Key Takeaways

  • Starting an LLC with a partner offers flexibility in profit sharing, liability protection, and business structure.
  • A written LLC partnership agreement is essential to avoid disputes and define partner roles, contributions, and decision-making rules.
  • LLCs offer liability protection not available in general partnerships.
  • Partners should plan for issues like death, exit, or business dissolution in their agreement.
  • LLCs can choose how they are taxed—either as a partnership, corporation, or S corporation.

LLC Business Partnership Agreements

To start an LLC with partners, you will first need to develop a partnership agreement for your limited liability company (LLC). Your partnership agreement will outline your LLC's management and structure and describe partner responsibilities. When forming an LLC, the owners of your company will get the benefits of owning a corporation without the tax drawbacks of the corporate structure. The main purpose of a business partnership agreement is to reduce the likelihood of disagreements by clearly outlining the LLC owners' responsibilities. 

Why Do You Need One?

To prevent future problems, every partnership should develop a strong partnership agreement that all LLC members agree to. Your partnership agreement will function much like a corporation's Articles of Incorporation, and every party will be legally bound by the agreement. It's a good idea to write your partnership agreement before you open your business instead of after operations have begun. 

What Does it Do?

A partnership agreement will clearly define the rules of the business partnership and make sure every partner understands important issues related to the company.

It's important to take your time when developing a partnership agreement. This process requires LLC members to closely examine their roles within the company, as well as consider what would happen if one of them passes away unexpectedly. With a formal agreement, partners will also be protected from each other, meaning one partner won't be able to take advantage of another. 

The Scope of the Agreement

When writing your LLC partnership agreement, you will start with some facts about your company, including:

  • Your LLC's name and address.
  • Your company's purpose.
  • Information stating that your company will be an LLC.

Your agreement should also list every partner's obligations, which will usually be based on what they have contributed to the company. Your partnership agreement will also outline the partners' rights. You might want to include rules for how company decisions will be made and how partner disputes will be resolved. It's important that your partnership agreement include steps for dissolving the company, including how to dispose of assets and distribute remaining money to the partners. 

Benefits to the Partners

Partnership agreements grant rights to the LLC partners, including to profits and ownership stakes. A partner's ownership stake is a representation of how much power they have in the company. While many partnerships provide equal ownership stakes, others give managing partners higher stakes and consultants or investors lower shares. You can distribute company profits by ownership stake or through another method agreed to by all partners. 

Responsibilities of the Partners

When starting an LLC with partners, you need to take into account the amount of capital each founding partner will contribute. Your LLC partners can contribute buildings, cash, land, or other assets. After defining each partner's contributions, you must decide how you want to distribute operational responsibilities. Your goal should be to give each partner control of one section of the company. 

Important Clauses to Include in Your Partnership Agreement

When starting an LLC with a partner, your operating or partnership agreement should go beyond basic ownership splits. Include clauses that address:

  • Decision-making authority: Clarify who can make decisions and what types require unanimous vs. majority approval.
  • Capital contributions: Specify each partner’s financial or asset investment and how future contributions will be handled.
  • Dispute resolution: Outline a process such as mediation or arbitration to resolve disagreements.
  • Buyout provisions: Detail how a partner can exit the business and how their share will be valued and distributed.
  • Succession planning: Address what happens if a partner dies, becomes disabled, or wants to leave the business.
  • Profit distribution methods: Define how profits and losses are allocated—equally, based on ownership percentage, or otherwise.

Clearly outlining these provisions can prevent major conflicts and ensure smoother business operations​.

Differences Between LLCs and Partnerships

Limited liability companies and partnerships are similar from a legal standpoint. For example, when an LLC pays income taxes, it does so as a partnership. However, LLCs and partnerships differ in important ways that you should consider when choosing a business structure, including: 

  • An LLC's structure allows it to operate similarly to a partnership, but with the personal liability protections of a corporation.
  • Partnership and LLC owners can divide profits and manage the business however they wish. However, owners of a partnership are liable for their business's debts while LLC owners are typically not.
  • LLCs almost always need to be registered with the state, whereas partnerships usually don't.

When starting a new business, think very carefully about whether you will structure your business as an LLC or a partnership.

If you choose to form your business as a partnership, the two partnership structures are: 

  • General partnerships, in which parties agree to operate their business for-profit. Every partner is responsible for managing the company and will have an equal share of losses and profits.
  • Limited partnerships, which have one general partner who provides funding for the company and handles management responsibilities and multiple limited partners whose only duty is to provide the company with capital.

Tax Treatment for LLCs With Partners

An LLC with multiple members is treated as a partnership by default for federal tax purposes, unless it elects to be taxed as a corporation. This allows the LLC to pass profits and losses through to the owners’ personal tax returns, avoiding double taxation.

However, partners can opt for corporate or S corporation taxation by filing IRS Form 8832 or Form 2553, respectively. This can be beneficial in some cases, such as reducing self-employment taxes or increasing retirement savings options. Consult a tax advisor to determine the best choice based on your business’s income and structure​​.

Key Considerations Before Starting an LLC With a Partner

Before forming an LLC with a partner, consider the following:

  • Shared vision: Ensure that both partners are aligned on the mission, goals, and values of the business.
  • Complementary skills: Partnerships work best when each member brings different strengths to the table.
  • Financial expectations: Discuss income needs, reinvestment plans, and personal financial commitments upfront.
  • Exit strategy: Talk through what happens if one partner wants to leave the business.
  • Legal structure: Choose your state of formation carefully, and determine whether you’ll need to register in other states for tax or operational reasons.

Starting an LLC with a partner works best when expectations are discussed and documented early in the process​.

Filing Requirements When Starting an LLC With a Partner

To legally start an LLC with a partner, you’ll typically need to:

  1. Choose a business name and ensure it’s available in your state.
  2. File Articles of Organization with the Secretary of State or appropriate agency.
  3. Designate a registered agent to receive legal notices on behalf of the business.
  4. Create an operating agreement outlining roles, contributions, profit sharing, and exit terms.
  5. Apply for an EIN (Employer Identification Number) from the IRS.
  6. Register for state taxes or licenses as required in your industry and location.

While filing requirements vary by state, completing these steps ensures your LLC with partners is recognized and compliant with the law​​.

Frequently Asked Questions

  • Can two people own an LLC together?
    Yes. An LLC can have two or more members, and it's treated as a partnership by default for tax purposes.
  • Do I need a formal agreement to start an LLC with a partner?
    While not legally required in every state, a written operating or partnership agreement is strongly recommended to avoid future disputes.
  • How is an LLC with partners taxed?
    By default, it’s taxed as a partnership. However, LLCs can elect corporate or S corporation taxation if eligible.
  • Can LLC partners have unequal ownership?
    Yes. Partners can agree to any ownership distribution they choose, based on capital contributions, responsibilities, or another formula.
  • What happens if a partner wants to leave the LLC?
    The operating agreement should include buyout terms or exit procedures. Without such terms, state default rules may apply.

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