If your organization is looking to streamline its partnership stakes, you’ll likely need to know the difference between an operating agreement vs partnership agreement.
It’s easy to get confused between the two, but recognizing which one is most appropriate for your business is crucial.
Key takeaways
- Although they’re similar, operating agreements and partnership agreements are not the same.
- Typically, partnership agreements clarify ownership stakes in a business.
- Operating agreements, conversely, are designed to protect members in a limited liability company.
- You can use contract management software to make producing your agreements as simple and streamlined as possible.
Is an operating agreement the same as a partnership agreement
Let’s start by clarifying one of the biggest misconceptions about partnership agreements and operating agreements: they’re not the same thing.
That’s even though they are pretty similar. They both help companies deal with levels of investment, ownership stakes, and dividing profit and loss.
However, partnership agreements are only used in partnerships, while operating agreements are designed for use in limited liability companies (LLCs).
With this in mind, let’s delve into their specific characteristics and differences.
What’s the definition of a partnership agreement
If you’re wondering, “What are partnership agreements exactly? ” you’ve come to the right place.
Essentially, they’re a legal contract explaining how a company will be run by multiple people.
A partnership agreement is a legally binding document that outlines the terms, conditions, and rules governing the relationships and responsibilities within a partnership.
It covers elements such as the partners’ contributions, profit and loss sharing, decision-making processes, dispute resolution, and other provisions linked to the operation and management of the partnership.
A partnership agreement aims to set clear guidelines to avoid misunderstandings and ensure a smooth and efficient collaboration between partners.
What is the definition of an operating agreement
Now, onto operating agreements.
An operating agreement is a legal document that can be considered a partnership agreement designed explicitly for the needs of an LLC.
It identifies the internal rules, structure, and operating procedures of an LLC.
It also defines the rights, responsibilities, and relationships of the LLC’s members and managers, and serves as an essential governance document for the organization.
Operating agreement vs partnership agreement: the main differences
The choice between an operating agreement and a partnership agreement can significantly impact the dynamics and governance of an organization.
So, let’s delve into the core differences between these two legal frameworks, pointing out their unique features and implications.
By understanding the main differences, businesses can decide which option aligns with their operational needs and long-term goals.
Business structure
Operating agreement: Pertains to limited liability companies (LLCs).
Partnership agreement: Pertains to partnerships, which can be general partnerships (GPs), limited partnerships (LPs), or LLPs.
Applicability
Operating agreement: Required for LLCs in many jurisdictions but not always legally mandated.
Partnership agreement: Not always required by law, but it’s highly recommended to have a written agreement to clarify the terms among partners.
Liability protection
Operating agreement: Typically provides limited liability protection to members, separating personal and business assets.
Partnership agreement: Depending on the type of partnership, personal liability may not be limited, exposing personal assets to business debts and liabilities.
Management structure
Operating agreement: Can outline various management structures, including member-managed or manager-managed LLCs.
Partnership agreement: Defines the roles and responsibilities of each partner in the management of the business.
Taxation
Operating agreement: LLCs can choose their tax treatment as a pass-through entity (like a partnership) or as a corporation.
Partnership agreement: Partnerships are pass-through entities for tax purposes, meaning profits and losses flow to the individual partners.
Termination and dissolution
Operating agreement: Specifies conditions for the termination or dissolution of the LLC, including procedures for member withdrawal or the addition of new members.
Partnership agreement: Outlines conditions under which the partnership can be dissolved and procedures for admitting new partners or dealing with partner withdrawals.
Legal formalities
Operating agreement: May have fewer legal formalities and reporting requirements compared to partnerships.
Partnership agreement: Legal formalities can vary based on the type of partnership and jurisdiction.
Example of a partnership agreement
Examples of partnership agreements can be found across a range of industries and sectors.
To keep it simple, let’s think about what a partnership agreement might look like for two entrepreneurs starting a small local shop together.
This sort of document should begin by naming the business and the two partners whose ownership percentage should be outlined – in this case, let’s call it 50% each.
It should then explain their responsibilities.
One partner might be in charge of the financial details, while the other will focus on the day-to-day management of the store.
In this example, the partnership agreement should also explain what will happen to the company if one partner leaves while clarifying that profits and losses are to be divided equally.
Example of an operating agreement
An example of when an operating agreement might be useful is if two business partners decided they needed to protect themselves as they scaled the company.
By turning it into an LLC, the business owners – now “members” – could protect their personal assets as their company took on more debt.
An operating agreement is the legal document that makes this process as straightforward as possible.
Five US states that require an operating agreement
When comparing a partnership agreement vs operating agreement, having an operating agreement is sometimes a legal requirement, unlike partnership agreements.
This depends on which state you’re doing business in.
These are the five US states that require LLCs to have one:
- California
- New York
- Missouri
- Maine
- Delaware
However, even if you don’t reside in these states, the clarity and protection offered by an operating agreement means most LLCs will benefit from using them.
Partnership agreement template
If you’re looking for a partnership agreement template, take a peek at the outline below.
Although it isn’t complete and will need adapting to your specific needs, it’s a good example of what a strategic partnership agreement might look like:
This agreement is made on [date], by and between [partner name] and [partner name].
The name of the partnership will be ….
The partnership will begin on … and will continue until …
The capital of this partnership will be … to which each partner will contribute an amount as follows …
Partnership Agreement Template
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Use this templateOperating agreement template
If you’re unsure about how to write an operating agreement, it’s often difficult to know where to start.
That’s why we’ve provided this basic template to get you going.
This LLC Operating Agreement is made on [date]. The members in this LLC Operating Agreement are: [partner name] and [partner name].
The name of the Company will be …. With a formation date of …
The Company’s primary purpose is to …
The Company’s primary place of business will be …
Members agree as follows: [provide the main elements of the agreement]
As with a partnership agreement, it’s essential to recognize that every operating agreement will be different, so be sure to design yours according to your LLC’s specific needs.
Get agreements out in minutes and eliminate bottlenecks with efficient contract management software
Whether you decide you need a partnership agreement or an operating agreement, these legal documents are a great way to protect company partners or members and build clear decision-making structures.
However, the process of drafting them can be expensive and time-consuming, especially for smaller organizations.
That’s why so many companies find PandaDoc’s contract management software useful.
With our streamlined contract workflow solution, which provides agreement templates and in-software editing, you can create and sign your legal docs quicker than ever.
Why not speed up your contract management today?
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