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 April 21, 2022

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

Business owner reviewing agreements

So you’ve decided to launch and run your own business—congratulations! But before you pop the champagne and throw open your doors, it’s important to create a document that will serve as a list of rules by which your business will run. But before you break out your laptop and start typing, you should know the difference between an operating agreement vs. partnership agreement, and why it could be key to your business’ success.

Why is it important to have this kind of document? Because it ensures everyone under your employ is on the same page, and it gives your business a firm foundation to grow from. Plus, if your business includes working with outside contractors or additional partners, this kind of documentation can ensure they’re also aware of the guidelines that govern your business, and how their work can mesh with your overall approach and needs.

But what is this document? Well, it depends on what kind of business you have and how you’re running it, but in general, what you ultimately want to create is either an operating agreement or a partnership agreement. Both of these documents are important to help you run your business seamlessly, but they serve different purposes. So before you decide whether you need an operating agreement vs. partnership agreement, let’s look at what both of these agreements are, what they do, and how they help you run your business.

What’s an Operating Agreement?

An operating agreement is a legal document that details how a company or business will be managed and operated—hence the name. Think of it as a contract that breaks down everything anyone would want to know about how to run the business including how income is distributed, how operations are handled, the roles and responsibilities of each of the company’s management team, and how profits and shares are distributed.

Some of the other things an operating agreement outlines include:

  • Who’s liable for business debts
  • Consequences for not upholding roles within the business
  • Terms of operation and ownership
  • Management hierarchy and determination of role duties
  • Terms of dissolution if the business is sold or ceases operation

When it comes to the difference between an operating agreement vs. partnership agreement, an operating agreement is similar to a partnership agreement in the way that it details the nuts and bolts of how a company is run, but it’s meant more for companies that are larger in scale with stakeholders, managers, and more intensive operational needs. If you’re running a business that’s just you and a buddy, you may prefer to opt for a partnership agreement.

What’s a Partnership Agreement?

Much like an operating agreement, a partnership agreement is a legal document that—you guessed it—details how your company or business will be managed and operated. But there’s a twist: this kind of agreement is better in situations where you’re running a business and looking to add a new partner, or you and your friend are joining up to create a business together.

A partnership agreement can help you determine a lot of necessities that surround your business, like percentages of ownership and investments, names and locations, who makes financial decisions and how profits and losses are shared, the focus of the business, the length of the partnership, and the terms of dissolution.

Some of the other things a partnership agreement outlines include:

  • Salaries of the owners, and if applicable, their employees
  • How tax and other liability issues will be handled
  • A game plan for handling business-based conflicts
  • The role each partner plays, and what their responsibilities are
  • How much each partner invested into the company

Even though a partnership agreement is similar to an operating agreement, it’s more tailored to a smaller venture that exists between two people, rather than a larger company with stakeholders, managers and other operational personnel. If your company expands, you may need an operating agreement down the road. But in the beginning, when it’s just a couple people banding together to turn a business dream into reality, a partnership agreement is a good way to start your business off on the right foot.

Do I Really Need an Operating Agreement vs. Partnership Agreement?

Absolutely. Whether it’s you and your bestie venturing out into your first business, or you’ve purchased an LLC that comes with a board, it’s important to have some kind of agreement in place that documents the rules and regulations associated with the business.

Not only does it ensure everything runs smoothly on an operational level, but it also prepares you in the event that something unexpected happens—say, if a partner passes away, someone wants to buy someone else’s stake in the business, or even when the business grows rapidly, or fails. Having a legal contract can help layout the terms of your business plainly and clearly for all involved—and offer protections, too.

LegalShield Can Help with Your Operating Agreement vs. Partnership Agreement

Are you ready to create an operating agreement or partnership agreement? LegalShield can help you. Don’t attempt to create an operating or partnership agreement on your own—get support from a partnering lawyer who can make the process easier and more efficient. A legal plan from LegalShield provides access to experienced business formation lawyers at an affordable price, with consultation and assistance from a provider law firm. Sign up today!

Pre-Paid Legal Services, Inc. d/b/a LegalShield (“LegalShield”) provides access to legal services offered by a network of provider law firms to LegalShield members through membership-based participation. Specific limitations apply. See a plan contract for specific state of residence for complete terms, coverage, amounts, and conditions. The benefits described, including trial defense, are not available in all legal plans or in all states. Neither LegalShield nor its officers, employees or sales associates directly or indirectly provide legal services, representation, or legal advice (business consulting or business advice). This is meant to provide general information and is not intended to provide legal advice, render an opinion, or provide any specific recommendations. If you are a LegalShield member, please contact your provider law firm for legal advice or assistance.

 

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