Operating Agreement Vs Limited Partnership Agreement
Operating Agreement vs Limited Partnership Agreement: Understanding the Differences
When forming a business, it’s essential to have legal documentation to protect your interests and outline the roles and responsibilities of all parties involved. Two common agreements used by businesses are the operating agreement and limited partnership agreement. While they may seem similar, they have significant differences.
Operating Agreement
An operating agreement is a legal document that outlines the management structure, ownership, and financial responsibilities of a limited liability company (LLC). It is a critical document as it serves as a guidebook for the LLC proceedings. The operating agreement sets out the rights and responsibilities of each member of the LLC and the percentage of ownership. Additionally, it outlines the distribution of profits and losses, management structure, and member voting rights.
The purpose of the operating agreement is to ensure that all members are aware of their roles and responsibilities to avoid future conflicts. It also provides protection in case of legal disputes between LLC members or between the LLC and an external party. For instance, when collaborating with partners, an operating agreement will guide the parties on how to resolve disputes. The operating agreement can be modified to cater to the needs of the LLC members.
Limited Partnership Agreement
A limited partnership agreement describes the relationship between general partners and limited partners. These partners work together to form a business for purposes of profit-making. However, the key difference is that limited partners play a passive role in the partnership`s management decisions and only contribute capital to the business. On the other hand, general partners contribute capital to the business and actively participate in the management of the partnership.
The limited partnership agreement outlines the roles and responsibilities of each partner and the distribution of profits and losses. Limited partners have limited liability and are not liable for the debt and obligations of the partnership beyond their investment. General partners, on the other hand, have unlimited liability and are responsible for all the debts and obligations of the partnership.
Which One Should You Choose?
The choice between an operating agreement and limited partnership agreement depends on the structure of your business and the roles of the parties involved. If you are forming an LLC, an operating agreement will be suitable to outline the management structure and financial responsibilities of the members. On the other hand, if you are forming a limited partnership, a limited partnership agreement will outline the roles and responsibilities of the general and limited partners.
Conclusion
In conclusion, both operating agreements and limited partnership agreements are essential legal documents that define the roles and responsibilities of business stakeholders. Each agreement has its unique purpose, and it is crucial to understand the differences between the two to make an informed decision. When forming a business, it is vital to consult with legal counsel to determine which agreement is best suited for your business.