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What to include in a partnership operating agreement

On Behalf of | Jun 26, 2024 | Business Law

Starting a partnership requires each owner to protect themselves while they simultaneously focus on the broader interests of the company. One way to do this is to have a comprehensive operating agreement in place for the business, ideally before it becomes operational.

One of the primary concerns that should be addressed in a partnership operating agreement is the definition of the partnership structure. This includes specifying the type of partnership, such as general, limited or limited liability partnership.

Defining contributions and ownership

Each partner’s contributions to the business, including intellectual property, physical assets and financial matters should be noted in the agreement. It should also clearly state the percentage of ownership in the company for each partner.

Roles and responsibilities

Each partner may have a part of the company that they’re responsible for. This should be written out in the operating agreement so that there’s not any doubt about who should handle what. Consider daily operations, overall management and decision-making processes.

Profits and losses

Profit and loss distribution is a critical part of an operating agreement. This should include the agreed-upon formula for splitting everything. It might be based on the initial contributions of each partner. The more detailed this information, the less of a chance there will be a dispute in the future.

Decision-making processes

The decision-making process should be outlined. This includes the voting rights of each partner and what’s required for making significant decisions. While it may not happen often, deadlocks should also be covered. This includes resolution methods for those situations.

Procedures for admitting new partners

There may be a time when new partners need to join the partnership. Having the selection criteria and procedures for this included in the agreement can make that easier. The method for adjusting profit and loss divisions and ownership percentages should also be included.

Exit strategy and dissolution

The terms for a partner leaving the company or for dissolving the partnership should be written out. This can include retirement, resignation and other options like buyouts.

A comprehensive operating agreement may have other elements. For example, dispute resolution methods might be a good addition so there’s a plan in place if partners don’t agree on business operations. Working with a legal representative who can assist with developing this document may be beneficial, given the complexities at issue and all that is at stake.