Articles of organization vs Operating agreement

Navigate the essentials of starting an LLC with our breakdown of Articles of Organization versus operating agreements. Understand the necessity, benefits, and filing process for both to ensure your business’s legal foundation.

By Douglas Wade, Attorney

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Table of Contents

1. Do you need Articles of Organization or an Operating Agreement to start a business?

2. What are Articles of Organization?

3. What is an operating agreement?

4. Differences Between Operating Agreements and Articles of Organization

6. How to Submit the Articles of Organization

7. Why Do Banks Ask to See Articles of Organization?

8. How to Write an Operating Agreement for an LLC

9. May I Create My Own Operating Agreement?

10. If It’s Just Me, Do I Still Need an Operating Agreement?

11. Why It’s Better to Have Both an Operating Agreement and Articles of Organization

Do you need Articles of Organization or an Operating Agreement to start a business?

Are you ready to start your new company but unsure if you require an operating agreement or Articles of Organization (or both)? It is necessary to have Articles of Organization if you intend to create an LLC. However, depending on your state, operating agreements are usually optional, even if having one might be quite beneficial to your company. To help you decide which is necessary and how to obtain it, we’ll examine the two in this article by comparing and contrasting them.

What are Articles of Organization?

If you decide to create a limited liability company (LLC), you must file articles of organization. Although filing for a legal business entity is unnecessary to operate your company, having a formal structure will offer you some advantages, such as liability protection. Depending on the entity type you select, different paperwork needs to be filed in order to incorporate your company. Articles of Organization must be filed by LLCs, while Articles of Incorporation must be filed by C Corps and S Corps.

All states require this paperwork before allowing you to formally establish an LLC, albeit they may go by different names, like these:

Certificate of Organization
Certificate of Formation

All states require the same information for the same reason, even though the documents may have various names.

In addition to the Articles of Organization, you may also need to get various company licenses or permits at the municipal, state, or federal levels, depending on your industry or line of work. Also, for tax filing purposes, you’ll need a method to provide the IRS with documentation of your firm. In certain situations, your Social Security number may be enough. Nevertheless, obtaining an Employer Identification Number, or EIN, is the recommended course of action.

Lastly, an operating agreement is a document that you might also need to file.

What is an operating agreement?

An operating agreement is a guide that outlines the specifics of how your company will be run. Most states do not require it legally, but if you live in one of the five that does, you must prepare it and file it with your articles of organization.

The following states require operating agreements:

Delaware
California
Maine
New York
Missouri

In addition to helping you get capital and build relationships with new business partners, establishing an operating agreement will support you in making critical business decisions. This is the case even if you don’t live in one of these states or are not founding your company there.

Differences Between Operating Agreements and Articles of Organization

Operating agreements and articles of organization, as we have shown, are two distinct but equally important documents for LLC business owners. This is how they differ:

Each has unique requirements

Regardless of the state, if you are founding an LLC, you must always have Articles of Organization.
Only the aforementioned five states require operating agreements.
When registering an LLC, you must file the articles of organization.
In jurisdictions where they are necessary, operating agreements must be filed with the articles of organization, but in other states, they can be made at any time.

Each has a unique purpose

The formal legal documents known as the Articles of Organization establish your LLC as a legitimate company entity.
All of your company’s fundamental information, including your name, address, and the identities of any LLC members, is contained in your articles of organization.
Contracts known as operating agreements specify how a company will be managed.
Establishing an LLC with additional partners or members requires operating agreements.
Operating agreements specify the management style of the company, the responsibilities of each member, and what happens in the event of disagreements or the company’s dissolution.

Similarities Between Operating Agreements and Articles of Organization

Although these documents aren’t identical, there are some similarities between them:

Both are only available to LLCs

Corporations file Articles of Incorporation, whereas LLCs file Articles of Organization.
LLCs make operating agreements, whereas bylaws are made by corporations.
For an LLC to be effective, it must have both operating agreements and articles of organization.

The state may handle both

The business formation agency in your state, typically the Secretary of State, will handle the processing of your Articles of Organization (or Certificate of Formation).
You must file it with your state as well if you live in one of the five states where operating agreements are necessary.
No matter where your company is headquartered, state agencies may ask for an operating agreement when you seek for funds, hire new members, or dissolve your company.

How to Submit the Articles of Organization

Are you prepared to submit your articles of organization and register your LLC? You must take the following actions:

Find out which state agency in your area is in charge of business creation. Typically, the Secretary of State handles it, but several states use different departments.
Collect vital details such as the name and address of your business, the names and addresses of every LLC member, and the information about your Registered Agent.
Make a filing decision. Some states allow filing by mail, while the majority only allow filing in person or online.
Look into the costs associated with formation. Every state has an LLC creation fee, which can range from $50 to $500 or more. When you file, you’ll need to have the money ready.
Contract out to a company creation agency. Leave the filing of your Articles of Organization to a formation agency to avoid the hassle and waste of time if the paperwork seems too much.
Maintain easy access to your articles of organization. These documents can come in handy later on.

Why Do Banks Ask to See Articles of Organization?

It’s crucial to have your articles of organization ready because banks will frequently ask to see them. The Articles of Organization prove your legitimacy to banks and demonstrate that you are operating a legitimate business entity. In order to keep your personal and business money separate, banks typically require Articles of Organization before allowing you to open a business bank account or business credit card.

How to Write an Operating Agreement for an LLC

You must know exactly how to draft an operating agreement, regardless of whether you’re in a state where it’s needed or if you’re just starting out and want to follow best practices.

Collect all LLC members’ names and addresses, the same way you did when submitting your articles of organization.
List each member’s name and the duties that they have.
Describe the planned LLC management structure. In most cases, it is either manager- or member-managed.
Establish your financial management strategy, including ownership shares, profit and loss sharing, accounting, and financial contributions.
Establish the conditions of your LLC, such as the frequency of meetings, the process for adding and removing members, the process for amending the agreement, any non-compete agreements, and the maintenance of documents.
Make a plan for getting out. In the event that members want to disband the company, how will you handle it? What would happen if that happened?

May I Create My Own Operating Agreement?

You are more than welcome to create your own operating agreement, but be sure to include all the necessary details, particularly if your state requires them. Use an operating agreement template that has been approved by a lawyer if you’re concerned about mistakes. Using a template will expedite the application process and guarantee that your firm has an accurate and complete operating agreement.

If It’s Just Me, Do I Still Need an Operating Agreement?

If you reside in any of the five states that require one, even if your company solely employs you, you must have an operating agreement (California, Maine, Delaware, New York, and Missouri). If not, it is not necessary. The best use cases for operating agreements are in commercial partnerships. They are still helpful for LLCs with a single member, though. They can serve as a guide for managing the day-to-day operations of your organization and assist you in identifying your objectives. A comprehensive operating agreement might be beneficial even in the absence of other partners.

Why It’s Better to Have Both an Operating Agreement and Articles of Organization

No matter what, you must file Articles of Organization when forming an LLC. Additionally, having a well-thought-out and drafted operating agreement will be beneficial to you regardless of whether you live in a state that requires them or not. A business creation service can be helpful if your company structure is intricate or you feel overwhelmed.

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