Strategic partnerships can be a powerful way to grow your startup, but they also come with legal and operational difficulties. In this section, we’ll compare two common agreements governing these relationships: partnership and operating contracts. We’ll also explain the benefits and risks of each one and how to choose the best option for your particular situation.
A partnership agreement outlines the rights and duties of two or more parties working toward a common goal. It can address the partnership’s objective, partners’ duties and contributions, profit and loss sharing, decision-making, dispute resolution, and termination clauses. To avoid miscommunication, a partnership agreement should be written.
The section discusses an operating agreement that supports a single corporate entity, an LLC, which may have multiple members who own a share of the LLC. While an operating agreement governs the internal workings of an LLC, there are more appropriate legal documents for establishing a strategic partnership. An operating agreement can cover various matters, such as ownership, management, voting rights, profit and loss distribution, tax treatment, dissolution, and other related issues. Even though an operating agreement is not mandatory in most states, it is advisable to have one in place to protect the LLC and its members.
The advantages of establishing partnership agreements.
Be careful what you offer in an agreement to partners and review internally what your business wants to accomplish with partners. Often, startups think partnerships will drive volume because they sign a deal with an established company. Instead, the document is the first step of many, and the time it takes to achieve accurate long-term results can take years. Don’t encourage Contracts to be signed; instead, focus on the first deal closed for partnership managers. Creating partnership agreements can offer several advantages for startups collaborating with other entities. These agreements help access new markets, customers, resources, skills, and technologies that are otherwise difficult to acquire.
Moreover, sharing costs, risks, and uncertainties with partners can reduce these factors. Additionally, pooling strengths and compensating for weaknesses can lead to synergies and innovation. Collaborating with partners and stakeholders can also establish trust and credibility.
Risks of partnership contracts
Although partnership agreements can be beneficial, they also carry risks and challenges that firms should be aware of. These risks include the possibility of legal liabilities and disputes if partners violate the agreement or act in bad faith. Additionally, these agreements can constrain a firm’s autonomy and flexibility, as partners must be consulted and coordinated on critical decisions and actions. Conflicts and inefficiencies may arise if partners have divergent goals, values, cultures, or work styles. Finally, a firm’s brand and reputation can be impacted negatively if a partner has a poor image or performance.
Benefits of operating agreements
Startups that opt for an LLC as their legal entity can gain various advantages by creating operating agreements. These advantages include safeguarding personal assets from the debts and liabilities of the LLC, providing greater management and governance control over the LLC, simplifying the LLC’s tax structure, and minimizing member conflicts and disputes. By establishing their own guidelines and policies, startups can clearly outline the rights and responsibilities of all members.
Risks of operating agreements
While operating agreements can be beneficial, they also come with risks and drawbacks that businesses must consider. These risks include higher administrative and legal expenses, limitations on the transfer and issuance of membership interests and the admission of new members, potential confusion and inconsistency if the agreement contradicts state laws or the LLC’s articles of organization, and the possibility of personal liabilities and penalties if the agreement or the members’ fiduciary duties are violated.