In 2023, the U.S. Census Bureau estimated that 5.5 million new businesses were created. For many, starting a business is an exciting yet daunting task—especially when entering into the venture with a partner. However, with the right legal guidance and a clear understanding of the essential documents required, you can streamline the transition into business ownership and partnership. A critical first step is deciding on the right type of business entity and ensuring you have the necessary legal agreements in place.
What Type of Business Entity Should You Form?
Choosing the right business structure is crucial, and the decision often comes down to liability protection, management preferences, and formalities. The three most common options for partnerships are Limited Liability Companies (LLCs), General Partnerships, and Limited Partnerships.
- LLC (Limited Liability Company): An LLC generally offers more personal liability protection than a partnership. The members of an LLC are typically not personally responsible for the company’s debts, safeguarding their personal assets. LLCs also require filing formation documents with the state, along with ongoing compliance like annual reports and fees.
- General Partnership: In a general partnership, all partners share unlimited personal liability for the business’s debts and obligations. There’s less formality compared to an LLC, and while a partnership agreement is necessary, state registration may not be required.
- Limited Partnership: A limited partnership consists of general partners, who have unlimited liability, and limited partners, whose liability is capped at their investment. This offers more flexibility but less protection for general partners compared to an LLC.
Your choice between these entities will depend on factors like liability exposure, management preferences, and the level of formality you want in your business operations.
Essential Documents for Forming a Business with a Partner
1. Partnership Agreement
For general and limited partnerships, a Partnership Agreement is essential. This document outlines each partner’s responsibilities, roles, and the profit-sharing arrangement. Some key elements to include are:
- Contributions: What will each partner contribute (capital, property, skills, etc.)?
- Profit and Loss Distribution: How will profits and losses be divided?
- Management and Decision-Making: Who manages day-to-day operations and how are key decisions made?
- Dispute Resolution: How will disputes between partners be handled?
- Withdrawal or Termination: What are the conditions for a partner to exit the business, and how can the business be dissolved?
2. Operating Agreement
For LLCs, an Operating Agreement serves a similar purpose as a partnership agreement but is tailored for LLCs, which have members or managers rather than partners. At a minimum, it should address:
- Ownership Interests: What percentage of ownership will each member hold?
- Management Structure: Will the LLC be managed by members or appointed managers?
- Voting Rights: How will decisions be made, and what voting process will be followed?
- Profit and Loss Allocation: How will profits and losses be distributed among members?
However, it is important to note there are many more clauses that an attorney is likely to include for you, such as what happens if your business partner stops working altogether but still wants their share? What happens if they want to sell their share? What happens if they pass away? These are all things that need to be discussed and agreed on to ensure your business relationship starts on the right foot.
3. Articles of Organization
If forming an LLC, you’ll need to file Articles of Organization with your state. This document officially registers your LLC and should include:
- Business Name: The legal name of the LLC.
- Duration: Whether the LLC will exist indefinitely or for a specific term.
- Registered Agent: The person or entity designated to receive legal documents on behalf of the LLC.
- Management Structure: Whether the LLC will be managed by its members or by designated managers.
Depending on the state you are in this list may change, either by addition or subtraction.
Additional Considerations
The above documents form the foundation for a new business, but depending on your industry and growth plans, you may need additional agreements, such as:
- Intellectual Property Agreements: To protect trademarks, copyrights, or patents.
- Work for Hire or Employment Agreements: When hiring employees or contractors.
- Financial Agreements: If securing loans or investments.
- Service Agreements: If you are providing a service to a client you will want to document what you agreed to do and what/how they are paying you.
By working with experienced legal counsel, you can ensure that these critical documents are in place, that roles are clearly defined, and that your business is fully compliant with all legal requirements.
Need help? Feel free to reach out to me directly at josh@landrypllc.com.
