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LLC partnership agreements are the perfect contract choice when starting a new business with your partners. They outline many vital provisions that ensure a legally sound relationship that recognizes your rights.
In this article, we outlined everything that entrepreneurs and start-ups should know about LLC partnership agreements.
What is an LLC Partnership Agreement?
An LLC partnership agreement, also called limited liability company partnership contracts and LLC operating agreements, establishes the terms between multi-member LLC business entity members. General partners become managing LLC members and sign the LLC partnership agreement to formalize the relationship. They also reserve the right to renegotiate the terms with each other as their business changes.
The terms of an LLC operating agreement vary according to the situation but generally address:
- Management structure
- Member investments
- Member number limits
- Paying LLC costs
- Profit and loss sharing
- Tax considerations
LLC partnership agreements become legally binding contracts by and among the members upon signing. From that point forward, all LLC members must follow the provisions contained in the contract. Otherwise, the other LLC members could file a breach of contract claim against the defaulted party.
Does an LLC Need a Partnership Agreement?
Your LLC needs a partnership agreement if you want personal liability protection while retaining the flexibility to operate as a partnership. Forming an LLC requires filing documents with your Secretary of State’s Office and providing them with information about your company. One of these requirements may also include a signed LLC partnership agreement, depending upon your location.
Regardless of your location, it’s essential to draft a partnership agreement to avoid legal conflicts or navigate disputes. LLC partnership agreements also protect your rights should a member commit a breach.
Can an LLC have a Partnership?
No, and LLC cannot legally have a partnership. However, the flexibility of an LLC allows business partners to draft an LLC partnership agreement to define how their business operates. Essentially, LLCs shield you from personal company liability while offering the operational functionality of a partnership.
What’s Included in an LLC Partnership Agreement?
LLC partnership agreements are legal contracts, which means that entrepreneurs should seek legal counsel from an LLC lawyer when forming one. Many online templates for LLC partnership agreements are available, but keep in mind that the majority generalized and may not address the issues relevant to your company.
Regardless of your methodology, here is an outline of the terms and conditions your LLC partnership agreement should include at a minimum:
Term 1. Company Information
Open your LLC partnership agreement with basic information about the company. The company information section lays the foundation for the rest of the document, so it’s vital to get it right.
You can include the following details for general purposes:
- Current capital contributions
- LLC name and formation date
- Member names and contact info
- Principal business address
- Registered agent name
- State of purpose
- Tax elections
- Term limitations, if any
Term 2. Member Ownership Interests
LLC partnership agreements also establish the percentage of the business that each member owns. Limited liability companies assign members a percentage based on their total business investment. Additionally, an LLC may have distinct membership classes to allocate profits and vote rights in a particular manner.
Term 3. Profit Assignments
Your contract should also specify how the LLC distributes profits to members. An LLC does not have to divide profits according to member ownership. Members reserve the right to assign profits as they see fit and according to the terms of the LLC partnership agreement.
Term 4. Management Structure
LLCs may be managed by their members or by a single manager. The LLC partnership agreement should detail the method agreed upon by the members clearly define the roles and responsibilities of members to ensure that everyone is on the same page.
Term 5. Voting and Meeting Processes
LLC partnership agreements typically specify the dates and times of the business’s member meetings and voting protocols. It would help to address what constitutes a quorum, the number of votes required to approve an action, and voting power.
Term 6. Compensation for Performance
If you intend to compensate members for their contributions, it is beneficial for the LLC partnership agreement to specify compensation terms. This option allows members with less cash liquidity to gain an equal footing among other members by contributing valuable skills, services, or resources.
Term 7. Terms for Adding and Removing Members
LLC members should plan for contingencies and changes. LLC partnership agreements state the procedures for adding and removing members. You can also include provisions that address retirement, incapacitation, or death.
Term 8. Dissolution Terms
Members of an LLC may choose to close the business at some point. Your members must agree upon a process for dissolving the company. Typically, LLC partnership agreements include a section on how to dissolve it and final asset distribution.
Image via Pexels by mentatdgt
How LLC Partnerships Work
General partners may decide to form an LLC since they are liable under their current structure. An LLC assumes total liability for debts and losses but protects the owners personally. As such, it is the ideal business structure for entrepreneurs who want the protections of an LLC while retaining the right to function as they see fit.
Example of an LLC Partnership
Let’s look at an LLC partnership example to see how they function in the real world:
- Chester, Jennifer, and Anthony operate under a partnership
- The partnership’s name is Intech Gaming & Designs
- They create virtual reality video games
- The partners are nervous about financial liability under the current structure
- They look into forming an LLC instead
- Intech’s partners find that they can still operate the same without liability
- Intech drafts and LLC partnership agreement
- They dissolve the partnership and form an LLC with their state
- Intech changes the name to “Intech LLC”
- The three partners are now members of the LLC and may operate as such
This web page also describes how partnerships work.
Difference Between an LLC and LLC Partnership
The correct term for an LLC partnership is just “LLC.” Avoid confusing this term with LLP, which stands for limited liability partnership , and LLPs function much differently than LLCs. LLC lawyers generally draft and negotiate operating agreements on behalf of their clients.
Both business entities primarily function the same, but the one critical distinction is that an LLP must have a managing partner who is personally liable for the partnership’s actions. As long as silent partners and investors do not take on managerial responsibilities, they benefit from debt and legal liability.
Here is an article that also discusses LLCs.
LLC Partnership Agreement vs. Operating Agreement
An LLC partnership agreement is an LLC operating agreement. However, LLC partnership agreements may focus more on supporting the terms of functioning as a partnership. There are several types of LLC operating agreements that address a wide range of structures.
For example, a single-member LLC , usually favored by sole proprietors, consultants, and freelancers, would use a single-member LLC operating agreement . In this case, the operating agreement would focus on insulating the founding member.
Get Legal Help with LLC Partnership Agreements
Partnership agreement lawyers can help you draft the right contract for your business and partners while helping you minimize your partnership agreement costs. Legal mistakes are easy to make, so ensure that legal professionals assist you throughout the process. Get in touch with a lawyer from your state today.
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Tim advises small businesses, entrepreneurs, and start-ups on a wide range of legal matters. He has experience with company formation and restructuring, capital and equity planning, tax planning and tax controversy, contract drafting, and employment law issues. His clients range from side gig sole proprietors to companies recognized by Inc. magazine.
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