Introduction
When starting a business, whether it’s a small partnership, a limited liability company (LLC), or a corporation, there are important legal documents that need to be established in order to govern the structure and functioning of the organisation. These crucial documents include, for instance, the Operating Agreement and the Articles of Incorporation.. When it comes to their nature, substance, and the kinds of entities they apply to, they are diverse even though they serve comparable functions in creating a framework for the organisation. The main distinctions between operating agreements and articles of incorporation will be discussed in this article.
Operating Agreement
An Operating Agreement is a document primarily associated with limited liability companies (LLCs). This internal document outlines how the LLC will be managed and operated. Here are some key characteristics of an Operating Agreement:
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- Flexibility:
- One of the main advantages of an Operating Agreement is its flexibility. LLC members have a great deal of freedom to customize the rules and regulations that govern their business. This allows for tailored management structures, profit distribution methods, and voting procedures.
- Not a Public Document:
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- Operating Agreements are not typically filed with any government agency, and they remain confidential among the LLC members. This ensures privacy regarding the company’s internal affairs.
- Member-Driven:
- The content and provisions of an Operating Agreement are typically drafted by the LLC members themselves. This document serves to define the roles and responsibilities of members and managers within the LLC.
- Optional in Some States: While highly recommended, Operating Agreements are not mandatory in all states. However, it is strongly advisable to have one in place to avoid potential legal issues.
Articles of Incorporation
Articles of Incorporation are documents specifically associated with corporations, whether they are C corporations or S corporations. These documents are filed with the appropriate state government agency to officially establish the corporation. Here are some key characteristics of Articles of Incorporation:
- Mandatory Filing:
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- Articles of Incorporation are required by law to establish a corporation. They contain essential information such as the corporation’s name, purpose, registered agent, and capital structure.
- Public Document:
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- Once filed, Articles of Incorporation become a matter of public record. Anyone can access this document to obtain information about the corporation.
- State-Specific:
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- From state to state, there can be differences in the particular specifications and substance of articles of incorporation. It is essential to abide by the laws of the state where the corporation is being established.
- Board of Directors:
- Articles of Incorporation, unlike an Operating Agreement, frequently do not specify how a business will run on a daily basis. Instead, they emphasise the establishment of a board of directors as part of the larger corporate structure.
Conclusion
Operating agreements and articles of incorporation are crucial legal papers with distinct functions for various kinds of company enterprises. Operating Agreements, which are connected to LLCs, offer freedom and anonymity in describing the internal workings of the business. On the other hand, Articles of Incorporation are public records that specify the organisational form and purpose and are filed to create corporations. For entrepreneurs and business owners to ensure they adhere to legal requirements and successfully organise their companies in accordance with their objectives and goals, it is imperative that they understand these variances.
