Articles of Organization vs. Operating Agreement
An operating agreement is also known as an LLC agreement or a limited liability company agreement.
Articles of Organization establish an LLC’s existence under state law. They typically require basic information about the LLC, such as the name, address, registered agent, and members. While Articles of Organization are required by state law to form an LLC, an Operating Agreement is advisable to provide clarity on operations.
An Operating Agreement provides more specific operational details, addressing management, voting rights, profit distribution, and other operations. Operating Agreements are not filed with the state like Articles of Organization. They serve as an internal document that acts as a binding contract between LLC members.
Operating Agreements outline ownership and operations and are more easily amended than Articles of Organization. Specific, non-vague wording is vital in both documents to avoid problems.
The Articles of Organization are a public record, whereas an Operating Agreement is a contract between the LLC’s members or managers that sets forth the company’s management and decision-making processes.
Mandatory Operating Agreements in Some States
Only in California, Missouri, and New York is an Operating Agreement mandated by law. In these states, LLCs must have them, while in other states, they govern LLCs lacking such agreements. Sole proprietorships, partnerships, and S-corporations can also benefit from operating agreements. Key provisions should cover percentages, contributions, profit-sharing, and roles. They can be created at the business’s inception and amended at any time through approval.
Difference Between an LLC and Operating Agreement
The difference between an LLC and an Operating Agreement lies in the scope and focus of each. An LLC is a legal entity itself established under state law, primarily through filing Articles of Organization. On the other hand, an Operating Agreement outlines the internal management of the LLC. It includes member contributions, accounting, structure, and ranking.
A Joint Operating Agreement (JOA) is something different, governing collaboration between oil and gas companies, allowing for joint operations while maintaining separate identities. The operator leads exploration and production while the other signatories bear less responsibility.