Partnership LLC Agreement: Everything You Need to Know
A partnership LLC agreement is a crucial document that ensures all parties are in agreement when creating a business entity. 3 min read
Partnership LLC Agreement
- General partnership agreements
- Articles of partnerships
- Partnership contracts
- Business partnership agreements
Partnership agreements are contracts between two or more partners that outline certain roles and responsibilities. They detail profit and loss distributions of each partner, including overall guidelines on the general partnership. Two or more individuals who own a for-profit business entity, including family members and friends, should draft a partnership agreement.
To know what type of partnership is best for your situation, be aware of the following partnership agreements:
- General Partnership:General partnerships involve two or more parties who form a partnership in pursuit of profit. All partners are held liable equally for obligations of debts that a business incurs, including the actions of other partners.
- Limited Partnership: A limited partnership entails one general partner with unlimited liability in the entity and a limited partner who is only responsible for his or her share of the partnership.
- Limited Liability Partnership: A limited liability partnership is a partnership where individuals are only liable for his or her activity within the business.
General Partnership Parameters
A partnership should include information in the following areas:
- The nature of the business
- Loss and profit distributions
- Management structure
- Voting system
- Dissolution and withdrawal methods
When it comes to capital contributions, all members should receive a percentage share based on his or her capital contributions. A loss and profit distribution can be instituted in the following manners:
- Fixed Percent: Number adding up to a fixed percentage of 100 percent between all parties. For instance, one party may own 55 percent, while another owns 45 percent.
- Equal Share: All shares are divided evenly among partners.
In regards to voting, partnerships may be managed via majority vote or other methods. You have three possible options when it comes to establishing a voting system:
- Proportional Contributions: Voting rights reflect a partner’s contribution to the partnership.
- Proportional Profit Share: Voting rights are assigned based on profit distribution.
- Equal Vote:All parties get a sole equal vote.
It is also a good idea to have a contingency plan regarding the withdrawal of members to avoid messy legal entanglements. If your agreement allows withdrawals, partners may exit as long as he or she adheres to the proper probation and notice periods, including any other terms noted in the contract.
There are two types of withdrawals to be aware of:
- Voluntary: General partners decide to exit the business due to a personal matter, such as retirement.
- Non-voluntary: Partners exit from the partnership due to unforeseen circumstances, such as death or sickness.
Having a dissolution plan in place is for a situation where you must dissolve the partnership. For instance, the dissolution section should outline how assets will be divided among members if the partnership falls apart. A partnership may be dissolved in the following ways:
- Partners agree on a certain end date
- All projects and deals have been completed to the satisfaction of all parties
- Dissolution upon the death of a partner
- Bankruptcy of one partner, or the entire partnership
- One partner decides to withdrawal
A limited liability companygives certain benefits and protections to owners. In addition, LLCs provide the benefits of a corporation and partnership, while helping members to avoid tax liabilities. Such protections safeguard members from personal risk in case creditors decide to collect on business debts. Once state authorities place an LLC in active status, you may then create your operating agreement. An operating agreement is an internal document that outlines the following:
- Roles and responsibilities of members and managers
- Compensation structure
- Voting rights
- Operating procedures
- General management structure
Operating agreements are generally not mandatory in most states, but you should draft one to ensure proper management of your LLC. When it comes to operating agreements, you may tailor the organization to how you see fit
Overall, creating an LLC gives you more flexibility and more protections than a general partnership. For instance, LLCs offer pass-through taxation, where profits and losses pass from the LLC to individual members to file on their personal tax returns. The LLC itself does not pay business income taxes, and members are only responsible for his or her share that’s noted on an individual tax return.
If you need more information on a partnership LLC agreement, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s attorneys will guide you in establishing the right partnership agreement that protects your interests. Moreover, they will help you decide if a partnership or LLC is the right move for your business goals.