Articles of Organization vs Operating Agreement
Articles of Organization, also called a Certificate of Formation and Operating Agreement are both documents that relate to LLC formation.3 min read
2. Facts about Operating Agreements
3. Articles of Incorporation
Updated October 27, 2020:
Articles of Organization vs Operating Agreement, what is the difference? These are both documents that relate to LLC formation. Articles of Organization are also called a Certificate of Formation in some states. It is a document filed with the appropriate state when registering a limited liability company (LLC). An Operating Agreement is the document LLC members look to when they need to resolve issues or disputes within the company.
Facts about Articles of Organization
LLCs don't exist until the state has Articles of Organization on file. LLC members do not necessarily have to file them. Anyone can file them because they're primarily just a formation document filed to create the business.
Articles of Organization contain some fundamental information about the LLC:
- The LLC's name.
- Name and addresses of all members, managers, and a registered agent.
- The registered agent's address for delivery of legal documents.
- Determination on whether the LLC will be member-managed or manager-managed.
In most cases, no other information is necessary.
Facts about Operating Agreements
Your Operating Agreement is one of the most important documents for your business. It is an internal document and not filed with the state. Essentially, it is an agreement between members on the handling of operations and dispute resolution. By keeping an Operating Agreement, members can refer back to a clear set of rules that they have already agreed to. It can help reduce arguments and disagreements down the line and save money and time spent dealing with misunderstandings.
Operating Agreements give LLCs the ability to govern their business the way they want rather than by default state rules. It governs the management and operation of the LLC and can describe the economic and business arrangement of LLC members.
There are some general topics that all LLC Operating Agreements should address:
- Business name and official address
- Member names
- LLC's purpose
- Capital accounts and money or property members contributed
- LLC management
- Dispute resolution processes
- How cash, profits, and losses get divided up among members.
- Meeting conduct and voting
- Duties, rights, and liabilities of managers and members
- LLC's duration, termination, dissolution, and amendments
- Governing law, arbitration, and notice
- Conditions where members can transfer interest to a third-party; their “right of first refusal” or “right of first offer”
- Books and records
All US states allow for LLCs to adopt an Operating Agreement, giving it full force and effect. All members must sign the agreement because it's only enforced against parties to the agreement.
Differences Between Articles of Organization and Operating Agreements
The Operating Agreement is the most important document in an LLC, but the LLC wouldn't exist without filed Articles of Organization. The Operating Agreement is not filed anywhere and handles the day-to-day operations and management. The Articles of Organization is primarily used just to create the business, which is why it's filed with the state. There is no reliance on it for the LLC's management and operation.
Articles of Incorporation
Some people confuse Articles of Organization and articles of incorporation. Articles of incorporation are not mandatory with an LLC, but it could be detrimental to forego having them. If you incorporate as a C or S corporation, articles of incorporation are mandatory and filed with the Secretary of the State. Articles of incorporation include fundamental information about your business:
- Name and physical location of your company
- How the company will operate
- The company's purpose
- Business owner names
- Registered agent's name and physical address
- Company stock information
- Which state the company primarily operates in
Articles of incorporation differ from an Operating Agreement as well. Articles of incorporation are important to legally establish the corporation in a particular state, along with identifying its business information and issuance of company stock. They are similar to Operating Agreements in their function and form because they contain similar information about the business, like its name, company purpose, and how it will operate, management, etc. However, they differ in that the Secretary of State must have articles of incorporation on file. They register the business as a separate legal entity apart from the company's owners. LLCs are not required to have Operating Agreements in most cases. They also go into much greater detail than articles of incorporation.
If you need help with Articles of Organization vs. Operating Agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.