Business Partnership Agreements and LLC Operating Agreements Explained

Starting and growing a business together can be tricky. New business partners are often unaware of the personal and financial sacrifices they have to make. You both may have different management styles, habits, boundaries, and levels of commitment.

This is our guide to help you draft a successful business partnership agreement.

Ownership of the Business

Splitting the Ownership

Ownership of your business should never be split equally between you and your partner(s). In the beginning, everyone is happy to be starting a business together, but things change as the company begins to take off or starts to fail. Eventually, partners will disagree with each other when it comes to shared ownership.

If neither side budges on what their share of ownership should be, the parties are in a deadlock. Louisiana does not have a statue that resolves such disputes, so if the parties haven’t previously agreed on how to settle the difference, you’re going to have to head to court.

Take finances into consideration when splitting ownership. Most businesses will need additional funding at some point. Consider you and your partner’s creditworthiness when splitting ownership.

What is a Partnership Agreement?

A partnership agreement is a broad term to describe the contract between the owners of a business. Most partners actually sign an Operating Agreement, which is the legal term for a Partnership Agreement among partners in an LLC. If the legal entity is a Corporation, the Partnership Agreement is technically considered Bylaws and Shareholder Agreements.

While the legal form of partnership still exists, it is not as widely used today because most partners form Operating Agreements. However, the concepts are generally the same, and we use the term “Partnership Agreement” to describe that contract.

These agreements will save time and money for you and your partner(s). The contents of this agreement will serve as a guide while operating the business.

The partnership agreement should include:

These are merely broad topics, and some of these significant issues have many sub-issues that will be addressed in further detail.

Be sure to include a deadlock provision in the partnership agreement when determining how disputes will be handled. This provision is triggered when neither partner will budge and outlines how the conflict will be resolved. Since partnership agreements can be broad, there are multiple ways to word this provision:

Mediation or Arbitration

Partners have to resolve differences by stating their case to a third-party mediator. This mediator will help them resolve the dispute without any bias. Mediation is an expensive option as attorney and clerk fees can add up.

The ‘Texas Shootout’ method

One member would be forced to offer a price to buy out the other member, and another member can either sell his ownership at their price or purchase the offering member’s ownership at their suggested price.

51% Ownership

This decision will prevent deadlock situations as there is always one partner with majority ownership. Just keep in mind that the partner with majority ownership calls the shots.

The goal of a business partnership agreement is to make it mutually beneficial for both partners, which requires fairness and excellent negotiation skills. Before consulting an attorney, business partners should clarify common goals and visions. Bringing in an attorney covers the legal aspect of a business partnership agreement, also known as an operating agreement.

How to write a Partnership Agreement or LLC Operating Agreement

How to Write an LLC Operating (or Partnership) Agreement - DIY and Free!

If you have a business partner, you need a document that defines the rights and responsibilities of all the partners. If the partnership is organized as an LLC, that document is a Operating Agreement. Wondering what goes into one? This detailed video explains it all.

Your Business Partner

Getting a business partner can be a blessing or a curse. Before you decide to get a business partner, ask yourself if you need one.

It’s common for business partners to work well early on when some decisions are relatively easy to make. As the business relationship grows, choices will become more complicated, and disagreements will occur.

How to Find the Right Partner

Starting a business comes with complicated formalities, taxes, accounts, and finances. Having a business partner could help make handling these much easier. The first thing you should determine is whether you need a partner or if you should hire an employee.

A business partner is not necessarily someone who owns a part of the company and helps you run the business. Strategic business partnerships can be so much more. You can form the business with another company whose business goals align with yours and who is willing to help you grow. A company as a business partner is not equal to a merger because both companies stay independent. In the partnership process, they provide essential services to one another and either share their income or pay commission.

Great ideas often turn into a success when friends, college buddies, or family members become business partners. Those relationships tend to be innovative and creative, but quickly become problematic when formalities are left on the side.

Before you get into business with your partner you should work together on small projects, so you can give your partnership a test run. If you make a great team, you can start talking bout your common visions for the business.

The criteria for a good business partnership consist of different things but one of the most important would be how well the skills you both have that complement each other. Strengths should be different from one another.

Understanding their financial situation is necessary before officially partnering with others. Discussing finances could save you from trouble later on.

Here’s how to get started:
  1. Reach out to your network professional network a compile a list of candidates
    Using your connections or referrals of colleagues is a great start.
  2. Evaluate your chosen candidate
    Take the time to learn about their personality, values, experience, and background. View resources like their social media, company websites, former partners, and other references.
  3. Respect boundaries with your partner(s)
    Once you decide on your partnership, be sure to set up the operating agreement and allow each other to handle the responsibilities defined.

Partnerships with Spouses and Loved Ones

Choosing a family member or close friend is often the obvious choice. Even though they might make it easier to raise capital, they can’t always bring the necessary skills to the table. If something raises an eyebrow, communicate and address it. Establish frequent reviews to keep the communication open and transparent.

Sometimes partnering up with a family member can be beneficial especially when you share many values that will keep the business growing. Regardless of your relationship to someone, there should always be an end goal you both are aiming for. The direction of the business needs to be clear from the beginning.

Friends and family members who are in business together often disregard the need for formalities. This is why partnerships between friends and family could be risky. Friend and spouses tend to neglect the planning aspect of building a partnership more than people who have no previous relationship. Strains can sometimes be put on the personal relationships you have with these kinds of partners.

Going into business together is the ultimate compatibility test for every couple. Becoming business partners allows you to get to know each other. In the process of building a business together, it’s important to have the same motivations while maintaining a healthy work-life balance.

If this kind of partnership works out, sharing every part of your life makes it easier to have common priorities when it comes to caring for your household and business. Achieving these goals and celebrating successes together will build on the business and personal relationship.

A spouse partnership can be beneficial as most couples have a deep understanding of their partner’s:

Strategic Business Partnerships

Business partners should always acknowledge personal boundaries, praise, and criticize appropriately, show respect, and be open to honest discussions. As leaders of the company, they must confront any challenges and clear up any confusion or resentment. Putting out small fires, in the beginning, will keep you from wasting your energy on managing negative emotions later on.

The benefits of business partners include:

It’s best to get business partners for the following business needs:
  1. Sales Representation
    Partner up with sales reps who have a network in your business industry. They could help land contracts with bigger businesses.
  2. Fulfillment
    Partnering with a fulfillment house could help with warehousing and shipping.
  3. Manufacturing
    Letting another company manufacture products for you can increase efficiency.
  4. Marketing and Promotion
    Targeted advertising can be the responsibility of a CMO or marketing director to increase outreach.

Other aspects such as white labeling, distribution, and licensing can also be skills you or your business partners should have.

The biggest cause of partner conflict would be the lack of thorough planning. And even the planning process can’t ward off all disagreements, but it will improve people’s odds of succeeding.

Systematically going through a list of issues both interpersonal and business is the key to avoiding conflict. Challenges will be much easier to overcome in the future because partners can routinely fail to share expectations of one another. Make an effort to create expectations of your partner and yourself to have the conversations you need to have.

Partnerships You’ll Want to Avoid

Who doesn’t know Ben & Jerry’s ice cream? It’s not only one of the most popular ice cream brands because of its taste, but also because of the successful business partnership between Ben Cohen and Jerry Greenfield. They became partners in 1978 and over four decades later they still work together and oversee the direction of the company. What makes their partnership work is they complement each other’s talents and share a common vision.

However, in worst-case scenarios, you’ll find yourself in court over failed partnerships. Initially, there should certain types of partners you need to avoid.

  1. Mr. Employee
    Mr. Employee is a first-time entrepreneur with a pristine resume and an abundance of references. He enjoys collecting a weekly paycheck, health benefits, and eating dinner with his family nightly at 7 p.m. Unfortunately, Mr. Employee isn’t self-sufficient and doesn’t know how to move the business forward without you instructing his every move. Plus if your investment deal doesn’t pan out soon he is going to need to find a “real job” to pay the kids’ college tuition.
    Tip: Individuals who do not share the priorities that you do will not be productive partners. Pass up individuals who cannot commit equal time, energy, and financial resources.
  2. Mr. Perfectionist (also known as Mr. Procrastinator)
    Mr. Perfectionist needs every “i” to be dotted and “t” to be crossed before he schedules an official product launch date. He enjoys researching competitors, building industry case studies, and improving his 150-page business plan. Mr. Perfectionist wanted the new business to be up-and-running by now but still feels something isn’t quite right. He plans on putting together another comprehensive survey to send to all of his colleagues, friends, and family in the next few weeks to help flesh out the concept further.
    Tip: A good plan today is always better than a perfect plan tomorrow. Steer clear of excuse-prone procrastinators. Seek out self-starters who run with the ball and make things happen.
  3. Mr. College Buddy
    Mr. College Buddy had a stroke of genius while out at the bar one night, wrote it on a cocktail napkin, and asked you to help him “make it happen”. He enjoys bragging about his great idea and giving you directions on how to execute (he’s not into the “heavy lifting” thing). The issue: he’s moving across the country to start med school in the Fall. But fear not, Mr. College Buddy will make himself available by phone when he’s not studying, working, in class, or on a date. He’ll be sure to forward you the address where you can mail his 50% of the profits.
    Tip: Never assume all of the risks in exchange for half the reward. Ideas are worthless without proper execution. Before you bring a co-conceived idea to fruition, make certain that your partner plans to be around for the long-run. Napkins are not legally binding. Always execute an operating agreement.
  4. Mr. Inventor
    Mr. Inventor thinks he’s created the next billion-dollar widget. He enjoys giving two-hour dissertations on Chinese electrical engineering standards to investors and making business decisions based on ‘nice people’ and ‘gut feelings’. Mr. Inventor doesn’t understand the phrase ‘in the black’ but feels it’s imperative to spend all of the company’s investment proceeds on research and development.
    Tip: Brilliant academics are not necessarily brilliant businessmen. In place of a partnership, first, consider licensing deals or strategic partnerships. If you decide to go ahead with a partnership, be sure your agreements clearly distinguish the differences between product control and operational control.
  5. Mr. Right
    Mr. Right will be the first person to tell you that he is never wrong. His favorite phrase is ‘my way or the highway’. He will rarely discuss his decision-making process because he views such discussions as a weakness. He enjoys demeaning partners who don’t agree with him and making decisions without telling them. The funny thing about Mr. Right: he always seems to blame everyone but himself when his plans don’t pan out.
    Tip: Communication is the key to a successful partnership. Find a collaborator, not a dictator. No one is always right.
  6. Mr. Dreamer
    You’ll hear Mr. Dreamer say this line a lot: “One day when we’re millionaires.” He loves talking about retiring by 29 and how he intends to spend his hypothetical millions on a gold plated yacht that he’ll dock off the coast of his private island. One small problem with Mr. Dreamer: he doesn’t seem to know how to keep the business above water next month.
    Tip: Big paydays come from years of hard work and persistence, not excessive rambling and daydreaming. While your partner must be both positive and optimistic, it is equally important that he or she is grounded and focused.
  7. Mr. Spender
    Mr. Spender can’t possibly survive without a six-figure salary, lavish office, and an in-house cigar roller. Price is no object when it comes to entertaining a client or flying first class. If you’re lucky, Mr. Spender might even invite you to one of the extravagant dinner meetings that he charges on your company’s corporate card.
    Tip: There is no such thing as an unlimited checkbook. Partner with fiscally conservative, financially responsible individuals who strive to make every dollar benefit company growth and development–not their lifestyles.
  8. Mr. CEO
    Mr. CEO feels compelled to tell everyone that he is a CEO within 30 seconds of meeting him–even if his company is worth less than the paper on which his business card is printed. He loves cocktail receptions, his name written in fancy fonts, and stacks of luxury car magazines neatly piled on a coffee table in plain sight of customers. The only thing he doesn’t seem to like: real work.
    Tip: Successful companies are not built on titles, talking, and toys. Keep away from selfish, egotistical individuals who want to talk the talk versus walk the walk.
  9. Mr. Vacation
    I’d tell you more about Mr. Vacation, but I don’t know much about him. He never seems to be around.
    Tip: No-shows are dead weight and eat away profits. Make sure that your operating agreement clearly outlines partner responsibilities and vacation days.And the partner to avoid like the plague is.
  10. Mr. Personal Issues
    Mr. Personal Issues always has a sad story. On the same day as your company’s keynote presentation at the big conference, his son’s wisdom teeth need to be pulled and his dog died of pneumonia. He would love to attend next week’s investor meeting, but his divorce hearing might tie him up all day. Unfortunately, Mr. Personal Issues can’t afford his legal bills, so he’ll need to pull a little more money out of the company this month to avoid his ex-wife from taking 50% of his equity in the settlement. Thankfully, this will be the last time he needs money.
    Tip: You’re not in business to be a babysitter or a psychiatrist. Know everything there is to know about a prospective partner before you sign on the dotted line. Discuss everything from business to politics to family life to finances. If a potential partner seems to have a few screws loose, run as fast as you can in the other direction.