What Are Articles of Organization?
Articles of Organization serve a fundamental purpose in the process of creating an LLC (limited liability company). The State of Minnesota requires the filing of Articles of Organization to legally form a limited liability company. Filing the Articles of Organization allows Minnesotans to create a legally recognized business entity, so corporations, sole proprietorships , and other individuals and businesses from other states that have filed with their own state’s Secretary of State can all compete on a level playing field.
The Articles of Organization are basically the rules or bylaws that you are creating for your business. This legal document by which the limited liability company is established contains basic information about the structure of and ownership in the LLC. The Minnesota Secretary of State website details the general contents of the Articles of Organization as the following:
• The name of the limited liability company;
• The name and address of the registered agent for the limited liability company;
• The address of the principal place of business of the limited liability company; and
• The name and the addresses of all organizers.
What Is An Operating Agreement?
An Operating Agreement is another important document for an LLC. It is the internal document that governs the management and operational structure of the LLC. Its purpose is to outline and define how the management of the LLC will be conducted and how the business will be run. Many states do not require an Operating Agreement to be filed with the Secretary of State, but nonetheless it remains an important item for any LLC.
Typically, in an Operating Agreement there will be provisions regarding what will be sold, where the business will take place, the management of the business, how profits will be distributed, when distributions will be made, the powers of the managers and members, various procedures for meetings, accounting practices, and dissolution procedures. The reason it is so important is because of the different classes of LLCs present. An LLC may be member-managed or manager-managed. It may be a single member LLC or a multi-member LLC. A multi-member manager-managed LLC may also have officers. The purpose of the Operating Agreement is to define all of those relationships inside the company and structure the company in the way that the members want to see it structured.
The Operating Agreement should be created as soon as possible, and in most cases, before any business is conducted by the LLC.
Articles of Organization vs. Operating Agreements: 4 Key Differences
The primary difference between articles of organization and operating agreements is that they serve different legal purposes and thus generally contain different information. Articles of organization are usually a short formation document that lists the name of the LLC, states its purpose, and provides certain information: name and address of its registered agent, principal address, duration (perpetual or otherwise), manager names and addresses, and whether or not the LLC is a member-managed or manager-managed. It may also contain the names of its members (owners) and may indicate whether or not it will issue shares to raise capital. Since most LLCs are organized for the purpose of running a continuous business and avoiding double corporate taxation, the articles of organization are simple, straightforward, unambiguous, and not very lengthy.
On the other hand, an operating agreement contains far more information than the articles of organization, including: formalities such as when and where meetings will be held and minutes recorded; procedures for collecting capital contributions from new and existing members; how profits will be allocated among members; specific rights each member has; rules for voting and how results will be tabulated; procedures for making distributions; procedures for voting out or expelling a member; capital accounts and how they will be accounted for in the LLC books and records; procedures for when and how members can withdraw from the LLC, including payments and buy-out formulas; procedures for amicable dissolution and liquidation of LLC assets; procedures for dissolving the LLC by vote and distributing assets to LLC members; and procedures for selling interests in the LLC to third parties. Notice that unless these provisions are spelled out specifically in the articles of organization, the provisions in the operating agreement will control and determine how the LLC does business and conducts its internal affairs. This is why it is important to have a well-drafted operating agreement.
Legal Filing Requirements for Articles of Organization and Operating Agreements
The Articles of Organization for a limited liability company must be filed with the Secretary of State of the state in which the company is formed. In Massachusetts, for example, the Articles must be filed at the time of formation, and the filing fee is $500 if done online and $545 if done by mail. The Articles should include the name of the company, the address of the principal office, the name and address of the initial registered agent, the effective date if not the date of filing, the duration, if other than perpetual, the person(s) authorized to execute documents and make expenditures , and other information from time to time deemed necessary by the Secretary of State. The Articles required in other states are generally similar but not identical. In Massachusetts the Articles do not have to list all Members or Managers of the LLC.
The Operating Agreement, on the other hand, is usually not required to be filed with the state. The Operating Agreement usually has no mandatory requirements for content (with the exception of a few states) other than his/her duties, rights etc. in relation to the company and other members. Generally, the manager of the company completes the Operating Agreement without reference to the state. Once complete, the LLC will usually maintain a hard copy and/or soft copy for its records.
Why Your Limited Liability Company Needs Both Articles of Organization and an Operating Agreement
Articles of Organization and Operating Agreements complement each other. While Articles of Organization lay the foundation for the legal existence of your LLC, an operating agreement gives you the freedom to modify the default rules that govern Illinois Limited Liability Companies as outlined in the Act. Many of these default rules are unavailable if your company does not have an operating agreement. For example, the Act imposes a 90 day notice period before a member can withdraw. If your LLC does not have an operating agreement, the statute does not permit you to change that time, even if your LLC’s purpose is investing and dealing in real estate. Such a long notice period could kill a real estate deal before it happens.
Further, the Act allows for particular management structures and default rights for both members and managers. Your LLC may want to hire a manager in order to more closely resemble the traditional corporate structure, or a bank might want a member that is a corporation to avoid the personal liability of its shareholder. The Act was written to give your LLC the default option of no such manager or corporate person as a member once again demonstrating that your company needs an operating agreement to modify these provisions.
In addition, the Act sets up different default rights if your LLC has more than one member. Partners, similar to members, are deemed by default as equal in their shares of the partnership. If your LLC has six members and three of them want to vote on a certain action while the other three members do not, your LLC would not be able to do that without an operating agreement. That is because the Act does not contemplate different classes of members where certain members only obtain a vote in particular situations. Moreover, your LLC would not be able to create a supermajority voting requirement for any particular decision. The Act does not contemplate a third classification of member apart from members and managers.
Although the Act covers a lot of ground, there are some topics that still are not addressed. For example, there is no process for dissolution or winding up more than once in the Act because not all LLCs that are dissolved will dissolve in the same way. It is for this reason that a limited liability company must have an operating agreement.
Articles of Organization and Operating Agreements: Common Misconceptions and FAQs
A common misconception is that the Articles of Organization and Operating Agreement are interchangeable. While both documents are necessary to create a Limited Liability Company, they serve different purposes. The primary purpose of the Articles of Organization is to provide necessary information to the state so as to properly organize your LLC. This information includes the name and address of the business, the address of a company representative (usually designated as an agent for service of process) and the amount of capital contributions being contributed to the business by each member. The purpose of the Operating Agreement is to provide LLC members with the procedures and policies necessary to operate a Limited Liability Company. This document includes information regarding how profits will be distributed , voting requirements, and how members can withdraw from the LLC.
Another common misconception is that only single member LLCs need an Operating Agreement. Often, clients are surprised when we inform them that multi-member and single member LLCs are required to have an Operating Agreement under New Jersey law. In fact, the LLC Act specifically states that an LLC may not dispense with an Operating Agreement. N.J.S.A. 42:2C-2.1. Similar to the Articles of Organization, if a member is designated as an agent for purposes of service of process, the Limited Liability Company Representative should be named in the LLC’s Operating Agreement.