Forming a limited liability company (LLC) isn’t as simple as just having a business idea—it requires careful planning and key documentation to establish your business’s legal structure and prepare it for success.
Two important documents in this process are the articles of organization and the operating agreement. Both are crucial for forming and managing your LLC, but they serve distinct purposes and have different requirements.
In this guide, we will explore the similarities and differences between the articles of organization and the operating agreement and explain why they’re vital to building a strong legal foundation for your business.
What Are Articles of Organization?
The articles of organization is a mandatory legal document for forming a limited liability company (LLC) and establishing its existence. The LLC owners or their representatives fill out their articles of organization according to the state laws of the business’s location and file it with the Secretary of State or another agency.
It provides the relevant business regulatory authority with details about the LLC’s formation, ensuring its members understand and comply with the law.
State-Specific Differences
Some states refer to an LLC’s articles of organization as its certificate of formation or certificate of organization.
What Should Articles of Organization Include?
The details to include in your articles of organization may differ from state to state, but generally must include the following:
- Name of the LLC
- Purpose of the LLC
- LLC’s official business address
- Details of LLC’s members, managers, and officers, where applicable
- Name and address of the LLC’s registered agent
- Specifications on whether the LLC is member-managed or manager-managed
- The LLC’s start date
- Date of dissolution, if applicable
What Is an Operating Agreement?
An operating agreement is a document that defines an LLC’s internal procedures, outlining members’ duties, obligations, and powers. It also outlines the relationship between members and the LLC regarding management, ownership structure, and succession.
While creating an operating agreement is only mandatory in five states (California, Delaware, Maine, Missouri, and New York), all businesses can benefit significantly from having one. It helps avoid internal conflicts, provides liability protection for the owners, and oversees internal procedures in a way that every member approves.
Example of Why an Operating Agreement Is Important
For example, suppose three people start an LLC together. Each person might be in charge of different aspects of the business. Their multi-member LLC operating agreement outlines these intricacies.
If one of the members fails to fulfill their obligations, the document has guidelines on how to handle the situation internally. Without an operating agreement, the business must follow the state’s laws on resolving such conflicts, which might be unfavorable for certain companies.
What Should an Operating Agreement Include?
Items to include in an operating agreement depend on the type of business and state laws. Some of the elements the document should cover are:
- Purpose of the LLC
- Name and address of the LLC
- Members’ contributions and investments
- Dispute resolution process
- Division of profits and losses
- Name of the business manager and their responsibilities
- Process of appointing a business manager and other officers
- Rules on transferring ownership percentage to third parties
- Process of dissolution, if applicable
- Voting rights
- Whether the LLC is member-managed or manager-managed
- Separation between members and the business entity
- Process of amending provisions in the operating agreement
Similarities Between Articles of Organization and Operating Agreements
While the articles of organization and operating agreement serve different purposes in forming and managing an LLC, they share some important similarities:
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They’re for LLCs: Both documents are essential for the successful operation of an LLC. The articles of organization establish the LLC’s existence with the state, while the operating agreement lays out the structure and rules for managing the business, including options for more formal management setups, if needed.
- This is as opposed to corporations, which require the filing of articles of incorporation and composing corporate bylaws, (learn the difference between both here).
- They include basic information about the LLC: Articles of organization and operation agreements must contain basic details about the LLC, including the name, address, business purpose, members’ information, and management structure.
- They comply with state-specific laws governing LLCs: The process of creating, filling out, and filing the articles of organization may vary with state laws. The rules governing what must be included in the operating agreement, if required, will also vary by state.
- They provide some legal protections: One of the benefits of forming an LLC is that it establishes the company as a separate entity with its own obligations. This separation protects the owners’ assets if the business has legal troubles. Articles of organization offer this legal protection by establishing the entity, while an operating agreement does so by laying out the relationship between members and the entity.
Differences Between Articles of Organization and Operating Agreements
Understanding the differences between an LLC operating agreement and articles of organization ensures you comply with applicable laws and make informed decisions regarding your business. Explore they key differences between articles of organization vs. operating agreement below:
Filing
- Articles of Organization: Business owners must file the articles of organization with the Secretary of State (or another business-regulating entity, depending on the state) and wait for approval before starting an LLC. The process is not flexible because one must stick to the items requested in a premade form.
- Operating Agreement: Business owners don’t typically have to file LLC operating agreements. Even in states that require the creation of this document, members simply have to store it and have it readily available to refer to in case internal disputes or questions arise.
Purpose
- Articles of Organization: The purpose of this document is to establish and form an LLC with a state’s relevant business regulatory body. Once approved, the business receives a certificate of formation, and the articles of organization’s purpose is fulfilled.
- Operating Agreement: An operating agreement outlines the LLC’s structure and its operation rules. Members rely on the terms of the document for internal management, decision-making, and business operations.
Content
- Articles of Organization: The document contains basic company information to establish an LLC, including the name, address, names of members, and details of the registered agent. The information is predetermined, and you typically cannot add items other than what the form requests.
- Operating Agreement: An operating agreement contains basic company information as well as rules for governing the LLC’s operations. Contrary to the articles of organization, business owners can create terms unique to their LLC in an operating agreement.
Requirement
- Articles of Organization: Articles of organization is a mandatory legal requirement when starting and forming an LLC in every state. An LLC is not legitimate without this document.
- Operating Agreement: Operating agreements are only mandatory in five states (California, Delaware, Maine, Missouri, and New York), but they’re still necessary and beneficial for businesses everywhere.
Privacy
- Articles of Organization: The articles of organization is a public record filed with the Secretary of State. They are available for everyone to view upon request.
- Operating Agreement: The operating agreement is a private internal document only available to members of an LLC, managers, and other relevant parties.
Legal Role
- Articles of Organization: The legal role of the articles of organization is to establish and form an LLC entity.
- Operating Agreement: The operating agreement determines the procedures to govern processes such as management, decision-making, voting, ownership, and succession within an LLC. While businesses can customize their operating agreement, the document becomes legally binding once all members have signed.
Amendment Process
- Articles of Organization: You can amend articles of organization anytime during your LLC’s existence by filing a certificate of amendment. Circumstances that may necessitate an amendment include changes in business structure, purpose, or ownership.
- Operating Agreement: Amending an operating agreement is easier than articles of organization because it doesn’t involve a legal process or filing with a regulatory body. To make changes, LLC members call for a meeting to discuss the proposed amendments and update the document if the majority (or everyone) concurs.
State Oversight
- Articles of Organization: Before approval, a regulatory authority, such as the office of the Secretary of State, must review the documents filed with the articles of organization to ensure the LLC complies with state laws.
- Operating Agreement: There’s no state oversight when creating and enforcing an operating agreement except in states where the document is a legal requirement.
Common Mistakes When Filling Out Articles of Organization
Because the articles of organization is an external document filed for approval, a mistake may mean a rejection of the application. Here’s a checklist of the common mistakes to avoid when filling out the form:
- Writing the LLC’s name inconsistently: It’s easy to make a mistake when filling out the LLC’s name, especially when you’re required to do it multiple times. Ensure accuracy by proofreading the document and having someone else review the form before submitting it.
- Choosing an unavailable name: Conduct a name search to ensure your LLC name isn’t already in use within your state.
- Failing to complete the forms: Confirm you’ve provided all requested information to the best of your abilities.
- Failing to follow state laws: The specifics of filing articles of organization differ from one state to another. If you don’t consult laws from the state within which the business is located, you risk receiving a rejection and having to redo the application.
- Not seeking legal advice: Consulting a legal professional ensures your articles of organization comply with the law and offer necessary protections.
Common Mistakes When Filling Out an LLC Operating Agreement
Although an LLC operating agreement doesn’t need approval from a government authority, mistakes in its drafting can lead to future disputes over unclear profit and loss distribution terms, vague management roles, and other issues. Here are some mistakes to avoid making when creating your written operating agreement:
- Using vague language: Include clear, precise language to prevent confusion or misinterpretation of key terms.
- Not including important information: While operating agreements differ from one LLC to another, certain provisions are essential for nearly all businesses. Omitting important information, such as voting rights, ownership, profit distribution, and management structure, may leave the business vulnerable to internal conflict.
- Not including all members in the LLC formation and signing: While an operating agreement can still be enforceable among those who sign it, it won’t be enforceable against those who don’t. Ensure you get everyone’s approval and signatures for the terms proposed to prevent issues.
- Failing to update the document: In case of any changes in the company, all LLC members must agree, and the same should be reflected in the operating agreement. Failure to update the document can cause legal challenges or impact its validity during dispute resolution.
- Not considering state requirements: While an operating agreement is not mandatory in most states, some places may still have guidelines for drafting one. A legal professional can guide you through this process to ensure you follow state laws.
Choose Both Articles of Organization and an LLC Operating Agreement
Both the articles of organization and operating agreement are important legal documents in the formation of an LLC. While the articles of organization is mandatory and the operating agreement is only mandatory in a few states, businesses can still benefit from writing an operating agreement to oversee internal operations and decision-making in a way the members see fit.
If you’re unsure how to proceed with the business formation process, you can consult a lawyer with business expertise in your jurisdiction. They can ensure you understand your legal obligations and help you avoid errors when filling out the forms.
Frequently Asked Questions
Do I need an LLC operating agreement if I’m the only business owner?
Yes, it’s recommended that you have an operating agreement even if you’re the sole owner. A single-member operating agreement separates the business owner’s personal assets from the LLC’s assets and establishes guidelines for running the business. Without this document, any issues within the business will be resolved through default state laws.
Does every business need an operating agreement?
While having an operating agreement is not mandatory in all states, all businesses can benefit significantly from having one. It eliminates any confusion or room for conflict on issues such as decision-making, ownership rights, voting, succession, profit sharing, and so on.
Furthermore, an operating agreement allows LLC members to govern their business in ways they deem fit rather than following default state laws.
Why do I have to show my articles of organization to banks?
Banks may ask for articles of organization to verify the existence and legitimacy of an LLC before granting a loan or registering a business bank account. The document also helps the bank identify persons with the authority to make decisions and transactions on the LLC’s behalf.
Can I change my articles of organization?
Yes. You can change or amend your LLC’s articles of organization. The process may vary depending where your business is located but typically involves paying a fee and filing a certificate of amendment, along with other documents. They include the original articles of organization and confirmation from LLC members agreeing to the change.
