When setting up a limited liability company (LLC), there are various legal documents that business owners must consider. Two of the most important documents are the LLC operating agreement and the limited partnership agreement (LPA). While both documents serve similar purposes, they are not interchangeable. This article will explore the key differences between the LPA and operating agreement to help business owners determine which document is appropriate for their LLC.
Limited Partnership Agreement (LPA)
A limited partnership agreement is a legal document that outlines the terms and conditions for a limited partnership. A limited partnership is a type of business structure where there are two types of partners, general and limited. The general partner(s) manage the business and are personally responsible for all debts and liabilities. The limited partner(s) are passive investors who have limited liability but do not participate in the management of the business.
The LPA outlines the responsibilities and powers of the general partner(s) as well as the rights and limitations of the limited partner(s). It also covers the distribution of profits and losses as well as the duration of the partnership.
An operating agreement is a legal document that outlines the terms and conditions for a limited liability company. An LLC is a business structure where owners have limited liability, meaning they are not personally responsible for the debts and liabilities of the company. The LLC is managed by its owners or managers who are known as members.
The operating agreement outlines the roles and responsibilities of the members, the distribution of profits and losses, and the procedures for decision-making and dispute resolution. It also covers the ownership structure of the LLC and the procedures for adding or removing members.
One of the key differences between the LPA and operating agreement is the type of business structure they cover. The LPA is used for limited partnerships, while the operating agreement is used for LLCs. Another significant difference is the role of the partners or members. In a limited partnership, the general partner(s) manage the business and are personally responsible for its debts and liabilities. In an LLC, the owners or managers are responsible for managing the business but are not personally liable for its debts and liabilities.
Additionally, LPAs often have more rigid structures than operating agreements. LPAs have legal requirements that must be met to ensure limited liability protection for limited partners. Operating agreements, on the other hand, are much more flexible and can be tailored to meet the needs of the LLC and its members.
When forming a limited liability company or limited partnership, it is essential to have a legal document in place that outlines the terms and conditions of the business. The limited partnership agreement is used for limited partnerships where there are general and limited partners, while the operating agreement is used for LLCs where the owners or managers are known as members. Both documents are critical for protecting the interests of the business and its partners or members. By understanding the key differences between the LPA and operating agreement, business owners can determine which document is appropriate for their LLC.