario's Partnerships Act defaults, the departure or death of a partner can trigger dissolution of the whole firm, which is rarely what the remaining partners want. A partnership agreement fixes this by setting out a continuation and buy-out mechanism — the business carries on, and the departing partner (or their estate) is bought out at a value determined by a method you agreed to in advance. This is the provision I see partnerships need most and have least often, and its absence is where families and former partners end up fighting.

Can a partnership agreement be changed later?

Yes. A partnership agreement is a contract among the partners, and the partners can amend it by agreement as the business evolves — when someone's role changes, a new partner joins, or the profit split needs adjusting. The practical key is to build the amendment process into the agreement itself: say clearly whether changes need unanimous consent or a defined majority, and require amendments to be in writing and signed. In my experience the partnerships that stay healthy are the ones that revisit the agreement every few years rather than signing it once and burying it in a drawer.

Partnership or incorporation — which is better?

It depends on your risk and your goals, and the honest answer is that there is no universal winner. A partnership is simple and flexible, but every partner carries personal liability for the firm's debts. A corporation is more formal and costs more to set up and maintain, but it is a separate legal entity that generally shields your personal assets, and it opens up tax-planning options a partnership does not. For a low-risk venture between two trusted people, a partnership with a solid agreement can be enough. As the money and risk grow, incorporating usually becomes the safer structure.

What if my partner and I disagree?

Disagreement is inevitable; how you handle it is what a good agreement decides in advance. Without one, a deadlock between two equal partners can paralyze the business or even force its dissolution. A well-drafted partnership agreement builds in a dispute-resolution path — a defined voting structure, a tie-breaking mechanism, and often a requirement to mediate or arbitrate before anyone heads to court. It can also include a buy-out or "shotgun" clause so one partner can exit cleanly if the relationship truly breaks down. Deciding these rules while everyone is still friendly is far easier than negotiating them mid-fight.

Do I need a lawyer to draft a partnership agreement?

You are not legally required to use one, and templates exist — but a partnership agreement is the document that governs your money, your liability, and your exit, and generic templates routinely miss the provisions that matter most, especially valuation and buy-out on a partner's departure. A lawyer tailors the agreement to your actual deal, makes sure it overrides the right Partnerships Act defaults, and catches the scenarios you have not thought about yet. In my experience the cost of getting it drafted properly is small compared to the cost of litigating its absence later.

Final thoughts

"Do I need a partnership agreement?" is the wrong question, and I say that gently. You have a partnership agreement the moment you go into business with someone — the only choice is whether it is one you wrote, reflecting your deal, or one the Partnerships Act wrote, reflecting nobody's. The defaults are not a safety net. They are a rigid set of rules that split profits equally, make every partner liable for the whole firm's debts, and can dissolve the business when a partner walks out.

The good news is that almost all of it is in your control. A clear, tailored agreement — capital, profit split, authority, restrictions, dispute resolution, and above all a real buy-out and valuation mechanism for the day a partner leaves — turns the riskiest parts of a partnership into terms you chose on purpose. The cost of drafting it well is small. The cost of litigating its absence, as I have watched more than a few former partners learn, is not.

If you are going into business with a partner — or you already have, and you never put anything in writing — the smartest move is to sort it out while the relationship is good. A partnership agreement lawyer in Toronto can draft one that fits your actual deal and overrides the defaults that do not work for you. Call 416-554-1639 or book a free consultation, and we can map out what your partnership needs before a problem forces the question.