Congratulations on taking the exciting step to launch and run your own business! But before you celebrate and open your doors, there’s an essential task you need to tackle; creating a document that outlines the rules by which your business will operate. This step is crucial for setting a strong foundation for your venture. However, before you dive in, it’s important to understand the difference between an operating agreement and a partnership agreement, and why choosing the right one is key to your business’s success.
Why Do You Need This Kind of Document?
Having a clear, well-defined document is vital because it ensures everyone involved in your business is on the same page. It provides your business with a solid framework to grow and operate smoothly. If you’re working with outside contractors or additional partners, this documentation becomes even more critical, as it helps them align with your business’s guidelines and ensures their work integrates seamlessly with your overall approach.
Operating Agreement vs. Partnership Agreement: Which One Do You Need?
The type of document you need depends on the structure and nature of your business. Generally, you’ll want to create either an operating agreement or a partnership agreement. Both documents are crucial for running your business efficiently, but they serve different purposes. Let’s break down what each of these agreements entails and how they can help you manage your business effectively.
What’s an Operating Agreement?
An operating agreement is a legal document that outlines how your business will be managed and operated. Think of it as a comprehensive contract that covers every aspect of your business operations, including income distribution, management roles, responsibilities, and how profits and shares are divided among members.
Some key elements an operating agreement covers include:
- Liability for business debts
- Consequences for not fulfilling roles within the business
- Terms of operation and ownership
- Management hierarchy and role duties
- Terms of dissolution if the business is sold or ceases operation
An operating agreement is particularly useful for businesses that are larger in scale, with multiple stakeholders, managers, and complex operational needs. If your business involves just you and a partner, you might find that a partnership agreement is more suitable.
What’s a Partnership Agreement?
A partnership agreement, much like an operating agreement, is a legal document that outlines how your business will be managed and operated. However, it’s tailored for situations where you’re starting a business with one or more partners, or when you’re bringing on a new partner.
A partnership agreement helps you define crucial aspects of your business, such as ownership percentages, investment contributions, decision-making processes, profit and loss sharing, and the roles and responsibilities of each partner.
Some additional details a partnership agreement covers include:
- Salaries for owners and employees
- Handling tax and liability issues
- Strategies for resolving business conflicts
- The role and responsibilities of each partner
- Investment amounts contributed by each partner
While a partnership agreement shares similarities with an operating agreement, it’s better suited for smaller ventures involving just a few people. As your business grows and becomes more complex, you might eventually need an operating agreement. But in the early stages, a partnership agreement is a great way to ensure everyone is on the same page as you turn your business dream into reality.
At BFE, we partner with LegalShield to provide affordable access to experienced small business lawyers. Whether you need help drafting an operating agreement or a partnership agreement, you can get the legal advice necessary to ensure your business is built on a solid legal foundation.
Do You Really Need an Operating Agreement or Partnership Agreement?
Absolutely. Whether you’re launching your first business with a close friend or managing an LLC with a board, it’s crucial to have a legal agreement in place. This document not only helps your business run smoothly but also prepares you for unexpected events—such as a partner passing away, someone wanting to buy out a partner’s stake, or even rapid business growth or failure.
Having a well-drafted legal contract clearly lays out the terms of your business for all involved and offers essential protections. At BFE, we’re here to help you navigate these important decisions and ensure your business is set up for success from the start.