Operating partnership: Overview, definition, and example
What is an operating partnership?
An operating partnership is a business arrangement in which two or more parties join together to run and manage an ongoing business operation, typically within the context of a partnership agreement. In this type of partnership, one or more partners are usually responsible for the day-to-day management and operations of the business, while the other partners may provide capital or other resources but take a more passive role in management.
An operating partnership is commonly seen in industries such as real estate, where a general partner (GP) may manage the day-to-day operations of a real estate development, and limited partners (LPs) may contribute capital and share in the profits but not participate in management.
Why is an operating partnership important?
Operating partnerships are important because they allow businesses to combine resources, expertise, and capital to operate a business effectively while distributing risks and rewards among the partners. They provide a flexible structure that allows partners to tailor their involvement, whether active or passive, in the management of the business. This structure also facilitates shared responsibility for managing operations and allows partners to benefit from the combined resources and efforts.
For businesses, operating partnerships provide the opportunity to pool resources, expand capabilities, and leverage the expertise of different partners, which can lead to more efficient operations and increased profitability. This arrangement also provides the flexibility to assign specific responsibilities and roles according to the partners' strengths.
Understanding operating partnership through an example
Imagine two companies, Company A and Company B, form an operating partnership to develop and manage a large commercial real estate property. Company A, a real estate developer, takes on the role of the general partner (GP), responsible for managing the day-to-day operations of the project, including construction, leasing, and tenant relations. Company B, an investment firm, contributes capital as a limited partner (LP) but does not engage in the operational management of the property.
The operating partnership allows Company A to leverage the capital of Company B to finance the project while Company B benefits from the expertise and management of Company A in running the property.
Example of an operating partnership clause
Here’s how an operating partnership clause might appear in a partnership agreement:
“The Parties agree to form an Operating Partnership for the purpose of developing and managing [Project Name]. The General Partner shall be responsible for all day-to-day operations, including property management, construction, and leasing activities. The Limited Partners shall provide the necessary capital and receive profits in proportion to their respective investments but shall have no active role in the management or operations of the Partnership.”
Conclusion
An operating partnership provides a structured arrangement for partners to collaborate on managing and operating a business while distributing responsibilities and rewards. It offers flexibility, enabling businesses to combine expertise, capital, and operational responsibilities in a way that maximizes efficiency and profitability.
For business owners and managers, understanding the concept of operating partnerships is essential for forming effective partnerships that align with your strategic goals. Whether you're seeking operational expertise, capital, or both, an operating partnership can be an ideal way to pool resources, manage risk, and grow your business.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.