Articles of Organization vs Operating Agreement: Everything You Should Know

New business owners are required to prepare and submit certain documents, such as articles of organization and operating agreements. These are both instrumental to your company but have stark differences. Many people who start their business on their own will only file the articles of organization because this fulfills the minimum filing requirement for the state. 

However, this leaves them exposed, vulnerable, and without a clear direction with respect to their outlined operating agreement.

In this article, you’ll learn which paperwork you need for your business and how to file them. You’ll also discover key distinctions regarding articles of organization vs. operating agreement.

What are Articles of Organization?

The articles of organization establish a limited liability company (LLC) within a particular state. It is also known as Articles of Organization or Articles of Incorporation, depending on how the State refers to it. This information is required by the state in order for business owners to set up a corporation or LLC.

Usually, you need to file the document with the secretary of state, which also entails a filing fee. Take note that each state has varying requirements. You can familiarize yourself with them through the provided pre-made forms. Getting a registered agent is vital, as the State requires a physical person that they can get a hold of and give a lawsuit to. If the company doesn’t have a representative in the State to be their registered agent, there are companies like NCH that can be their registered agent

For instance, Chapter 86 of the Nevada Revised Statutes (NRS) includes guidelines regarding articles of organization for the state. You must provide information on the following:

1. Name of the LLC
2. Management 
3. Name and address of registered agent
4. Name and address of each member or manager
5. Nature of Business
6. Dissolution date
7. Signature of the organizer
8. Initial list of officers

Another example would be that, in New York, Section 203 of its Limited Liability Company Law requires that the articles of organization include the following details:

1. Name of the LLC
2. County where the LLC’s principal office will be located
3. Date of dissolution, if applicable
4. Name and address of the registered agent, if any

On the other hand, Maryland requires the following details from an LLC’s articles of organization:

1. Name of the LLC
2. Purpose of the company
3. Address of the LLC
4. Name and address of registered agent
5. Signature of the registered agent
6. Return address

You may find these forms on the secretary of state’s official website. Remember that you must submit the articles of organization to form an LLC. Take note that these forms are public information and can be seen by anyone upon request.

What is an Operating Agreement?

An operating agreement establishes the internal operating procedures of a business. It also defines the duties, powers, and obligations of the members of the LLC and the company according to laws or the operating agreement This will also involve the Minutes of Meeting, wherein each member has a specific role to serve in relation to company meetings.

Operating agreements need to be in compliance with the state in which the LLC is incorporated. It is also highly recommended that the LLC comply with all 50 states, especially with foreign filings. Ensuring that the business is compliant with all 50 states gives business owners more room for growth and expansion.

Although the document is only required by three states, specifically California, Missouri, and New York, you are still encouraged to prepare it.

These are the benefits your LLC will enjoy due to an operating agreement:

• Serves as a contract between the members to memorialize the agreement
• Provides members protection from personal liability to the LLC
• Outlines the percentage of ownership and voting rights
• Establishes powers and duties of the members
• Provides procedures for transferring interest in the future

In New York, Section 417 of its Limited Liability Company Law states that LLC members must prepare a written operating agreement consistent with the law or its articles of organization. It’s within the members’ discretion on what they should include in the document.

California also requires an operating agreement among the LLC’s members. They must keep it at the LLC’s main office or where they store other business documents.

On the other hand, an operating agreement isn’t required when forming an LLC in Nevada. It is not included in the forms you must file with the secretary of state.

Articles of Organization vs. Operating Agreement: Similarities

Both Define Your Business Structure

• For instance, articles of organization in Nevada include management information, whether the LLC has members or managers. 
• An operating agreement may outline each member’s duties and powers among themselves and the business.

Both Contribute to the LLC’s Successful Operation

• You must file articles of organization with the state’s secretary when forming your company. Business experts also recommend preparing an operating agreement to clarify verbal agreements, duties, and responsibilities between members according to the agreed and written instructions. 
• For example, if two people do business together, they are in charge of one aspect. If one person fails to fulfill their obligation to the company based on the operating agreement, its remedy provisions can be activated in case of a lawsuit. 

Both Documents Contain Basic Company Details

• These include the name of the LLC, its purpose, and its management structure. They even include information on how the business will operate. 
• In states that require both the articles of organization and an operating agreement, you might notice that they codify it within their laws.

LLC Operating Agreement vs. Articles of Organization: Differences

Purpose

• The articles of organization establish an LLC and provide basic information such as the company’s name, address, purpose, registered agent, and management structure.
• Operating agreements specify how the company will be managed, the roles and responsibilities of members or managers, decision-making processes, profit and loss distribution, and other internal procedures.

Filing Requirements

• Articles of organization must be filed with the state government to create the LLC legally. Filing requirements vary by state.
• Although not required to be filed, operating agreements are recommended to be in place for internal governance purposes.
• The articles of organization usually require a pre-made form, while an operating agreement’s details depend on the members.

Content

• The articles of organization likewise include less information than operating agreements.
• You will need basic information about the LLC, while the latter requires information on voting rights, management plans, and profit and loss allocations.

How to File Articles of Organization?

Here are the general steps in filing the articles of organization:

1. If there are no details on the website, contact the secretary of state to familiarize yourself with the various requirements.
2. File your LLC’s articles of organization.
3. Pay the filing fee.
4. Receive a certificate of formation.
5. Publish the certificate of formation if the state requires it.

Take note that clients will need to assign a registered agent and give them all the necessary information about the company or business. Most states, including Nevada, allow you to file your articles of organization online. 

You may visit the Secretary of State’s website, then select “Start a business” under the main category of “Business.” On the next page, click “Domestic LLC,” then follow the prompts to submit your articles.

How to Draft an Operating Agreement?

There are no fixed rules in preparing an operating agreement, but you may include the following information in your document:

• Business purpose
• Tax election
• Admission of new members
• Identification of members
• Distribution of profits and losses
• Voting rights
• Transfer of interest
• Death of a member
• Dissolution

It’s recommended that you retain a copy with the LLC’s corporate records and that every member secure a copy for personal use. If the LLC accepts additional members, they should also have a copy of the signed document. This ensures that all members have read and understood the terms contained in the agreement.

Frequently Asked Questions (FAQs)

Can you change your articles of organization at some point?

Yes, you can typically amend your articles of organization at any point during the existence of your business. Changes might be necessary for various reasons, such as changes in ownership structure, business activities, or legal requirements. However, the process and requirements for amending articles of organization can vary depending on the jurisdiction and the specific provisions outlined in your original articles.

Does every business need an operating agreement?

Although not always legally required, having an operating agreement is highly advisable for all businesses, especially those with multiple owners or members. Operating agreements provide clear guidelines on how the company will be managed, how decisions will be made, and how disputes will be resolved. Even for single-member LLCs, having an operating agreement can help delineate the separation between personal and business affairs

Why do banks need articles of organization?

Banks usually require articles of organization (or equivalent documents) to verify the legal existence and structure of a business entity before opening a business bank account. This helps ensure compliance with banking regulations and allows the bank to accurately identify the individuals authorized to conduct business on behalf of the company.

May I make my own operating agreement?

Yes, you can create your own operating agreement. However, it’s strongly recommended to seek legal assistance to ensure that the agreement accurately reflects the needs and intentions of the business owners or members, and complies with relevant state laws. Using a template or drafting the agreement yourself without proper legal knowledge may result in unintended consequences or legal issues down the line.

Do I need an operating agreement if it’s just me?

Even if you’re the sole owner of your business, having an operating agreement is still beneficial. It helps establish clear guidelines for how the business will be run, separates personal and business affairs, and can provide protection in case of legal disputes. 

Articles of Organization vs. Operating Agreements: Why the Best Choice Is Both

The articles of organization and operating agreements serve critical roles in forming and managing a business, making them complementary rather than mutually exclusive. 

Articles of organization lay the foundational framework for the business, outlining the company’s name, purpose, registered agent, structure, and initial members or owners. These documents are filed with the state to form the business entity and establish its legal existence officially. 

On the other hand, operating agreements govern the day-to-day operations and management structure of the business. It covers matters such as ownership interests, management roles and responsibilities, profit and loss distribution, decision-making processes, dispute resolution mechanisms, and business dissolution.

In short, both documents are instrumental in defining the legal and operational parameters of the business, protecting the interests of its owners, and ensuring compliance with state laws.

Get Help With Filing LLC Documents

It takes a considerable amount of time to prepare and file your articles of organization and operating agreements. These components are essential in Resolutions, Amendments, and Minutes. 

Consult NCH today to discuss your LLC application with an established business startup specialist. Companies without proper operating agreements risk getting exposed, which is why all NCH operating agreements comply with all 50 states.

With over 30 years of experience, NCH can handle your LLC formation so that you can focus on important business matters. We employ private consultants to guide you in enhancing your privacy, protecting your assets, and preparing your tax returns.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.