Operating Agreement vs Limited Partnership Agreement: Key Terms
An LLC fund is governed by an operating agreement and an LP fund by a limited partnership agreement. They cover the same ground: who controls the fund, how capital is called, how distributions flow, how interests are transferred, when the manager can be removed, and what duties the sponsor owes. The terms are negotiated, and disputes usually trace to vague or missing provisions, so these terms deserve the most attention.
Core terms to expect
| Term | What it decides |
|---|---|
| Capital contributions and calls | When investors must fund and what happens if they do not |
| Distribution waterfall | Who gets paid first and in what proportions |
| Management authority | What the sponsor can decide alone and what needs investor consent |
| Fees and expenses | What the sponsor charges and what the fund pays |
| Transfers | Whether and how investors can sell or assign interests |
| Removal | When investors can remove the sponsor and what follows |
| Reporting | Financial statements, tax forms and information rights |
| Dissolution | How and when the fund winds up |
Fiduciary duties
Delaware lets an agreement modify or eliminate many fiduciary duties, subject to the implied covenant of good faith and fair dealing. Texas lets an LLC agreement expand or restrict duties by contract, but does not allow eliminating the duty of good faith in the same way. A sponsor-friendly agreement may limit duties and indemnify the sponsor broadly, and investors should read those sections closely. Any limit should also be clearly disclosed in the PPM.
Capital calls and default
- State how much notice investors get and how much they can be called for.
- Define default remedies, such as dilution, forfeiture of part of the interest or a forced sale.
- Consider a cap on penalties so they cannot be challenged as unenforceable.
Removal and key person
- For cause. Define cause clearly, such as fraud, gross negligence or a material breach, and decide who determines it.
- No-fault. Some funds let a supermajority of investors remove the sponsor without cause, usually with economic consequences.
- Key person events. If named individuals leave, the investment period may pause until investors consent.
Aligning the documents
The governing agreement, PPM and subscription agreement must say the same things about fees, risks and rights. Inconsistent documents invite disputes and anti-fraud claims. See what a PPM contains and subscription agreements.
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Book Free ConsultationFrequently asked questions
What is the difference between an operating agreement and an LPA?
They are the governing documents of an LLC and an LP respectively. They serve the same purpose with different statutory defaults.
Can investors negotiate the agreement?
Large investors often can through a side letter. See the guide on side letters. Smaller investors usually accept standard terms.
Can the sponsor amend the agreement alone?
Only as the agreement allows, and typically with investor consent for changes that hurt their rights.
Do I need a different agreement for each fund?
Yes. Each fund entity has its own agreement tailored to its terms.