When two or more people start a joint business, they usually spend the most time on the product, customers, and financing. The difficult questions are often left for later: who will have the final say, what happens in the absence of results, and can a partner sell their share to an outsider. It is precisely an agreement between partners in a limited liability company will provide a clear answer to these questions before the differences turn into a costly trade dispute.
The company's founding agreement is the mandatory document by which a limited liability company is established and managed according to the rules of the Commercial Act. A separate agreement between the partners does not replace it. It is an internal agreement by which the partners can more comprehensively regulate their relationships, including issues they do not wish to be publicly announced in the Commercial Register.
When is an agreement between partners in an LLC necessary
Such a contract is most important when the partners contribute different types and amounts of funds and have different roles. One may provide the capital, and the other may develop sales and manage the team. It's possible for both to work actively but disagree on issues like salary, investments, and risk.
It is especially recommended to agree on rules when the company has two partners with equal shares. In the event of a 50/50 disagreement, a formal decision may be impossible. If there is no pre-established mechanism to resolve this issue, business activities will remain blocked, even when a quick response is needed – for example, for financing, a new client contract, or a change of manager.
The agreement will also be beneficial for family or friendly businesses. Trust is a good foundation to start with, but it cannot replace clearly established rules for leaving, valuing a stake, or distributing losses. Clear agreements also protect personal relationships because important decisions will not be made in times of personal conflict.
What is the difference with the founding agreement?
The articles of association of a limited liability company regulate the main characteristics of the company: firm name, registered office, object of activity, capital, shares, management, and other circumstances required by law. Some of the changes to it are subject to registration in the Commercial Register.
For its part, the partnership agreement governs their relations in connection with the business, which do not affect third parties and which the law does not require to be publicly disclosed. It may include rules for providing funds, assigning tasks, confidentiality, and conduct upon exiting the company. This agreement is not published in the Commercial Register.
This distinction has practical significance. The internal agreement cannot override an imperative provision of the law, nor can it by itself change a circumstance that must be publicly disclosed. For example, if the partners have agreed on the transfer of a share, the legal requirements for the transfer, form, and registration must also be complied with.
Clauses that prevent the most common disputes
Decisions, Voting, and Deadlocks
It is advisable to specify which decisions can be made by a simple majority and for which the partners will require a higher majority or unanimity. This typically involves taking on a significant loan, selling a key asset, entering into a contract involving high financial risk, changing the scope of business, or admitting a new partner.
In the case of equal shares, a procedure for resolving deadlocks should also be agreed upon. It could first provide for a meeting and written proposals, followed by negotiations with a neutral mediator, and finally a mechanism for the buyout of a share. There is no single correct model for this issue. It is important that the mechanism not allow one partner to force the other to agree to terms that are clearly disadvantageous.
Contribution, Work, and Compensation
The ownership stake does not always reflect the actual day-to-day operations. Therefore, the agreement may specify who is responsible for clients, finances, personnel, technology, or supplies; how performance will be measured; and what happens in the event of persistent non-performance.
A dividend should not be confused with compensation for labor or management. A dividend depends on the profit and the decision regarding its distribution. The compensation of a manager or partner who performs personal labor is based on different grounds and must be determined in accordance with the actual circumstances. This is precisely where disputes often arise if there are no clearly agreed-upon terms: for example, one partner expects payment for their daily work, while the other believes that all funds should remain in the company.
Additional Funding and Profit
At the start of operations, additional funds are often needed. The agreement must specify whether the partners will provide a loan, make additional cash contributions in accordance with legal requirements, or increase the capital. It is advisable to establish criteria for when funding is requested, what the decision-making timeline is, and what the consequences are if only one partner is able or willing to participate.
It is also useful to agree on a profit policy. For example, until a certain financial reserve is reached, it should be reinvested, and then the distribution of profits should be discussed. This preemptively reduces the risk of disputes, for instance, between a partner seeking current income and a partner aiming for growth.
Sale, Transfer, and Valuation of a Share
This is one of the most essential parts of the agreement. It should be stipulated whether a partner is obliged to first offer their share to the remaining partners, within what timeframe, and under what conditions. A right of first refusal may be provided for when there is an offer from an external buyer, as well as a prohibition on transferring shares to a direct competitor, provided that the specific arrangement is legally permissible and within reasonable limits.
The question of price is also essential. The wording „at market price“ is often not sufficient. It is better to have an explicitly provided method: an appraiser, a predetermined financial formula, accounting indicators, or a procedure for selecting an independent expert. Payment terms, installments, and collateral should also be considered.
A different approach may be necessary in the event of voluntary withdrawal, permanent inability to participate, the death of a partner, a serious breach, or insolvency. The law contains rules for some of these scenarios, but the partnership agreement may further establish a detailed and predictable procedure, thereby reducing uncertainty for the partnership and the heirs.
Confidentiality, Competition, and Customers
To begin with, partners have access to information that is important to the company and that remains known to them even after they leave: prices, customer databases, proposals, technologies, and development plans. In this regard, a precisely worded confidentiality clause is necessary, specifying what information is to be kept confidential, for how long, and what the consequences are in the event of a breach.
A non-compete clause must strike a certain balance. It should protect the company’s legitimate interests without unduly restricting the professional activities of the departing partner. The geographic scope, duration, specific activities, and potential penalty must be tailored to the business. An overly strict non-compete clause creates new risks rather than ensuring security.
How is the contract drawn up and what is its weight/significance?
The agreement should be worded clearly and, as much as possible, concisely, and should be consistent with the articles of incorporation, the resolutions of the general meeting, and the actual way the company operates. Do not rely on general phrases such as „the parties shall act in good faith“ or „shall resolve issues by mutual agreement.“ While these are useful principles, they do not address what steps should be taken in the absence of agreement.
In the case of clauses relating to the future transfer of a company share, it must be carefully assessed whether they comply with the requirements of the Commercial Code and whether subsequent action is necessary in the form prescribed by law. Not every agreement between partners can be directly enforced against the company or third parties.
A penalty clause may be useful in the event of a breach of confidentiality, a refusal to cooperate, or circumvention of the agreed-upon sales procedure. However, it must be of a reasonable amount. An excessively high penalty clause does not always provide better protection; rather, it may become the subject of further disputes and may even be reduced by the court in the course of litigation.
What to Prepare Before Your Consultation
To determine what type of agreement is needed, we will review your company’s articles of incorporation, the current distribution of shares, the roles of the partners, and the management structure. Information regarding loans granted, contracts with key clients, investments, intellectual property, and any existing points of tension will also be helpful.
You don't need to have the text ready. It’s more important to describe how your business actually operates and what you want to avoid. I can help you by drafting the necessary clauses, in accordance with the Commercial Code and the specific balance of interests among the partners.
If you need legal assistance in drafting, reviewing, or renegotiating an LLC partnership agreement, Please don't hesitate to contact me. Timely regulation of rules is often the best way to secure your business by ensuring that operations will continue smoothly.
