Partnership Agreement vs. Operating Agreement: What’s the Difference?

When starting a business with another person, it’s important to create a legal agreement that outlines the roles, responsibilities, and ownership of each partner. This agreement can take two forms: a partnership agreement or an operating agreement. While the two may seem similar, there are significant differences that could impact your business.

Partnership Agreement

A partnership agreement is a legal document that outlines the relationship between two or more individuals who have come together to start a business. This agreement usually includes the following:

– The name of the partnership

– The purpose of the partnership

– The contribution of each partner (financial or otherwise)

– The division of profits and losses

– The roles and responsibilities of each partner

– The conditions for admitting new partners or removing existing ones

– The process for dissolving the partnership

Partnership agreements are usually used for businesses with two or more owners that are not registered as a corporation or a limited liability company (LLC). This type of agreement is relatively simple to create and can be customized to suit the specific needs of the partners.

Operating Agreement

An operating agreement, on the other hand, is a legal document that outlines the ownership and operating procedures of a limited liability company (LLC). This agreement usually includes the following:

– The name of the LLC

– The purpose of the LLC

– The initial ownership percentage of each member

– The voting rights and responsibilities of each member

– The roles and responsibilities of each member

– The distribution of profits and losses

– The process for admitting new members or removing existing ones

– The process for dissolving the LLC

Operating agreements are required by law for LLCs in most states in the United States. Even if your state does not require an operating agreement, it is still strongly recommended that you create one. This document can help prevent disputes between members and protect the LLC’s limited liability status.

Key Differences

The main difference between a partnership agreement and an operating agreement is the type of business they are used for. Partnership agreements are used for businesses with two or more owners that are not registered as corporations or LLCs, while operating agreements are used exclusively for LLCs.

Another difference is the level of detail. Partnership agreements are usually less detailed than operating agreements, as they are meant to be simple and easy to understand. Operating agreements, on the other hand, can be quite complex and can include provisions for things like management structure, capital contributions, and dispute resolution.

Conclusion

Creating a legal agreement is an important step in starting a business with another person. Understanding the differences between a partnership agreement and an operating agreement can help you choose the right document for your business. Whether you are starting a partnership or an LLC, it is always a good idea to consult with a lawyer to ensure that your agreement is legally binding and protects the interests of all parties involved.