What is a Partnership Agreement?

“​​Hi, I'm calling because I need a partnership agreement.” I've heard that one a time or two…let’s talk about partnership agreements and why they're probably not what you think they are.

First off, a partnership agreement is really kind of a false language. Most people think that if they set up an LLC with a partner, they need a partnership agreement.

Wrong–you need an operating agreement.

An operating agreement talks about the people that own your business or are members of your LLC and how they work together. So if you haven't watched my video on operating agreements, take a look at that so you can understand the details in operating agreements.

For our purposes, a partnership means that two people have come together, and they have formed some kind of venture. So let's say they both put their names on the LLC, the first thing they need to do is make sure that operating agreement accounts for their percentages of payments, how they're going to pay each other, how they're going to work together, assets– really, the details of that relationship. Remember, the operating agreement sets expectations and boundaries–and it just makes everyone's life a heck of a lot easier if we know what to expect of one another and how we're going to transact together. And again, if you're forming a partnership with an LLC, you call yourselves partners. But really, you formed an LLC together, you just need an operating agreement for both members.

Now, let's say that you didn't do it that way. Let's say that you live in one state, your friend lives in another, you guys come together and you want to do a business venture together. There's a couple of different ways we can structure this. Here’s what I'm typically going to advise if you don't have a business entity setup together, there's no LLC, there's no corporation: you're just two separate people that want to plot a chart together. If that is you, you're likely going to fall under the joint venture category. A joint venture means that you both typically have your own LLCs, your own businesses, but you want to come together to do a program, a training, you want to group coach for a certain duration. That is where a joint venture comes in. It’s not a true partnership, because you still have your respective businesses and your own liabilities. It is a way to do business together without the obligations or liabilities of being a true partnership.

Now, sometimes people want to come right out the gate with a partnership. “We want to be partners, we don't want a joint venture.” What's the best way to do this? And the lawyer answer that no one likes: it really does depend.

What does it depend on? It depends if a corporation makes sense for your business or if a limited liability makes sense for your business. You have to wade through that to see what is the correct business entity to be partners within. Before you ever do that. I highly, highly recommend that you start as a joint venture. If you start as a joint venture, you can see not only how you work together, you can also see if your idea is profitable, if the market responds, if you can build an audience, or if you both work well and play well together. If you can handle that together, then let's pour money, pour resources and build a business together. And then at that point, it makes sense to dig into the nuances of the different types of business entities because you'll also be more clear on what your business should look like and the direction it needs to go for growth and scaling.

Now, that is the importance of a partnership and a partnership agreement. Remember, they're not truly partnership agreements. For most purposes, it's an operating agreement or a joint venture. A partnership agreement could come in down the road. But before we ever want to get into that language of a “partnership”, you want to explore other options because the legal liabilities that it opens you up to can really have quite the impact on your business. So let's start there. And if you have questions, let me know.