What to Put in a Partnership or Operating Agreement

When two or more people own a business together, the agreement between them matters more than almost any other document. Without one, your state's default rules decide what happens when you disagree, someone leaves or someone dies, and those defaults rarely match what partners expect.

Ownership and contributions

• Who owns what percentage, and whether ownership follows money invested, work contributed or both.
• Initial contributions: cash, equipment, intellectual property or "sweat equity," and how each is valued.
• Future contributions: what happens if the business needs more money and one partner can't or won't put it in.

Management and decisions

• Who runs day-to-day operations, and what each person's role is.
• Which decisions need a majority, which need everyone, such as taking on debt, selling the company or admitting a new owner.
• Deadlock: how a tie gets broken when there are two equal owners, for example by mediation, a neutral tiebreaker or a buyout trigger.

Money

• How and when profits are distributed, and whether partners take salaries.
• Tax distributions, so owners can pay taxes on pass-through income even when profits stay in the business.
• Spending limits and who can sign checks.

Buy-sell terms (the most important section)

Decide now what happens if an owner:

• Dies or becomes disabled. Many businesses fund buyouts with life or disability insurance.
• Wants to leave. Notice period and buyout terms.
• Divorces. Can a spouse end up owning a share?
• Goes bankrupt or breaks the agreement.

Spell out how the price is set, whether by formula, appraisal or an agreed value updated yearly, and how it's paid, such as a lump sum or installments.

Transfers and competition

• Restrictions on selling ownership to outsiders, with a right of first refusal for the other owners.
• Confidentiality and, where your state allows, reasonable non-compete or non-solicitation terms.

Ending the business

How the company is wound up, debts paid and remaining assets divided.

Get it done early

These terms are easy to agree on when everyone gets along and very hard once there's a dispute. A business attorney can draft an agreement that fits your state's law and your entity type. See LLC vs. corporation or find a business attorney near you.

This guide is general information, not legal or tax advice.