What is an LLC partnership agreement?

Here’s what you need to know about limited liability companies.

A limited liability company, better known as an LLC, is a type of business in the United States wherein owners are not personally liable for the company’s debt and do not pay taxes. Instead, profits and losses are passed through to members, who claim those profits on their personal tax returns. An LLC can have one or more owners (members), each of whom has equal ownership of the business. You can think of LLCs as a hybrid between a corporation and a partnership— like a corporation, LLCs shield their owners from liability should the business fail. Like a partnership, LLCs pass through profits so that they’re taxed as part of members’ personal incomes.

An LLC is a great structure for a small business: inexpensive, easy to form, and simple to maintain. Learn how to establish a formal LLC partnership with an LLC partnership agreement.

What is the purpose of an LLC partnership agreement?

An LLC partnership agreement ensures that all members are on the same page about the business’s operational and financial aspects. Some of the key purposes of having an LLC partnership agreement are the following:

• Describes ownership and roles. An LLC partnership agreement clearly states the ownership percentages of each member and outlines their roles and responsibilities within the partnership.
• Specifies capital contributions. The agreement also details the initial financial capital each member contributes and sets the stage for future required contributions.
• Handles membership changes. The LLC partnership agreement also specifies the different protocols when it comes to members wanting to leave or adding new members to the partnership or company.
• Establishes decision-making processes. This type of agreement establishes the procedures for making major business decisions, such as the required vote to approve them.
• Outlines how to distribute profits and losses. An LLC partnership agreement outlines how the LLC’s profits and losses will be divided among members. This can be based on the ownership percentage or another agreed-upon formula.

What to include in your LLC partnership agreement.

An LLC partnership agreement is a legal document that members write to set the rules for operating their LLC and to protect their legal rights as members. When you are starting an LLC, make sure your agreement includes these elements:

• Basic information about your company. This includes the LLC’s name, address, statement of intent, statement of purpose, income tax election, and LLC terms.
• Member ownership interest. This outlines how much of the business each member owns. Usually, this is done as a percentage of the total funds invested in the business.
• Profit and loss allocations. These dictate how company profits and losses will be split among members.
• LLC management structure. Will your LLC be managed by its members? Or by third-party managers? Your agreement should clearly define each person’s role and responsibility.
• Meetings and voting procedures. These outline how decisions will be made.

LLC partnership agreement vs operating agreement.

Although the terms LLC partnership agreement and operating agreement sound very similar, it’s important to understand the differences between the two of them:

• LLC partnership agreement. This term is used when referring to an LLC that has various partners and focuses on the relationships between the different members, their contributions, and how they manage the business collectively.
• Operating agreement. You can learn how to establish a formal LLC partnership with an LLC operating agreement. An operating agreement outlines the rules for the business’s operation and the financial and managerial rights of its members.

Can you modify your partnership agreement for LLC members easily?

Yes, you can modify your LLC partnership agreement. However, the ease of this process varies depending on the case:

• State laws. The requirements to modify your partnership agreement for an LLC may vary by state since some states have specific provisions that you should follow for the amendment to be valid.
• Mutual consent. Usually, changes to an LLC partnership agreement require consent from all of the members. The original agreement should specify the process for amendments, including any required vote percentage.
• Process. Typically, members need to draft an amendment document that outlines the changes that must be agreed upon and signed by all members.
• Documentation. It’s very important to document any amendments properly as well as update the operating agreement to reflect the changes. This is done to ensure that the document remains current and continues to accurately represent the LLC’s operations and member agreements.

Write your LLC partnership agreement with ease.

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