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Operating Agreements and Articles of Incorporation: Similarities and Differences

Have you decided to put those entrepreneurial juices to work and open up your own small business? If so, congratulations! But before you begin this exciting journey, learning the differences between certain necessary documents is vital.

For starters, let's talk about two such legal forms that are each important but often get mixed up: the operating agreement and articles of incorporation. Both are legally significant documents and each serves a unique purpose.

From the start of your business venture, learning to properly and thoroughly document specific guidelines and important information is priority (though understandably dull).  The more organized, systematic and detailed you can be, the better it will be for your business in the future.

Articles of Incorporation

The articles of incorporation play a key role in the launching of your business.  If you have chosen to incorporate your business as a limited liability corporation (LLC), you are not legally bound to have articles of incorporation.  However, not doing so could be detrimental.  If your business is an S or C corporation, you must legally draft this document and usually it is filed with the secretary of state.

These articles are a document that outlines some basic, yet essential, information about your business.  Below are common items that are often found in this document:

  • The purpose of your organization
  • How the company will operate
  • Names of the business owners
  • Information on company stock
  • Which the state the company will primarily operate in
  • Name and physical address of your business
  • The name and physical address of your registered agent

Whether you draft this document yourself or hire someone else to do so, it doesn't have to be a long and complicated process.  However, it does need to be done properly.  If you are a corporation and filing this document with the state, it is necessary to do it correctly as it could be rejected and delay the formation of your company. Read here for more guidelines on writing, as well as filing, this important document.

Operating Agreement

The operating agreement is another important document that structures the financial and functional structure of your business. As SBA.gov states, "the purpose of an operating agreement is to govern the internal operations of the business in a way that suits the needs of its members (owners)."

Listed below are the items that are generally found in an operating agreement:

  • An explanation of how the organization will carry out its business obligations
  • The percentages of each member's ownership of the company
  • The division of each member's responsibilities, duties and powers within the organization
  • A description of when and where meetings will be held by members
  • Signatures of the company's members, which act as a binding agreement

The operating agreement is not required by the state, but it is highly recommended. To learn more about what to include in your operating agreement, read this article.

Similarities

Both the articles of incorporation and operating agreement are comparable in a few ways:

  • Both are significant and offer necessary information for your business to function as optimally as possible.
  • Both documents detail name and function of business, and describe how the business will operate.
  • They define the management and ownership structure.

Differences

However, there are a couple important distinctions between these two types of documents as well:

  • Corporations (not LLC's) are required by law to file the articles of incorporation but not an operating agreement.
  • An operating agreement is an agreement between its members; whereas the articles of incorporation is an outline about the basic function of the business.

Continue browsing our blog and knowledge center for further information to help guide you in your business venture.

If you have any questions regarding corporations vs. LLC's, Maxfilings can help with this as well.  Contact us to ask about our incorporation and small business services.