So you’ve decided to take the leap and start your small business.
Congratulations are in order — and unfortunately, so is a lot of paperwork.
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.
Filing the articles of incorporation is mandated by law if your business is an S or C corporation. But there’s another key legal document that isn’t mandated by law; however, it’s no less important when it comes to the smooth functioning of your business.
We’re talking about your operating agreement.
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.
Let’s explore what an operating agreement is and how it differs from the articles of incorporation.
The operating agreement structures the financial and functional structure of your business — whether its an S corporation, C corporation, limited liability corporation (LLC) or other entity type. 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)."
These are the items that are generally found in an operating agreement:
While the operating agreement is not required by the state, it is highly recommended.
The articles of incorporation play a key role in the launching of your business. If you have chosen to incorporate your business as a 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 it’s usually filed with your state’s Secretary of State office.
Your articles of incorporation should outline some basic, yet essential, information about your business. Below are common items often found in this document:
Whether you draft the articles 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’re a corporation filing this document with the state, it’s necessary to do it correctly as it could be rejected and delay the formation of your company.
Perhaps the main difference between operating agreements and articles of incorporation can be summed up this way:
The operating agreement defines how the owners of the business professionally relate to each other (in a binding way),
whereas the articles of incorporation define how the business legally relates to the state.
There are also important similarities between an operating agreement and articles of incorporation. For instance:
It’s fair to say the most important similarity is this:
If your business is going to be successful, you should have both documents, required or not.