DOBRMAN

What is a partnership agreement?

A partnership agreement is a contract among the partners of a business that governs how the partnership is owned, managed, funded, and wound up. Partnerships are used across many industries including professional practices, family businesses, creative collaborations, real estate ventures, and operating businesses. A partnership agreement records each partner’s contributions, how profits and losses are shared, how decisions are made, and how partners enter and exit over time. Without a partnership agreement, the default rules of Alberta’s Partnership Act govern the relationship, and those defaults rarely match what the partners actually intended. A well-drafted partnership agreement anticipates how the business will be run, how disputes will be resolved, and what happens when the partnership changes or comes to an end.

Why you should consider a partnership agreement

Overriding the default statutory rules. In the absence of a partnership agreement, the Partnership Act fills the gaps with one-size-fits-all defaults — including equal sharing of profits regardless of who contributed more money or work, and dissolution triggered by events such as a partner’s death. A partnership agreement replaces the statutory defaults with terms the partners actually choose.

Defining contributions, profits, and losses. A partnership agreement records what each partner contributes — money, property, equipment, intellectual property, or services — and how profits, losses, and drawings are divided. Clear terms in the partnership agreement prevent the contribution and profit-sharing disputes that are among the most common causes of partnership breakdowns.

Setting decision-making and dispute resolution. A partnership agreement allocates authority between the partners, distinguishes day-to-day decisions from fundamental ones requiring unanimous approval, and builds in deadlock and dispute resolution mechanisms. Clear governance terms allow partners to resolve disagreements without ending the business.

Protecting intellectual property and confidential information and data. A partnership agreement can address who owns the intellectual property, confidential information, and data created or contributed during the partnership, and what each partner can do with it after a partner leaves or the partnership ends. These terms are particularly important for technology, creative, and content-driven partnerships.

Planning partner entry and exit. A partnership agreement addresses how new partners are admitted and what happens when a partner retires, dies, becomes disabled, or needs to be removed. Buyout provisions, valuation mechanics, and restrictions on transferring partnership interests can be built into the partnership agreement so that one partner’s departure does not destroy the business.

Relevant laws and regulations

Partnership Act, RSA 2000, c P-3. Alberta’s partnership legislation, which governs general partnerships, limited partnerships, and limited liability partnerships, supplies the default rules that apply in the absence of a partnership agreement, and sets out registration requirements for certain partnerships.

Income Tax Act, RSC 1985, c 1 (5th Supp). Canada’s federal tax legislation. A partnership is generally not taxed as a separate entity — income and losses flow through to the partners — which makes the allocation provisions of a partnership agreement important for tax purposes.

Common legal issues

Accidental partnerships. A partnership can arise in law without any paperwork when persons carry on business in common with a view to profit. Collaborators and co-venturers can find they have formed a partnership — with shared liability for each other’s business conduct — without ever intending to, and without a partnership agreement to limit the consequences.

Unlimited and shared liability. In a general partnership, each partner can bind the firm in the ordinary course of business, and the partners are personally liable for the firm’s obligations. A partnership agreement can allocate responsibility between the partners internally, but it does not, on its own, shield partners from claims by outside parties.

Profit-sharing and contribution disputes. The statutory defaults can entitle partners to equal shares even where contributions were unequal. Disputes commonly arise when one partner contributes capital and another contributes labour, or when partners disagree over drawings, reinvestment, or the value of non-cash contributions that a partnership agreement never recorded.

Partner exits and dissolution. Absent a partnership agreement, the statutory default rules can dissolve a partnership on events such as a partner’s death, and the remaining partners may have no mechanism to remove a non-performing partner. Poorly planned exits frequently force the sale or winding up of an otherwise healthy business.

Choosing the wrong structure. Partnerships, corporations, joint ventures, and independent contractor arrangements each carry different liability, tax, and registration consequences. Businesses commonly drift into one structure when another would have served them better, and restructuring later can be costly.

Frequently asked questions

Does a partnership agreement have to be in writing? No. A partnership can exist, and be governed by oral terms or conduct, without anything in writing. A written partnership agreement is generally recommended, because without one the partners are left with the statutory defaults and whatever terms can be proven.

What is the difference between a general partnership, a limited partnership, and a limited liability partnership? In a general partnership, all partners share management and personal liability. In a limited partnership, one or more general partners manage the business with unlimited liability, while limited partners contribute capital with liability generally limited to their contribution. In a limited liability partnership, a partner receives statutory protection from certain liabilities of the other partners. Which structure is available and appropriate depends on the business and the registration requirements under the Partnership Act.

Is a partnership a separate legal entity? Generally, no. Unlike a corporation, a partnership is a relationship between the partners rather than a separate legal person, and the partners are personally exposed to the partnership’s obligations.

How is a partnership taxed? A partnership does not pay income tax as an entity. Income and losses are calculated at the partnership level and allocated to the partners, who report them on their own returns under the Income Tax Act. The allocation terms of a partnership agreement can determine how that income is divided.

Can a partnership agreement be changed? Yes. The partners can amend a partnership agreement, typically with the consent of all partners. Many partnership agreements set out a specific amendment process, and the mutual rights and duties of partners can also be varied by the consent of all partners under the Partnership Act.