If you’re thinking about forming a partnership with someone, it’s important to establish clear expectations and responsibilities from the outset. One way to do this is by creating a partnership operating agreement. This document lays out the framework for how the partnership will operate, including the roles and rights of each partner, how profits and losses will be distributed, and how disputes will be resolved. In this article, we’ll explore partnership operating agreements and how they can help in maximizing business success.
What Is a Partnership?
A business partnership is a legal agreement between two or more entities that outlines the shared ownership and operation of a business. This agreement can be between people, businesses, or a combination of both. There are three types of partnerships:
The main difference between a general partnership, limited partnership, and limited liability partnership lies in the liability assumed by the partners for the business’ obligations and debts.
What Is a Partnership Operating Agreement?
If you’re in a partnership, it’s important to have a partnership operating agreement in place. This document lays out everything you and your partner(s) need to know about who does what, who has what responsibilities, and who gets what profits. It covers things like voting powers, how profits and losses will be divided, and other important rules and regulations to keep your partnership running smoothly.
Partnership Agreement vs. Operating Agreement
A partnership agreement and an operating agreement share many similarities in terms of what they define, such as ownership, profit and loss distribution, and management roles. However, a partnership agreement is exclusively used for partnerships, while operating agreements are used specifically for limited liability companies (LLCs).
9 Key Factors of a Partnership Operating Agreement
Some of the key factors that are included in a partnership operating agreement are as follows:
1. Management and Decision-Making
The agreement should clearly define how the management of a partnership will be handled and how major decisions will be made.
This section may also include details about the roles and responsibilities of each partner in the management of the business, including any limitations or restrictions on decision-making authority. It may also outline how daily operations will be managed and the protocols for communication and reporting.
2. Voting Powers
The partnership operating agreement should specify how voting power will be allocated among the partners and how important decisions will be made. For example, if one partner has a larger ownership stake, they may be given a greater share of voting power. Additionally, the agreement may require a certain number of votes to make decisions, such as a unanimous vote for significant decisions or a simple majority for routine decisions.
3. Capital Contribution
The capital contribution clause in a partnership operating agreement should specify the initial amount contributed by each partner at the start of the partnership, as well as how additional contributions will be made if required. This helps to ensure that all partners are clear about their financial obligations and responsibilities in the partnership.
4. Salaries or Profit Allocation
The agreement should define how profits will be allocated among the partners and whether any partners will receive salaries. It should also specify the method of profit allocation, such as pro-rata based on ownership interest or by using a predetermined formula.
5. Ownership Interest
The partnership operating agreement should specify the percentage of ownership interest held by each partner. If a partner wants to sell their ownership interest, the agreement may stipulate that the remaining partners have the right of first refusal to buy the interest at a fair market value.
The agreement may also include restrictions on transferring ownership interest to outside parties to maintain control and stability within the partnership.
The agreement should address what happens in the event of a partner leaving or a new partner joining the partnership.
The partnership operating agreement should outline how the partners’ ownership interest will be handled, whether it will be bought out by the remaining partners or distributed among them. It should also address how any outstanding debts or obligations of the departing partner will be handled.
To ensure the smooth operation of a partnership, the agreement should contain a clear process for resolving any disputes that may arise among the partners. This process may include mediation or arbitration and should define the responsibilities and obligations of each partner in resolving any conflicts. By having a clear process in place, the partners can prevent disputes from escalating and damaging their business relationship.
The agreement should specify how the partnership will be dissolved in the event that it is no longer viable. It should outline the steps that need to be taken to wind up the business affairs and distribute assets to the partners in the event of dissolution.
9. Death or Disability
The partnership operating agreement may include provisions on what happens to a partner’s ownership interest in the event of death or disability, such as allowing the remaining partners to buy out the departing partner’s share at a predetermined price or distributing the ownership interest to the departing partner’s family. For instance, if one partner dies or becomes incapacitated, the remaining partners may want the option to buy out the deceased or disabled partner’s ownership interest, rather than having to work with their heirs or family members.
Maximizing Business Success
A well-crafted partnership operating agreement can be a key factor in maximizing business success. By defining crucial elements such as management, voting powers, and profit allocation, partners can establish a clear path to achieving their goals. And while managing the financial aspects of a partnership can be challenging, doola is here to help with all your partnership bookkeeping needs. So don’t let the accounting details get in the way of your partnership’s success and let doola help you stay on top of it all.
What is the purpose of the partnership operating agreement?
The purpose of a partnership operating agreement is to define the terms of the partnership, including the rights and responsibilities of the partners, and to establish guidelines for the operation of the business.
Who makes the operating agreement in a partnership?
The partners in a partnership make the operating agreement.
How to write a partnership operating agreement?
To write a partnership operating agreement, partners should consider factors such as management and decision-making, voting powers, capital contribution, salaries or profit allocation, ownership interest, transitions, disputes, dissolution, and death or disability. It is recommended to consult with a legal professional to ensure that the agreement is legally binding and covers all necessary aspects.
What happens if there’s no partnership agreement?
If there is no partnership agreement, the partnership is subject to the default rules of the state in which it is registered. This can lead to disputes and misunderstandings between partners.
How to dissolve a partnership with no operating agreement?
If a partnership has no operating agreement, partners must follow the default rules of their state for dissolving a partnership. Typically, this involves giving notice to all partners and creditors, selling assets, paying off debts, and distributing remaining funds to partners in proportion to their ownership interests.