Articles of Organization vs. Operating Agreement
What is the difference between Articles of Organization and an Operating Agreement when they are both documents that are concerned with establishing a Limited Liability Company (LLC)?
For starters, Articles of Organization are also referred to as a Certificate of Formation in certain states.
The Articles of Organization are a set of documents filed in the corresponding state where a Limited Liability Company will be registered and primarily operated in.
On the other hand, an Operating Agreement is the document that members of the Limited Liability Company look to when issues or disputes within the company arrive and need to be resolved.
Facts About Articles of Organization
Without the Articles of Organization being properly filed in the business location’s corresponding state, a Limited Liability Company does not exist.
Articles of Organization are a portion of the legal documents needed to file an LLC at the state level.
The documents are created, compiled and submitted to formalize the powers, duties, liabilities, rights, and other obligations between the Limited Liability Company and its members in addition to formalizing the aforementioned between each member of the Limited Liability Company.
Anyone can file Articles of Organizations as it does not have to be done by the LLC members specifically since its purpose is to just serve as a formal document of formation.
Articles of Organization do not even need to be written from scratch; several states have forms that allows the filer to just fill in the blanks and are often readily downloadable from the website of the state where the business operates.
The following essential information of an LLC can be found on Articles of Organization:
- The registered business name of the Limited Liability Company
- A list of the names and the respective addresses of all the LLC’s members, managers and its registered agent
- The address of the registered agents for the purpose of knowing where to deliver legal documents
- The statement that declares whether the LLC will be managed by its members or whether it will have a dedicated manager to manage the LLC
Primarily, most Articles of Organization would not contain detailed information outside of what was mentioned in the bullet points as it is not deemed as necessary in the legal formation of the business.
Here is a sample Articles of Organization – they will look different in each state but have the same basic requirements:
Facts About Operating Agreements
Arguably, one of the most crucial documents your business possesses is its Operating Agreement.
An Operating Agreement is a company’s internal document as it is not filed within the state it operates.
Fundamentally, an Operating Agreement is a document that serves as the proof of understanding between members on the handling of operations and the discourse on dispute resolution.
The existence of an Operating Agreement eliminates confusion on the internal procedures of the LLC and brings forth a clear cut set of rules that have been explicitly decided on, allowing little to no room for contest.
Operating Agreements come in handy to save resources such as time and money that are spent when dealing with misunderstandings and resolving conflicts.
Operating Agreements can also aid in the reduction of internal altercations, arguments, debates, and disagreements.
A sometimes overlooked benefit to having an Operating Agreement is that the company can lay out how it wants to be run, managed, lead, and regulated in the way that it sees fit instead of relying on the default rules set by the state.
The Operating Agreements also details how the administration, direction and functions of the LLC will go.
Furthermore, Operating Agreements detail the business and economic dispositions of each member of the LLC.
The information that every LLC Operating Agreement must present are the following:
- The registered business name of the Limited Liability Company
- A list of the names of the members of the Limited Liability Company
- The purpose of the Limited Liability Company
- The list of capital accounts and assets whether monetary or property that each member has contributed
- The structure of the Limited Liability Company’s management
- The dispute resolution processes of the Limited Liability Company
- The cash, profit and loss allocations of each member of the Limited Liability Company
- The process of meeting conduct and voting
- The duties, liabilities and rights of the managers and members of the Limited Liability Company
- The Limited Liability Company’s governing laws, notice and arbitration
- The Limited Liability Company’s business duration, termination, amendments and dissolution
- The Limited Liability Company’s indemnifications
- The Limited Liability Company’s conditions where its members can transfer interest to third parties, their ‘right of first refusal’ and ‘right of first offer’
- The Limited Liability Company’s records and books
Each US State permits LLCs to adopt an Operating Agreement and have it reinforced with full implementation rights.
All members must sign the agreement for it to effectively take place as it is only enforced against the signed parties.
Here is a page from a sample Operating Agreement:
Differences Between Articles of Organization and Operating Agreements
The Operating Agreement is one of the most crucial documents of any Limited Liability Company though the Limited Liability Company would not be able to exist without properly filing its Articles of Organization.
The Operating Agreement is an internal document that is not filed with any governing body and is solely implemented within the organization of the Limited Liability Company.
The Articles of Organization need to be filed with its respective state for it to take effect.
The Operating Agreement details how the Limited Liability Company will be run day to day from its operations to its management while the Articles of Organization is chiefly used to establish the business formally on a state level hence, the Limited Liability Company does not depend on Articles of Organization to manage and operate its business activities and resources.
Due to the nature of the Operating Agreement and how it works, it is more detailed than the LLC’s Articles of Organization.
Operating agreements are the documents set to resolve internal disputes while Articles of Organization do not have provisions that cater to that.
Articles of Organization inform the state of the plan to establish and run a Limited Liability Corporation while Operating Agreements do not have the power to do that.
Operating Agreements are the comprehensive documents that serve as the governing body of a Limited Liability Corporation and generally do not need to be filed with the state.
It contains the details that identify the LLC, the LLC’s duration, the contribution information of the members of the LLC, the LLC members’ corresponding ownership percentages, information on how the members of the LLC should relate with one another, voting information, officer information, fiscal considerations, and information on handling dissolution and the wrapping up of the LLC.
The main purpose of the Articles of Organization is to give the state information while Operating Agreements give structure to the way members of the LLC interact with each other.
The Articles of Organization are state mandated and therefore are required by law while Operating Agreements are typically not required by law.
The Operating Agreement aids in the wrap up of the LLC while the Articles of Organization will not since they are made to just establish the business.
Articles of Incorporation
It should be noted that it is not mandatory to have Articles of Incorporation in a Limited Liability Company however, completely forgoing the Articles of Incorporation could lead to the impairment of the Limited Liability Company.
In the event that your tax status is the standard, thus resulting in a C Corporation, or if your tax status is considered special with certain tax benefits thus resulting in an S Corporation, Articles of Incorporation are required to be properly filed with the Secretary of the State.
The vital information that Articles of Incorporation need to present about your business are:
- The registered name of your business
- The registered physical location of your business
- How the company will be operated
- The purpose of the company
- A list of the business owners’ names
- The name of the registered agent
- The physical address of the registered agent
- The registered company’s stock information
- The specific state the company chiefly operates in
Articles of Incorporation are different from Operating Agreements as well.
Articles of Incorporation are compulsory in legally establishing a corporation in a particular state.
Articles of Incorporation are also used to formally identify the company’s business information and its issuance of company stocks.
Articles of Incorporation are similar to Operating Agreements in both its form and function in the sense that they share some attributes such as containing identical information on the business like the registered business name, the business’ purpose, and how the business will be managed, operated, etc.
However, the differences start at Articles of Incorporation being non-internal documents as the Secretary of State must have the business’ Articles of Incorporation on file.
Articles of Incorporation registers a business as an independent legal entity, completely separate from the owners of the company.
Generally and as with most cases, Operating Agreements are internal documents that are not filed to any external governing body thus Limited Liability Companies are not typically obliged to have Operating Agreements.
In addition, Operating Agreements delve into details deeper than Articles of Incorporation.