Operating and Partnership Agreements. What Are They, and Why Do You Need Them?

The birth of a new business is an exciting time. There’s no shortage of motivation, or enthusiasm and your creative juices must be flowing. Everything you’ve worked towards for the past few months has culminated into this moment... so congrats! But the legal aspect is often overlooked or worse, completely ignored. You may need a business agreement like an operating or partnership agreement. These concepts new to you? No worries! Keep reading to figure out what kind of agreement suits you best.

Partnership Agreement Basics

If you have two or more individuals coming together to form a partnership, you will need a Partnership Agreement. Since a general partnership doesn’t have a separate existence in the eyes of the law – the partners will be jointly and severally liable for any debts of liabilities of the business. Also, in California, and in many other states, state default rules apply in absence of a partnership agreement. In short, if you don’t have an agreement, a court can make and infer particular rules. Generally, a partnership agreement will include the following:

• The nature of business;
• Initial capital contributions of each partner;
• Expectations for future capital contributions;
• Distributions of capital and cash receipts/profit;
• Meeting and voting requirements;
• Business interest transfer restrictions;
• What should happen in the case of business dissolution;
• Rights and responsibilities of each partner; and
• Tax allocations between the partners.

It’s not uncommon for business partners to get into disputes. In fact, it’s totally normal. Partners are going to have differing ideas on how to market and where to invest money. Sometimes there may be a discrepancy in the hours worked by each partner in relation to how the partners are being paid. All of these issues can be considered and sometime prevented in a partnership agreement.

Operating Agreement Basics

Obviously, if you are the sole owner of your business, you won’t need a partnership agreement. However, once you decide to form an LLC or corporation, you will need an operating agreement. Seems silly right? You’re creating an agreement with yourself. The main reason to form an LLC is for liability protection. To maintain your liability protection, you must meet particular requirements that show that you are keep yourself separate from your business. One way to do that is through an operating agreement. The agreement places rules on you. For example, you can state the method and manner by which you will pay yourself. This shows that you are treating your biz like a business and yourself like an employee of the business. Many of the provisions in an operating agreement will be similar to those in a partnership agreement.

Are You Missing These Docs?

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Not Sure What Else You’re Missing?

Check out my blog on the Small Biz Blueprint for a more comprehensive list.