June 18th, 2021
Contents
June 18th, 2021
Rating
4.8 - 5 votes
Starting a small business can be one of the best things you can do for your life and your career. Often, starting a business is incredibly fulfilling because you get to call all the shots. Most people start small businesses because they have an area they have been passionate about their whole lives, and they would like to see that passion grow into a money-making company. Common examples include bakeries, fitness studios, and restaurants.
Although starting a business is incredibly exciting, it can also be somewhat overwhelming. That's because usually there are several legal requirements to keep track of, including several different forms. When you are trying to set up your business on your own, it can be challenging to understand all of the different things you need to get up and running.
Most solo or small businesses choose to form as Limited Liability Companies, or LLCs. In this guide, we'll discuss the differences between two of the LLC's main documents: Articles of Organization and Operating Agreements.
It's always a good idea to get a licensed attorney in your state to help you with your business formation, including drafting and filing the relevant documents. An attorney that works in this area will know what needs to be done and can help guide you through the process. Although this guide will help, please note that it is not meant to constitute legal advice, and it should instead be taken as informational only.
Let's get started.
First thing's first, though: before we can discuss the differences in the major documents of an LLC, we have to discuss what an LLC is.
As noted above, LLC stands for Limited Liability Company. This is usually the preferred form of business for most solo entrepreneurs and small- to medium-sized businesses. The reason that many people prefer the LLC is because of its primary benefit feature: limited liability. As the name implies, when you create an LLC, your own personal liability is limited for the activities of the business.
In other words, if you formed an LLC for your fitness business, and someone got hurt while at your business, they might decide to go after you in court. If they did, your liability would be limited to the assets of the business; i.e., the profits that the business made or the value of the building, etc. Conversely, if you didn't form an LLC for your fitness business and choose to operate without a formal business structure, your liability could go as far as all of your personal assets, including your personal income, your home, etc.
An LLC also has other benefits, such as the avoidance of double taxation, which means that your personal taxes and the LLC's taxes won't be taken separately: you can have the LLC's taxes "flow through" to your income and just get taxed once. For more information, check out our guide "How to Form an LLC."
Now that we know just what an LLC is, let's discuss its two primary documents.
Articles of Organization are the main document for the formation document for the LLC. This is the document that will be filed with the Secretary of State. This document alerts your state to the fact that you plan to open and run an LLC.
Usually, the Articles of Organization are a fairly basic document that gives the state only the most pertinent information. Articles of Organization will most often contain:
Our guide "What are the Articles of Organization for an LLC?" gives more detailed information.
The state's main purpose in requiring this information is to know how to contact the LLC when needed and to ensure that they have information about what parties are liable in case something goes wrong.
An Operating Agreement is a robust document that is also created when the life of the LLC begins. This is the main governing document for how the LLC operates, as the name implies.
The Operating Agreement does not need to be filed with the Secretary of State.
Usually, this document contains:
As you can see, an Operating Agreement is generally a lot more detailed than the Articles of Organization.
Although there are important differences to discuss between Articles of Organization and an Operating Agreement, there are also similarities that need to be discussed to truly understand each of these documents in the life of an LLC.
Although in most cases an Operating Agreement isn't strictly required by law, the fact is that you need both of these documents in order to have a successful, organized business. The Articles of Organization must be given to the state, but the Operating Agreement is extremely critical for your needs as a business owner.
Although the two documents differ in their scope, they do both contain the most basic identifying information about the LLC. Neither document would make sense without this information!
Though the Operating Agreement is far more detailed, both documents do contain basic information about the management structure. In some states, the Articles of Organization will just describe whether the LLC is member-managed or manager-managed, but in some states identities of the members or managers are required.
Of course, the differences are a key part of why both of these documents are needed. We'll discuss them here.
The management of the LLC shouldn't be relying on the Articles of Organization for any of their day-to-day operations or decision making. This is because the sole governing document for the internal processes of the LLC is the Operating Agreement. It's the most important document for information about how the LLC should run and how the members should relate to each other within the business.
On the other hand, the LLC wouldn't exist without the Articles of Organization, because the state would have no way of knowing there was a business going.
They are both critical documents, but are meant for different purposes.
It's true that a business could not run without the Articles of Organization. All states require this document (or something called by a different name that is the same document, such as a Certificate of Formation).
An Operating Agreement is generally not required by state law, though there may be some exceptions.
That being said, neither document should be skipped over. An LLC's success will be dependent on whether it follows all the legal requirements for the business and whether its internal operations run smoothly.
A well-drafted Operating Agreement should govern not only the life of the LLC, but what happens after. In other words, the Operating Agreement should have robust provisions describing what happens if one of the members wants to leave or is forced out or if the business needs to completely close.
Depending on your particular business, this may be one of the most important reasons to have an Operating Agreement. The Articles of Organization, on the other hand, are just meant to form the company for the state. Therefore, it won't have detailed information on how to handle it if the business needs to close.
As you can see, an LLC should take care to have both Articles of Organization and a well-drafted Operating Agreement. Each of these documents are essential to the LLC in its own way. The Articles of Organization are legally required to be filed with the state, but the Operating Agreement is an absolute must for outlining the day-to-day operations of the business and its members.
As mentioned above, please be sure to speak to an attorney licensed in your state to handle your LLC formation and operating needs. LLCs are governed by state law, which means each state may have its own individual requirements for formation. An attorney that practices in this area will be able to help you make sure that you can get up to speed legally, with everything that you need.
About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.