Understanding the Difference Between Operating Agreements and Articles of Organization

An operating agreement and articles of organization are two crucial documents that new business owners must familiarize themselves with. While they serve similar purposes, they are not the same thing. In this article, we'll delve into the differences between these two documents and help you understand which one is right for your business.

Articles of organization, also known as a certificate of formation, are the documents filed with the state to officially create a business entity. This document outlines the basic structure and purpose of the company, including its name, address, and the type of business it will operate as. It's essentially a public document that provides a snapshot of the company's inception.

An operating agreement, on the other hand, is a private document that outlines the internal workings of a business. It's a contract between the owners or members of a business that outlines how the company will be managed, including the roles and responsibilities of each owner, how profits and losses will be distributed, and how decisions will be made. An operating agreement is typically used by limited liability companies (LLCs) and partnerships, but can also be used by corporations.

While both documents are essential for a business's success, they serve different purposes. The articles of organization are a public document that provides a framework for the company's existence, whereas the operating agreement is a private document that outlines the internal dynamics of the business.

Key differences between operating agreements and articles of organization include:

• Public vs. private: Articles of organization are public documents, while operating agreements are private contracts.
• Purpose: Articles of organization outline the company's basic structure and purpose, while operating agreements outline the internal workings of the business.
• Content: Articles of organization typically include the company's name, address, and type of business, while operating agreements outline the roles and responsibilities of each owner, how profits and losses will be distributed, and how decisions will be made.

When deciding which document to create first, consider the following:

• If you're just starting out, it's recommended to create the articles of organization first. This will provide a foundation for your business and allow you to establish a formal presence.
• Once you have your articles of organization in place, you can create an operating agreement to outline the internal workings of your business.

It's worth noting that some states may require an operating agreement to be filed with the state, while others may not. Check with your state's business registration office to determine the specific requirements for your business.

In conclusion, while an operating agreement and articles of organization are both essential documents for a business, they serve different purposes and have distinct differences. By understanding the differences between these two documents, you can create a solid foundation for your business and ensure a smooth operation.