Articles of organization and operating agreements are essential when starting a limited liability company (LLC). Learn about the similarities and differences between articles of organization and operating agreements for your LLC.
What Are Articles of Organization?
Articles of organization refer to a document filed with the state to establish an LLC as an entity. This process distinguishes it as a legal entity, separating it from the personal liability of the members.
Articles of organization may also be called a certificate of formation or certificate of organization. All LLCs must file this form with the state in which they operate. This document must include the business name, member information, business address, and an acknowledgement of state business laws.
What Is an Operating Agreement?
An operating agreement is an internal business document that outlines the operations of an LLC. It includes the duties, powers, and liabilities of each member. Unlike articles of incorporation, this document is not always required, and may not need official filing or approval. New LLCs use this form to dictate the management, ownership, and succession structures.
Similarities Between Articles of Organization and Operating Agreements
Both articles of organization and operating agreements benefit LLCs and their members. While the two documents differ, they include a few key similarities. These forms share terms and purposes for LLCs, legal protections, and state compliance.
LLC Use
Articles of organization and operating agreements pertain to the process of creating an LLC. The articles of organization establish its existence, while an operating agreement determines its internal policies. These forms each benefit and are sometimes required for LLC creation.
Legal Protection
With the proper documentation, the individual owners of an LLC can obtain extra legal protections. By using articles of incorporation, the business members establish it as a separate entity with its own legal liability. This protects the individual members from being personally sued if the business runs into legal troubles.
With an operating agreement, members receive protection from claims or disputes, as the agreement defines the relationship between the members and the LLC. Operating agreements define liability limits, personal responsibilities, and procedures for conflict resolution.
State Compliance
Both forms must comply with state laws. All articles of organization must have the state-required information and must be filed with the Secretary of State. California, Delaware, Maine, Missouri, and New York also require the use of an operating agreement. This agreement must include the proper legal terms and acknowledge state laws.
Differences Between Articles of Organization and Operating Agreements
Articles of organization and operating agreements differ in many ways as well. These documents have different requirements, purposes, contents, privacy factors, and amendment processes.
Requirements
State laws and the Secretary of State set the requirements for articles of organization. Every state requires all LLCs to file articles of organization with the Secretary of State. Then, it must be approved for a certificate of formation. Your LLC cannot operate without this certificate.
An operating agreement has fewer formal requirements. While it must follow state laws, it serves as an internal record and does not require filing with an outside agency. While an operating agreement is not always necessary, it is recommended for all LLCs to streamline operations and provide a mechanism for decision-making and dispute resolution.
Purposes
Articles of organization and operating agreements serve two different purposes. The articles of organization are used to formalize the formation of the LLC. It aims to prove the existence of the business and record details such as its business name, address, members, and start date.
In contrast, the purpose of an operating agreement is to define the internal structures of an existing LLC. This form focuses on the duties, liabilities, and roles of each member. It also includes processes for decision-making and conflict resolution.
Contents
The contents of articles of organization and operating agreements differ. Articles of organization contain the following information:
- LLC name
- Business address
- Member names
- Registered agent information
Articles of organization may not have additional information defining the business operations.
An operating agreement offers flexibility and includes more information about business procedures. A typical operating agreement may consist of the following content:
- LLC name
- Members’ contributions and investments
- Conflict resolution terms
- Division of profits and losses
- Rules on transferring ownership percentage to third parties
- Process of dissolution
- Voting rights
Privacy
These two forms also offer differing levels of privacy. Articles of organization become part of the public record once they’re filed. At this point, the articles of organization are available to anyone upon request.
An operating agreement serves as a private and internal document. Only the parties involved, such as the members, managers, and stakeholders, can view the agreement.
Amendments
While both articles of organization and operating agreements can be amended, the processes differ. Amending articles of organization requires a certificate of amendment filed with the state. Typically, amendments reflect changes in the business structure, purpose, or ownership.
An operating agreement amendment requires a majority or unanimous approval from members. The process involves meeting with the members to discuss changes and new terms.
Using Both Articles of Organization and Operating Agreements
Every LLC benefits from using both forms. Creating the articles of organization ensures the business is legally recognized and has the right to operate. The additional creation of an operating agreement records the terms, obligations, and recourse for each member involved. Having all these documents reduces disputes and increases compliance with state laws, while also providing legal protection for individual members.
