If you own a small business with at least one other person or more, whether you have it structured as a partnership or a limited liability company, you need to put your operating or business partnership agreement in writing. Although it is possible to form a partnership with a handshake, it is definitely not recommended to do business this way.
Under New York law, members of an LLC are required to put their operating agreement in writing. The only real difference in a partnership operating agreement is that the owners are called partners. Those who form an LLC together are referred to as members.
You can find a business partnership agreement template and create your own partnership and operating agreement. Most business experts recommend that if you find one you think might work for you, review it carefully. Then, consult a business attorney, who will analyze it and make changes and recommendations specific to your type of business and the goals you have for it.
Why You Need a Written Business Partnership Agreement or LLC Operating Agreement
According to the Small Business Administration, when all partners or members have signed the agreement, it acts as an official contract and binds all those who signed to comply with its terms. Some reasons for having a written agreement include:
- Protecting the individual personal assets of members from the LLC’s business liabilities.
- Clearly defining the duties and responsibilities of all members.
- Providing agreed-on rules for resolving disputes. If there is no operating agreement and any dispute arises, it is resolved under the default rules of the state, which are generally not as favorable as the terms that are included in a written operating agreement signed by all partners or members.
Terms All Business Partnership Agreements or LLC Operating Agreements Should Include
The SBA recommends that all partnership or operating agreements contain the following terms:
- The official name of the business. Sometimes, disagreements begin at this level. Would the future of a major retail sales business have been the same if it had been called Roebuck and Sears? In New York, if the company is an LLC, the name of the business must include the words “Limited Liability Company” or the initials “LLC.”
- The type of the business. Are you selling goods or services? Are you manufacturing products? Make the purpose of the business clear in the operating agreement.
- Percentage of the business that each partner or member owns. Will there be equal contributions, or will one or more own more than others? How will profits and losses be allocated?
- The voting rights and responsibilities of each partner or member.
- How often meetings will be held.
- How business decisions will be made. Will all partners need to vote, with the majority winning? Will the vote need to be unanimous? Will one partner be managing partner with decision-making authority?
- Specifically defined duties and responsibilities of each partner or member. Every aspect of how the business operates needs to be put in writing. You want to avoid any disputes in which one partner or member argues, “But I thought you were going to do it.”
- How the business will be transferred if one person wants to sell his or her share. Establish buy-sell rules. For example, can partners or members sell their share of the business to someone with whom the other members and partners do not want to work? Establishing the parameters ahead of time avoids costly future litigation.
- A buy-sell agreement for how to handle the heirs of a member or partner who dies.
- How the business will eventually be dissolved if dissolution becomes necessary.
Although New York requires an LLC to have a written operating agreement, it is not filed with the state. It should be kept in a safe place along with all of your other important business documents.
Contact Small Business Attorney David Fogel for Assistance
Business partnership agreements and LLC operating agreements are legally binding documents. If litigation does arise, it is more likely the documents will hold up to a challenge if they have been prepared by an experienced small business attorney such as David Fogel. A well-crafted document that covers as many eventualities as possible can go a long way to preventing future time-consuming and costly litigation. Call Mr. Fogel today at his Brooklyn, New York office.
