How to Create a Business Partnership Agreement

A partnership agreement records how people carry on a business together. It is not the same document as a corporation’s shareholders’ agreement or an LLC operating agreement. Before discussing percentages, decide whether the legal structure matches the intended business and risk.

Canadian CRA guidance recognizes that a partnership can arise without a formal written agreement. BC’s Partnership Act provides a provincial example of formation, authority and default rules. US formation and liability rules depend on state law; IRS guidance addresses federal tax matters rather than establishing a state-law entity.

A written agreement does not itself create a liability shield, complete registrations or obtain licences. General partnerships, limited partnerships and LLPs have different conditions and protections. Obtain local advice when choosing a structure rather than relying on the agreement’s title.

List each partner’s cash, equipment, services, intellectual property and other contributions. Distinguish an asset transferred to the business from one merely loaned for use. State when contributions are due, how they are valued and what happens if one is not delivered.

Do not assume ownership percentages, profit allocations and cash distributions are the same concept. Explain loss sharing, reserves, draws, compensation for work and future funding. A partner who contributes cash and a partner who contributes labour need a realistic agreement about effort and risk.

Illustrative worksheet: Alex contributes CAD $20,000; Priya contributes specified equipment and a defined time commitment. Before choosing a split, they record valuation, ownership or use rights in the equipment, compensation, loss sharing and any obligation to fund future shortfalls. “We split everything equally” leaves important questions unanswered.

Specify operational roles and decisions reserved for approval. Create an authority matrix covering spending, borrowing, hiring, signing customer contracts and acquiring assets. Record thresholds and who can approve exceptions.

• Routine purchases within an approved budget: designated operator.
• New borrowing or guarantees: proposed unanimous approval.
• Hiring and major customer commitments: an agreed voting rule.
• Changes to ownership or admission of a partner: a reserved decision.

These are illustrative internal controls, not universal legal rules. Partner authority and third-party rights can arise under applicable law. Do not claim that an internal spending limit automatically defeats a lender’s or customer’s rights. Banking mandates and actual business practices should support the agreed controls.

Describe voting rights, meeting procedures and access to accounts. Define ordinary decisions and matters requiring a larger majority or unanimity. Two equal partners should address deadlock before a dispute makes cooperation impossible.

State who keeps books, prepares budgets, communicates with tax advisers and authorizes distributions. Agree on regular reporting and access to records. A partner should not have to discover the business’s debts only after a relationship breaks down.

Use an escalation process such as discussion followed by mediation where suitable. Arbitration, court and buy-sell mechanisms need careful drafting; an aggressive forced-buyout clause can disadvantage the partner with less financing. Obtain advice rather than assuming a standard clause is fair in every partnership.

Address admission of new partners, voluntary withdrawal, retirement, incapacity and death. Determine whether the business continues and how an outgoing interest is valued. A valuation method should explain the valuation date, debts, goodwill, appraisal process and dispute procedure.

State buyout payment timing and any security or financing conditions. A promise to pay the departing partner immediately may be unrealistic if the business lacks cash. Consider the effect on guarantees, licences, customer work and staff.

For dissolution, define a lawful winding-up process, treatment of creditors, unfinished work, records and remaining assets. Liability to third parties is not necessarily released by an agreement between partners. Registration, tax and notification tasks remain separate.

BC’s statute supplies default rules on management, profits, losses and other matters, subject to the agreement and law. Other provinces and US states have their own frameworks. Do not copy a default from one jurisdiction and call it the North American rule.

Have local advisers review structure, liability, tax treatment and mandatory rules. Confirm that schedules for contributions, authority and buyouts are attached. Each partner should receive the same completed agreement and understand how changes will be approved.

For a simpler project collaboration, the structure may differ from a continuing partnership. For related confidentiality issues, see our NDA guide; for execution, see our PDF signing guide.