Articles of Organization vs. Operating Agreements: Don’t Let Your Business Be Left in the Dark

Monday, June 17, 2024

So you’ve taken the exciting leap into entrepreneurship and formed your business! Congratulations! But as the dust settles, you might be encountering some unfamiliar legal terms like “Articles of Organization” and “Operating Agreements.” Understanding the difference between these two documents is crucial for protecting your business and avoiding future headaches.

Articles of Organization: The Business Birth Certificate

Think of your Articles of Organization (AO) as your business’s birth certificate. It’s a public record filed with the state that formally establishes your business’s existence. The AO typically includes basic information like your business name, address, registered agent (who receives legal documents on your behalf), and business structure (LLC, corporation, etc.). It’s a foundational document, but it doesn’t delve into the internal workings of your business.

Operating Agreements: The Private Rulebook

Here’s where things get interesting. Your Operating Agreement (OA) is a private document that outlines the internal rules of the road for your business. It’s like a rulebook that spells out how your business will be run on a day-to-day basis. Here are some key details typically covered in an OA:

  • Ownership percentages: How much of the business does each owner hold?
  • Profit and loss sharing: How are profits and losses divided among the owners?
  • Management structure: Who makes key decisions, and how are they voted on?
  • Dispute resolution: How will disagreements between owners be handled?
  • Exit strategy: What happens if an owner wants to leave the business?
Articles of Organization

Why an Operating Agreement is Essential (Even Though It Might Not Be Mandatory)

In most states, having an OA isn’t legally mandatory. However, it’s highly recommended, especially for businesses with multiple owners. Here’s why:

  • Clarity and Communication: An OA fosters clear communication and avoids confusion between owners. It eliminates any room for misinterpretations about ownership rights, decision-making power, or profit sharing.
  • Dispute Prevention: A well-crafted OA acts as a roadmap for resolving disagreements that might arise between owners. It saves money and time on potential legal battles down the road.
  • Flexibility: Your OA can be customized to fit your specific business needs and ownership structure. It’s not a one-size-fits-all document.

Don’t Leave Your Business Exposed – Get an Operating Agreement

While the Articles of Organization establishes your business’s legal existence, an Operating Agreement ensures its smooth and harmonious operation. Think of it as an investment in your business’s future. Consider consulting with a lawyer to create an OA that reflects your unique ownership structure and goals. By taking this step, you’ll be setting your business up for long-term success.

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This blog post is not intended to provide legal advice or substitute for the advice of legal counsel with respect to specific facts and situations. See disclaimer