When starting a new business venture, it is important to establish the legal structure of your company. For many entrepreneurs, forming a Limited Liability Company (LLC) is a popular choice due to its flexibility and tax benefits.
However, before you can officially register your LLC, you must file two important documents: the Articles of Organization and the Operating Agreement. In this article, we will explore the differences and similarities between these two documents, how to file them, and why they are both necessary for your LLC’s success.
What are Articles of Organization?
Articles of Organization (also known as a Certificate of Organization or Certificate of Formation) are legal documents required by each state’s Secretary of State office to officially form an LLC. The Articles of Organization typically include basic information about the LLC, such as the company name, registered agent, business purpose, and the names and addresses of the LLC’s members or managers.
The Articles of Organization are a public record and can be accessed by anyone who wishes to view them. They serve as a legal declaration that the LLC has been established and is operating in compliance with state laws.
What is an Operating Agreement?
An Operating Agreement is a private document that outlines the internal operations of an LLC. It is a contract between the LLC’s members or managers that sets forth the rules and regulations that govern the company’s management and decision-making processes. The Operating Agreement is not required by law, but it is strongly recommended for all LLCs, as it can help prevent disputes and provide clarity in the event of disagreements or changes in ownership.
The Operating Agreement can cover a wide range of topics, including member/manager roles and responsibilities, voting procedures, profit and loss distribution, and dispute resolution processes. It is a customizable document that can be tailored to the specific needs and goals of the LLC and its members.
Differences Between Articles of Organization and Operating Agreements
While both the Articles of Organization and Operating Agreement are important documents for LLCs, there are several key differences between them.
Legal Requirements
The Articles of Organization are a legal requirement for forming an LLC in every state. On the other hand, the Operating Agreement is not required by law in most states, but it is highly recommended. However, in some states such as California, the Operating Agreement is required by law to be in writing.
Public Record vs. Private Document
The Articles of Organization are a public record, meaning that anyone can access them and review the basic information about the LLC. In contrast, the Operating Agreement is a private document that is not filed with the state and is only accessible to the LLC’s members and managers.
Content
The Articles of Organization typically include basic information about the LLC, such as the company name, registered agent, business purpose, and member/manager information. The Operating Agreement, on the other hand, covers a wide range of topics related to the LLC’s internal operations, such as member/manager roles and responsibilities, voting procedures, profit and loss distribution, and dispute resolution processes.
Permanence
The Articles of Organization are a permanent record of the LLC’s formation and cannot be altered once they have been filed with the state. The Operating Agreement, on the other hand, can be amended or revised by the LLC’s members at any time, as long as the changes are agreed upon by all parties.
Similarities Between Articles of Organization and Operating Agreements
Despite their differences, the Articles of Organization and Operating Agreement also share some similarities.
Legal Status
Both the Articles of Organization and Operating Agreement are legally binding documents that establish the LLC’s existence and govern its operations. They are both important for ensuring that the LLC is operating in compliance with state laws and regulations.
Customizability
Both the Articles of Organization and Operating Agreement can be customized to fit the specific needs and goals of the LLC and its members. The Articles of Organization typically require basic information about the LLC, but there may be some additional options to choose from, such as electing for the LLC to be member-managed or manager-managed. The Operating Agreement is a highly customizable document that can be tailored to the unique needs of the LLC, such as specifying the distribution of profits or outlining procedures for adding or removing members.
Importance for Legal Protection
Both the Articles of Organization and Operating Agreement are important for legal protection. The Articles of Organization establish the LLC’s legal existence and protect the owners’ personal assets from business liabilities. The Operating Agreement helps to further protect the owners by clarifying how the LLC will operate and how disputes will be handled. In the absence of an Operating Agreement, the LLC will default to the state’s default LLC laws, which may not reflect the owners’ wishes.
How to File Articles of Organization
Filing Articles of Organization is a necessary step in forming an LLC. While the exact process may vary by state, the following steps are generally required:
- Choose a name for your LLC that complies with your state’s naming rules and is available for use. Most states require the name to include “Limited Liability Company” or an abbreviation such as “LLC.”
- Choose a registered agent, who is responsible for accepting legal documents on behalf of the LLC. The registered agent must have a physical address in the state where the LLC is registered.
- File the Articles of Organization with your state’s Secretary of State office. This typically requires completing a form and paying a filing fee. The form will typically require basic information about the LLC, such as the name, registered agent, business purpose, and member/manager information.
- Wait for your Articles of Organization to be approved by the state. This process can take several weeks, depending on the state.
Once your LLC’s Articles of Organization have been approved, you will receive a certificate of organization that officially establishes your LLC’s existence.
How to Compose an LLC Operating Agreement
While an Operating Agreement is not legally required in most states, it is highly recommended for all LLCs. Composing an Operating Agreement typically involves the following steps:
- Determine what topics you want to cover in the Operating Agreement. This may include member/manager roles and responsibilities, voting procedures, profit and loss distribution, and dispute resolution processes.
- Draft the Operating Agreement. This can be done using a template or with the assistance of a legal professional.
- Review and edit the Operating Agreement with your LLC’s members or managers. Make sure everyone is in agreement and that the Operating Agreement reflects the LLC’s goals and needs.
- Sign the Operating Agreement. All members or managers should sign the document to indicate their agreement.
- Store the Operating Agreement in a safe place. Make sure all members or managers have access to the document and that it is regularly reviewed and updated as necessary.
Why You Need Both: Articles of Organization vs Operating Agreements
While the Articles of Organization and Operating Agreement serve different purposes, they are both important for your LLC’s success. The Articles of Organization establish your LLC’s legal existence and provide basic information about the company, while the Operating Agreement sets forth the rules and regulations that govern the company’s management and decision-making processes.
Having both documents in place helps to ensure that your LLC is operating in compliance with state laws and regulations, while also providing clarity and protection for the LLC’s owners. The Articles of Organization protect the owners’ personal assets from business liabilities, while the Operating Agreement helps to prevent disputes and clarify how the LLC will operate.
When starting an LLC, it is important to have a clear understanding of the differences and similarities between Articles of Organization and Operating Agreements. Both of these documents are critical for establishing and running an LLC. The Articles of Organization create the LLC and establish its legal existence, while the Operating Agreement sets out the rules and regulations that will govern the company’s management and decision-making processes.
Conclusion
Ultimately, it is important to have both Articles of Organization and an Operating Agreement in place for your LLC in order to ensure compliance with state laws and regulations, protect the owners’ personal assets, and provide clarity and protection for the LLC’s owners. By understanding the differences and similarities between these two documents and following the proper steps for filing and creating them, you can establish a successful and legally sound LLC.
