An LLC operating agreement means a business rulebook. It clarifies who owns the company, who makes decisions, how earnings are distributed, and what to do if issues emerge. This document differs from the
Articles of Organization, which are just the paperwork filed to officially establish the business. Even though an operating agreement is not required in all states, having one can help keep everything clear and organized.
Table of Contents
The LLC Operating Agreement deals with internal management and operations.
Characteristics of The LLC Operating Agreement
- Not filed with the state; retained for internal purposes
- Ownership percentages among members
- The roles and responsibilities of members and management
- Profit and Loss Distribution
- Voting rights and decision-making procedures
- Procedures to add or remove members
- Dissolution terminology
- Not usually required but strongly recommended, particularly with multi-member LLCs
Characteristics of Article of organization
The LLC Operating Agreement and the Articles of Organization are two important legal papers for a Limited Liability Company (LLC), although they serve different purposes:
Articles of Organisation (sometimes called Certificate of Formation or Certificate of Organisation in some nations) have the following characteristics:
- This is the official paperwork establishing the LLC as a legal entity with the state.
- The Secretary of State (or the appropriate state office).
- Contains the LLC name and address.
- Name and address of the registered agent.
- Names of LLC members or management (if applicable)
- Business purpose is optional in some states.
- Management structure (member or manager-managed)
- Legal Requirement: Required for LLC creation
An LLC operating agreement is vital for both single-member LLCs and multi-member LLCs, but it serves different functions for each.
Single Member LLC (SMLLC)
Even if you own the LLC solely, an operating agreement demonstrates that your business is distinct from your personal money.
It can describe what occurs if you are unable to operate the business (for example, who will take over).
It increases legal protection by demonstrating that your LLC is a legitimate business, not merely a personal extension of oneself.
Multi-member LLC (MMLLC)
It is especially significant for LLCs with many owners.
It specifies ownership percentages, profit sharing, decision-making procedures, and how conflicts will be resolved.
It also discusses what happens if a member leaves or the LLC must close.
Even though not all states require an operating agreement, having one—whether you’re a single owner or have numerous partners—can help you prevent future legal and financial issues.
Linkage between Operating Agreement and Article of Organization
The Operating Agreement and Articles of Organization are inextricably intertwined since they play critical roles in the formation and control of an LLC. This is how they connect:
Sequential Relationship
The Articles of Organization are the first stage in creating an LLC. It officially registers the corporation with the state.
The Operating Agreement is normally drafted following the Articles of Organization and defines how the LLC will be administered internally.
Complementary roles.
The Articles of Organization contain essential legal information regarding the LLC (such as the name, registered agent, and structure).
The operating agreement expands on those elements by establishing internal procedures for decision-making and profit distribution.
Ensuring consistency
To avoid problems, the operating agreement should agree with the Articles of Organization.
For example, if the Articles say that the LLC is member-managed, the Operating Agreement should not contradict this by delegating full management responsibilities to a third-party manager.
Legal and Functional Linkages
Some states (such as California) require an operating agreement, while others do not. However, it is still useful for establishing the LLC’s structure and safeguarding its limited liability status.
Banks, investors, and courts frequently review both documents together to ensure the LLC’s authenticity and structure.
Amendments and Updates
If the Articles of Organization change (for example, from member-managed to manager-managed), the Operating Agreement should be revised to reflect the change.