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How to Create a Partnership in Ontario

Updated November 2016

This How-To Brief outlines the steps to take to set up a general partnership in Ontario.

1Discuss due diligence and general business formation issues with the client

  • Canvass options with the client as to the most appropriate business vehicle, including a discussion of alternative business arrangements that might be applicable in the circumstances, such as sole proprietorship, corporation, trust or joint venture. Issues to be covered would normally include concepts such as limited liability, perpetual existence, taxation and initial set-up and ongoing maintenance costs.
  • Consult the Government of Canada webpage "Corporation, partnership, or sole proprietorship" for a helpful information on business forms, including the advantages and disadvantages of each (See the link in the Resources section of this How-To Brief.).
  • Consider with the client's accountant whether any existing business assets and/or obligations need to be formally transferred to the new partnership and, if so, the tax implications of same and whether any formal tax rollovers are required for tax planning purposes.
  • Consider if the proposed partnership might be created as a limited liability partnership (an "LLP") to the extent permitted by applicable laws governing the business to be carried on by the partnership (i.e., law partnership, accounting partnership, medical/dental partnership, etc.). If so, this will impact the name permitted under the Business Names Act and other applicable legislation governing the LLP (i.e., the firm name must include "limited liability partnership" or "LLP", etc.).
  • Consider the identity of the proposed new partners – i.e., individuals, corporations or other entities.
  • Consider extra-provincial registrations outside Ontario for the new partnership to the extent it intends to carry on business in other provinces, etc.

2Establish that the desired name is permitted

  • Obtain a NUANS search result; ensure that the name otherwise complies with applicable legislation and regulations (Business Names Act and O. Reg. 122/91, made under the Business Names Act).
  • When choosing a business name, certain words or expressions cannot be used:
    • words or expressions, in any language, that are obscene or objectionable in nature;
    • words that imply the business is a different type of organization;
    • numbers or words that imply the business name is a corporate number name;
    • the words "limited", "corporation", "incorporated" or their respective abbreviations "Ltd ", "Corp." and "Inc.";
    • the words "college," "institute" or "university" without the written consent of the Ministry of Education if using the word implies the business is a post-secondary institution;
    • words with restricted use under federal or Ontario laws;
    • words that imply the business is associated with the Crown, the Government of Canada, any province of Canada or any municipal government without the written consent of the appropriate authority; and
    • names of individuals unless they have or had a material interest in the business activity and have given their written permission : if an individual is not living and the name is used within 30 years of the date of death, the written consent of the individual's estate must be obtained.
  • Business names must be registered in the Roman alphabet (English, French, Spanish, Italian, Latin, etc.) and may contain numerals.
  • The following marks may also be included in the name, but may not be used as the first character: ! " # $ % & ' ( ) * + , - . / : ; > = < ? [ [ \ ^ ` @.
  • Business names composed of characters from other alphabets must be translated and registered in a language using the Roman alphabet.
  • A business name in a language other than one using the Roman alphabet may be used in advertising and signs, but the business name must also be displayed in a language using the Roman alphabet.

3Prepare and file the registration under the Business Names Act

  • Note that the following information is required for business name registration:
    • name and address of the business; and
    • description of the business activity to be carried out (description cannot be more than 40 characters including spaces and punctuation).
  • If you are registering a partnership with 10 or fewer partners, you must include the names and home addresses or addresses where legal papers can be served for all partners. Corporate partners must also include their Ontario corporation number.
  • Partnerships with more than 10 partners and meeting other requirements may choose one (1) or more partners to register the business name, eliminating the need to file information on all partners. In this case, the designated partner must keep the required information (the partners' names and home addresses or addresses where legal papers can be served) on record at the place of business. The same partner must also permit any person to inspect the record and make a copy free of charge during normal business hours.
  • A registration fee applies. Check with the Companies and Personal Property Security Branch at the Ministry of Government Services for an up-to-date fee schedule.
  • Consult the Ministry of Government Services, Registration Form 1 under the Business Names Act — Sole Proprietorship/Partnership. (See the link in the Resources section of this How-To Brief.).

4Prepare and execute an appropriate partnership agreement

Below is a non-exhaustive list of provisions to be considered as part of a preparing a formal partnership agreement for the new partnership:

All references to section numbers, unless otherwise noted, are from the Partnerships Act (Ontario) (the "Act"). 

NOTE: Section 20 expressly contemplates that the mutual rights and duties of partners (whether by contract or statute) may be varied by the consent of all of the partners.

  1. Effective Date of the Partnership
  2. Joint and Several Liability of Partners (see ss. 10, 13, 15 and 18) of the Act
  3. Describe Identity of Partners; Nature of Partnership Interest
    A partner may be a corporation. In the case of a natural person, ensure the individual is at least 18 years old. Obtain a representation that each partner is acquiring the interest for his, her or its own account. Some partnerships have different categories of partnership interests (e.g., "equity partners" vs. "non-equity partners" or "income partners") depending on the nature of each partner's expected contribution to firm business and his/her intended profit sharing and voting entitlements.
  4. Firm Name
    The partnership must carry on business under this name. A conflict with another name may result in loss of goodwill, an injunction for trade-mark infringement and/or a passing-off action against the partnership and the partners. Conduct a name search and, perhaps, a detailed trade-mark search (in the applicable jurisdictions) and/or register under the Trade-marks Act (Canada).
  5. Term of Partnership
    If the agreement does not include a commencement date, the signing date governs. Unless the term is explicitly stated, such term is at the will of all the partners, subject to provisions of the agreement and ss. 32 –33 of the Act.
  6. Place of Business
    A defined place of business is not required if there is no desire to geographically limit the partnership's business.
  7. Description of Business
    A description of the business may impliedly define the scope of the agency of each partner. It typically cannot be changed without the consent of all the partners. The description governs the scope of prohibited competition and restrictive covenants on subsequent retirement/withdrawal if applicable.  See below re: partners' ability to bind each other and the partnership to creditors/other third parties.
  8. Percentage and/or Amount of Contribution to Capital
    It is important to detail initial capital requirements to be added to initial partner capital accounts and to include any obligation to make future contributions to capital, which could be financed from distributed profits or through the retention of undistributed profits. Often "income" or "non-equity" partners will have NIL or minimal initial capital contributions.
  9. Division and Distribution of Partnership Profits
    Absent an agreement, partners equally share in the capital and profits (as determined by the firm's auditors/accountants) of the business and contribute equally towards the losses (see s. 24(1) of the Act). It is important to carefully consider both (a) the manner in which profits/losses will be shared among the partners (whether by simple percentage, detailed formula or other quantitative or qualitative methodologies) and (b) the timing of distribution of profits (whether as regular draws or periodic distributions) (see below also). It is important to consider (with the partnership's tax advisors) the timing in which partners are deemed to have received their share of partnership profits and required to pay taxes/tax installments in respect of same so that distributions of profit can be coordinated with the timing of the payment of tax liabilities by individual partners, etc.
  10. Accounting and Other Records
    The records kept and the statements to be given to partners should be sufficient for tax purposes and the legal requirements and allow for efficient business operation.  An auditor/accountant should be sought to advise and assist the partnership to provide to its partners all necessary annual tax slips for income tax reporting purposes.  In the absence of an agreement stating otherwise, every partner may, when the partner thinks fit, have access to and inspect and copy any of the books, which are to be kept at the place of business of the partnership (see s. 24(9 ) of the Act). Consider what scope and frequency of financial and other business information will be provided to partners (subject to any applicable privacy and confidentiality restrictions). Consider firm file/document storage and retention policies in light of records retention requirements under applicable laws.
  11. Auditor/Accountant Selection
  12. Fiscal Year
  13. Accounting Principles
    Determine whether assets of the partnership will be valued at cost, market or depreciated value. Determine the valuation of goodwill and depreciation policy. Determine whether there will be any interest on advances and capital contributions by the partners. Unless otherwise agreed, a partner is not entitled, before the ascertainment of profits, to any interest on capital subscribed by the partner (see s. 24(4)of the Act). However, if a partner makes any payment or advance for the partnership beyond the amount of capital that the partner has agreed to subscribe, then the partner is, unless otherwise agreed, entitled to interest at a rate of 5% per annum from the date of payment or advance (see s. 24(3) of the Act). Determine the write-off policy, reserves for working capital, receivables, overvalued inventory, policy regarding partnership and personal expenses, calculation of profit and any other relevant accounting principles and policies. All of the above should be considered with the firm's auditors or accountants.
  14. Banking Arrangements
    Determine the partnership's banker, the kinds of bank accounts (including any trust accounts, if applicable) and the signing authorities desired.  It may be advisable to require multiple signatures on large amounts and carefully outline signing authorities (for both banking and contractual matters). 
  15. Restrictions on Partners
    Consider restricting partners from encumbering their partnership interests to secure personal debts. If a partner's liability for personal obligations is eligible out of the partner's share of partnership assets, this may enable others to dissolve the partnership (see s. 33(2) of the Act and also see below) and could also diminish that partner's ability to assume the partner's share of the firm's obligations to the detriment of the other partners.
  16. Partners to Devote Full Time
    Section 28 of the Act states that partners are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner's legal representative. Section 29 of the Act states that every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership or from any use by the partner of the partnership property, name or business connection. Consider the impact of partners personally receiving other sources of income related to firm business (e.g., directors' fees, stock options from clients, teaching fees, and publishing royalties, etc.) and whether same can be retained by such partners or must be contributed to and considered part of the firm's revenues. Determine and clearly outline in the agreement whether "moonlighting" is prohibited. Determine the salaries or other remuneration of the partners, if any.  Absent an agreement to the contrary, no partner is entitled to remuneration for acting in the partnership business (see s. 24(6) of the Act). Consider if all partners are required to participate in firm business on a full-time or other basis.
  17. Management
    Determine who is in charge of various partnership functions, such as sales, administration and production (or whether a managing partner or managing committee should be appointed from time to time). Unless otherwise agreed, every partner may take part in the management of the partnership business (see s. 24(5) of the Act).  This may be impractical or undesirable.  The agreement should provide for partnership meeting and notice procedures, as well as what voting and approval thresholds apply in respect of decisions in respect of partnership business. Unless otherwise agreed, a simple majority vote of all of the partners governs except for the introduction of new partners (see s. 24(7) of the Act), a change in the nature of the partnership business (see s. 24(8 )of the Act), and a change in the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act (see s. 20 of the Act).  Absent an agreement to the contrary, the foregoing exceptions require the consent of all existing partners. Consider carefully what partnership decisions may require (a) unanimous approval, (b) a special majority (i.e., 75%) or (c) a simple majority.
  18. Partnership Contracts
    Determine who signs what contracts and who may bind the partnership generally to creditors, customers, suppliers and other parties. Unless otherwise provided by agreement, each partner in a general partnership has the authority to bind the partnership (see ss. 6-9 of the Act).
  19. Drawing Arrangements
    Determine how often, how much and who may draw against partnership profits. Consider limiting draws to a specified percentage of anticipated share of profits for a year to avoid distributing to partners more than their anticipated share of annual profits. Draws can either be paid from firm cash flows or borrowed credit as determined under the agreement and the firm's policies from time to time.
  20. Retirement, Bankruptcy or Death of Partner
    Unless otherwise agreed, death or insolvency of a partner results in the dissolution of the partnership (see s. 33(1) of the Act). The agreement should contemplate a notice period and contain an agreement of the remaining partners to buy out a retiring, insolvent or deceased partner. It is important to outline a method of valuating a current or former partner's partnership interest  in the partnership (see below) and the payment/other terms.
  21. Restrictive Covenants; Intellectual Property Ownership
    Unless the other partners consent, a partner has a statutory obligation not to compete with the partnership. Sections 29-30 of the Act require that a partner account for and pay over to the firm all profits made by the partner in a business, if the partner, without the consent of the other partners, carries on a business of the same nature as and competing with that of the partnership. Partners will also have fiduciary duties to each other under common law. Consider including suitable restrictive covenants limiting each partner's potential competitive activities  both while a partner and thereafter once they cease, for any reason, to be a partner of the firm. Such restrictive covenants will be subject to common law principles with respect to reasonableness as to time, activity and geographical area, both as between the parties and to the public. Consider also providing for firm ownership of all intellectual property rights authored by individual partners (such as copyright in software or marketing materials/firm publications, etc.).
  22. Sale of Partnership Interest
    It is typically best to prohibit the sale or transfer in any manner, of a partner's partnership interest to an outside third party (other permitted transfers to "controlled" corporations or other entities can be considered for tax planning purposes). However, the agreement could provide for a "put right" of a retiring or withdrawing partners if the continuing partners refuse to buy out a retiring or withdrawing partner.  Some partnership agreements do not provide for any formal purchase of departing partners' partnership interests (i.e., attribute no goodwill to partnership interests) and merely deal with final distributions of profit and capital to the departing partner who ceases to be a partner (subject to any continuing payment rights and surviving obligations to the partnership including set-off rights against unpaid amounts or liability to firm creditors for acts prior to departure, etc.).  Some partnerships can consider residual payments to retiring partners as a form of retirement plan, etc.
  23. Expulsion of Partner; Voluntary Withdrawal
    Unless otherwise agreed, no majority of the partners can expel any partner (see s. 25 of the Act) unless conferred by express agreement of the partners. Consider also the implications under the agreement should a partner elect to voluntarily withdraw from the firm. Also consider adding to the agreement rules (or policies) for the expulsion of existing partners so that such determination is made on an objective (not subjective) basis by the requisite partnership approval threshold. Grounds for expulsion could be based on breach of the agreement or other "bad" conduct, failure to achieve/maintain certain financial targets, permanent disability or otherwise.
  24. Grounds for Dissolution
    Unless otherwise agreed, every partnership is dissolved by the death or insolvency of a partner (see s. 33(1) of the Act). Unless otherwise agreed, a partnership is also dissolved if entered into for an undefined time if a partner gives notice to the other partners of the intention to dissolve the partnership (see s. 32 (c)of the Act). As a result, it is best to set out in the partnership agreement how and when a partnership will be dissolved. A partnership may also be dissolved, at the option of the other partners, if any partner suffers that partner's share of the partnership property to be charged for that partner's separate debt (see s. 33(2) of the Act). A partnership is in every case dissolved by the happening of any event that makes it unlawful for the business of the partnership to be carried on or for the members of the partnership to carry it on in partnership (see s. 34 of the Act). Furthermore, ss. 35(a)–(f) of the Act provide other grounds on which a partner may seek a court order to dissolve a partnership. An agreement that contemplates dissolution by vote of a specified number of partners, such as 50 per cent or more than 50 per cent of the partnership interest, could be an effective force for settling differences.
  25. Admission of New Partner
    Unless otherwise agreed, no person may be introduced as a partner without the consent of all existing partners (see s. 24(7) of the Act).  Consider providing for a simple majority vote or 50 per cent or more of the partnership interests. A new partner should be specifically required to become bound under the existing partnership agreement which may need to be amended to address new issues raised by adding new partners, etc.).  In respect of new partners, the agreements should detail the new partner's capital contribution (and timing of payment of same), share of profit and other related matters.  Also consider adding to the agreement rules (or policies) for the admission of new partners so that such determination is made on an objective (not subjective) basis by the requisite partnership approval threshold.
  26. Obligation to Purchase
    Consider including a provision that requires continuing partners to purchase an outgoing partner's interest on retirement, expulsion or death. See above.
  27. Option to Purchase
    Consider including a provision that gives continuing partners a right (but not an obligation) to purchase an outgoing partner's interest. For example, mandatory retirement at a specified age with a right allowing the remaining partners to purchase the retiring partner's interest. See above.
  28. Valuation of Partnership Interest
    Determine how the amount to be paid to a withdrawing/retiring, expelled or deceased partner for the partner's interest in the partnership is to be calculated. Determine whether goodwill will be included in the valuation. If so, the valuation could be based on a reasonable multiple of profits over the past several years or a multiple of book value at cost or depreciated value or at a value to be determined annually/periodically by all partners.  If goodwill is not to be included, a valuation may be based on advances or loans plus a share of capital assets, including amounts contributed by partners, plus the undrawn share of profits. Income tax consequences could impact the valuation. An auditor/accountant can assist in advising on a reasonable and workable valuation formula, which should be included in the agreement. The valuation should not be based on future profits, as this may cause the retiring partner to be considered a continuing partner (see s. 3 of the Act).
  29. Partnership Property
    Partnership property should be registered in the firm's name or in the name of one or more of the partners. If the latter is done, clearly define the property in the agreement. See ss. 21-22 of the Act.
  30. Insurance
    Determine the kinds of professional liability and commercial insurance coverages, the limits and the deductibles that are appropriate for the partnership.  These should be reviewed annually/periodically.  Consider an obligation on each partner to purchase a stipulated amount of term insurance on the life of the other partners sufficient to fund in whole or in part the partner's obligation to purchase the interest of the deceased partner. An agreement of the partners to consent to and facilitate obtaining such insurance may be desirable. Consider if any professional liability insurance applicable to a departing or deceased partner needs to be maintained for some future period of time following such departure or death.
  31. Arbitration of Disputes
    1. It is best to keep disputes between partners out of courts since it could harm the partnership's business, reputation and goodwill.
    2. Consider naming the auditor/accountant as final arbitrator on financial or accounting matters.
    3. For non-financial matters, consider appointing an arbitrator under the Arbitrations Act, 1991, whose decision would be final and binding.
  32. Registration and Amendment
    Provide for requisite registration under the Business Names Act and an undertaking by all the partners to facilitate registration of any change made in accordance with the partnership agreement. Consider using a power of attorney making each partner an attorney for the other (surviving death or any assignment of interest) for the purpose of any registration requirements. Where applicable, consider providing for less than a unanimous vote to change or amend the terms of the partnership agreement since it will likely be difficult to obtain the agreement of all partners.
  33. 3Consider Specific LLP Provisions (if applicable – see ss.10 and 44 of the Act)
  34. Consider Rights of Indemnity and Contribution among Partners
  35. Applicable law
  36. Enurement
  37. No Assignment
  38. Noticesv
  39. Counterparts
  40. Signed and sealed



Explication des termes et concepts