Articles of organization are the public document you file with the state to create your LLC. An operating agreement is the private document that sets out how the LLC is owned and run. You need the articles to exist, and you need the operating agreement to avoid internal conflicts and keep your limited liability intact.
The first is a legal must everywhere. The second isn’t required in writing in most states, but odds are you’ll need both to grow your business. This guide explains the difference between an operating agreement and articles of organization, why both are important for your business and how to create and file them.
Operating agreement vs. articles of organization at a glance
| Item | Articles of organization | Operating agreement |
|---|---|---|
| Purpose | Creates the LLC with the state | Sets the rules for owning and running the LLC |
| Filed with the state | Yes, with the Secretary of State or equivalent | No; you keep it with your records |
| Public | Yes | No |
| Required | In every state | Required in writing only in New York; a few other states require one but allow oral or implied agreements |
| Cost | State filing fee, $35–$500 depending on the state | No state fee |
| Typical contents | LLC name, address, registered agent, management type, organizer | Ownership, contributions, profit splits, voting, management, member changes, dissolution |
| Other names | Certificate of formation or certificate of organization | LLC agreement or company agreement |
What is an operating agreement?
An operating agreement is often treated as an optional extra when forming an LLC. But much like health insurance, you’ll be thankful you have it when needed.
Operating agreements are internal documents that contain the rules and regulations for an LLC, outlining the ownership structure, management, and operating procedures. It includes details like who owns how much, their rights and responsibilities, how you’ll share profits and losses, and, if the worst happens, how you’ll dissolve your LLC.
The purpose of an operating agreement is to govern your business’ internal operations in a way that suits its members’ specific needs.
Why is an operating agreement critical for an LLC?
An operating agreement is critical when forming an LLC because it explains how you and other members will run the business, reducing the chance of internal disagreements and costly legal battles.
It also helps protect your LLC liability shield by showing your business is separate from your personal assets in cases of litigation or debt.
And while you don’t have to create a written operating agreement in most states, without one, your state’s default rules decide how internal disputes or LLC dissolution are handled, which rarely suits your needs.
A well-written operating agreement should contain the following information.
- The LLC’s purpose (your industry, what you’ll sell or provide, and how)
- LLC business name and official address
- Members’ names and addresses
- Management structure
- Dispute resolution procedure, such as mediation or arbitration
- Members’ capital contributions
- How you’ll divide profits
- Voting rights
- Whether the LLC is member-managed or manager-managed
- Who the managers are and their duties
- Indemnification provisions, if applicable
- Rules outlining how members can transfer their percentage interest to a third party
- Conditions for the “right of first refusal” or “right of first offer” on other members’ ownership, often set out in a buy-sell agreement
New York is the only state that requires a written operating agreement, within 90 days after you file your articles. Delaware, Maine and Missouri require every LLC to have one, but it can be oral or implied, and California law also recognizes oral and implied agreements. Have every member sign a written agreement as best practice.
Does a single-member LLC need an operating agreement?
It might sound counterintuitive, but even single-member LLCs benefit from an operating agreement. The point is to help maintain your limited liability shield of protection, since there’s no one to argue with. Our guide to the single-member LLC operating agreement covers what to include.
For example, a single-member LLC hair salon owner operating in South Carolina without general liability insurance or an operating agreement outlining the separation between themselves and the business could have a harder time protecting personal assets if a client sues for damages caused by their service.
What are the risks of not having an operating agreement?
The answer depends on your LLC structure, like how many members there are and who owns what percentage. And whether you’re in business with family and friends or purely on a professional level. Risks can include the following.
- Disputes among members that cause potential legal battles
- State default rules governing the LLC’s operations, which can lead to unfavorable outcomes for members, like how you divide profits and losses or make final decisions
- A greater chance of losing your liability protection and being held accountable for debts or litigation
What are the main benefits of an operating agreement?
Operating agreements exist to protect you and other members from various undesirable situations. These are the main benefits.
- Clarity and certainty in the management and operation of your LLC
- Keeping limited liability protection
- Flexibility in the ownership structure and distribution of profits and losses
- Prevention of misunderstandings and disputes among members
- Financial security for members and their families
An operating agreement can save you time and money by avoiding misunderstandings and resolving conflicts, because it helps reduce internal arguments and disagreements.
Does an LLC need an operating agreement?
Yes, every LLC should use an operating agreement to prevent misunderstandings and disputes between members and protect the LLC’s liability shield, even in states that don’t require one.
What are articles of organization?
Articles of organization (also called a certificate of organization or a certificate of formation) are a legal requirement for anyone wishing to form an LLC business entity.
They give your state’s Secretary of State the information it needs to create your new business on the public record.
You file articles of organization in the state where you form your LLC. They include the business name and address and your registered agent’s contact details, and some states also ask for the LLC’s purpose or management structure.
While state requirements vary, the key steps to file articles of organization are similar throughout the U.S.
Does an LLC need articles of organization?
Yes, every LLC must file articles of organization with the state where it forms.
What to include in articles of organization
The information you must include varies between states. Most ask for these details.
- LLC name
- Purpose or description of your LLC, in states that ask
- LLC’s principal business address
- Name and address of your registered agent (called a statutory or resident agent in some states)
- Whether the LLC is member-managed or manager-managed, and member or manager names where required
- The organizer’s name and signature
- An effective date, if you want the LLC to start on a later date
What is the difference between articles of organization and articles of incorporation?
Articles of organization and articles of incorporation are similar, with one key difference. You file articles of incorporation to form a corporation and articles of organization to form an LLC.
What is the difference between articles of organization and an operating agreement?
Articles of organization are an external legal document you file with your state to form an LLC, while your operating agreement is an internal document you create to outline your LLC’s management and operation structure.
Another way to look at it is that your operating agreement details the relationship between LLC members, and your articles of organization summarize your business’s relationship with your state. If you change something that appears in both, such as the LLC’s name, update the articles with an LLC amendment and amend the operating agreement too.
Common mistakes with operating agreements
Each operating agreement is as individual as the people who create it and the LLC it serves. Still, there are several mistakes people often make.
Not having an operating agreement
Only a few states require LLCs to have operating agreements, so many business owners don’t prioritize creating one.
Not customizing the document
Every LLC is different, and you should customize your operating agreement to fit the needs of your business, including provisions relevant to your LLC to avoid confusion and conflict with other members.
Not including important provisions
An operating agreement should cover key provisions like its management structure, members’ voting rights, profit-and-loss distribution, and dispute resolution to keep everyone on good terms.
Vague language
Business jargon has no place in your operating agreement. Use clear and easy-to-understand language to avoid alternative interpretations.
Not updating the document
Update your operating agreement to reflect changes in your LLC’s ownership so it stays reliable in internal disputes or external litigation.
Not consulting with a lawyer
An operating agreement is a legal document, so if in doubt, consult with a lawyer or other professional to make sure it’s legally sound and protects your interests.
Not understanding the requirements in your state
LLC laws vary by state, and your state’s default rules apply to anything your agreement leaves out. Review your state’s LLC act or your state page before writing your operating agreement.
Not signing the document
Have all LLC members agree to the terms and sign the written agreement. A signed copy is much easier to enforce than an oral understanding.
Not explaining the document to all members
All LLC members should understand the operating agreement’s contents before signing to avoid misinterpretation and disagreements.
Common mistakes with articles of organization
A mistake on your articles of organization works differently from one on your operating agreement, because it’s an official document your Secretary of State reviews before forming your LLC. If something is missing or wrong, the state may reject the filing. Here are the most common mistakes.
Not researching state requirements
Each state has specific requirements for articles of organization; following them avoids delays or rejection.
Not selecting a unique name
Your LLC name must be distinguishable from other business entities already registered in your state. You can confirm your name’s availability with a business entity search on your state’s filing site.
Not including required information
Your state can only approve your LLC when you provide all the required information, such as your LLC name, management structure where asked, and registered agent’s details.
Not understanding tax implications
When you form a legal entity, you must comply with specific state and federal tax requirements. Failing to understand what they are could cost you down the line.
Not seeking legal advice
Articles of organization are legal documents, so if in doubt, speak with a lawyer to make sure they meet state requirements and protect your business interests.
Not keeping a copy of the document
When your articles of organization are approved, keep copies for your members and your accountant or lawyer. Banks usually ask for them when you open a business account.
Not updating the document
If information in your articles changes, such as your LLC name or management structure, file an amendment so your public record stays accurate. Some states also expect updates to managers or members on your annual report.
Not paying filing fees
Not paying the correct filing fee can cause your application to be rejected.
Tips for getting both right
You have 3 options to create your operating agreement.
- Single LLC owners could use a template, fill it out, and update it when needed.
- Multi-member LLC members could work with a local lawyer (they should know your state’s regulations); while it’s more expensive, it can help with partnership complications.
- Use a business formation service to form and register your LLC, complete the paperwork, and provide your operating agreement.
The last option is popular with entrepreneurs who want low fees and a faster way to form their businesses. Below are 5 steps to creating your operating agreement.
1. Form your LLC
Most owners create the operating agreement right after they file the articles of organization, since the agreement refers to details from the articles, such as the LLC’s exact name and formation date.
2. Follow your state requirements
New York requires a written operating agreement within 90 days of filing. Delaware, Maine and Missouri require every LLC to have one, but it can be oral or implied, and California recognizes oral and implied agreements. Most other states don’t require one at all.
There are 3 ways to make sure you’re following your state’s requirements.
- Check your state’s LLC statute or Secretary of State website
- Hire a local lawyer
- Use a business formation service
3. Define the provisions
Regardless of which state you do business in, your agreement should include basic business information, such as the LLC business name, business address, business purpose, members’ names and addresses, and your registered agent’s contact details.
Multi-member LLCs should schedule members’ meetings to make sure everyone understands and agrees with the operating agreement’s information.
4. Define member guidelines
Multi-member LLCs should define guidelines relative to member ownership, finances, management duties, and payment structure so everything is transparent and all agree. Single-member LLCs can add this to their operating agreement if they plan to take on partners or seek investment.
- Contributions. Record all members’ contributions, such as money, property, equipment, and services.
- Profit distribution. Detail how members will divide business profits. Usually, it’s relative to percentage ownership, but an operating agreement lets you divide profits other ways, such as based on working hours, experience, or internal roles.
- Percentage ownership. Single LLC owners are the sole owner; multi-member LLCs should document all percentage ownership, especially if it determines how you’ll divide profits.
- Management structure. You can run your LLC as a member-managed or manager-managed LLC. Record your decision in your operating agreement and define the manager’s roles, responsibilities, and voting rights.
- Decision making. Remove doubts on how your LLC will run by recording how voting works, such as by percentage ownership, majority or unanimous decisions, and who, if anyone, has the final say.
- Member withdrawal. Confirm what will happen to a member’s interest should one leave or die.
For example, if a member leaves, will the remaining members get first refusal to buy the interest? Or how will the LLC pay a deceased member’s heirs?
Two-member LLCs split 50/50 should also plan for deadlock. Common options include a mediation or arbitration clause, a buy-sell provision, or naming a trusted adviser to break ties.
5. Finalize the operating agreement
Once all members agree on the operating agreement, you can complete it. Here’s how you make your operating agreement official.
- Sign it. All members should sign the agreement so it’s clear everyone accepted the terms.
- Keep it with your records. You don’t file an operating agreement with any state, including the ones that require you to have one.
- Share copies. Keep digital and paper copies, and give one to your attorney and accountant. In multi-member LLCs, each member should have a copy.
Tips for filing articles of organization
Articles of organization requirements vary by state, so take these 3 steps before completing your state’s form.
- Research your state requirements and make sure you meet them when drafting your document.
- Check that your chosen business name is available before you file.
- Provide complete, accurate information; otherwise, your state might reject your application.
Next, follow these steps to file your articles of organization correctly.
- Choose an available name for your business
- Find the articles of organization form or online filing on your Secretary of State’s website
- Select your registered agent
- Confirm how you’ll run your LLC, member-managed or manager-managed
- Sign your articles of organization
- Submit them to your Secretary of State’s office
- Pay the filing fee (usually online, though some states take checks for mail filings)
Don’t attach your operating agreement to the articles. It stays private.
Do you need both?
When you start your business, completing government forms and other legal documents is part of the process.
Some are obligatory, others optional, like commercial auto insurance. But you wouldn’t drive without it, would you?
Consider an operating agreement as your LLC’s internal insurance policy that protects your assets and partner relationships. The difference is that an operating agreement has no state fee, and you get to set the terms. So why run your business without one?
FAQ
No. Articles of organization are a legal document you file with the state where you’re forming your LLC. An operating agreement is a private internal document outlining your LLC’s management and operation.
Most states ask for your LLC’s name and address, your registered agent’s name and address, the organizer’s signature, and sometimes the management structure or business purpose.
Articles of organization create an LLC, while articles of incorporation create a corporation. Both are filed with the state, usually with the Secretary of State.
The purpose of articles of organization is to legally establish your LLC as a business entity in your state and put its basic details on the public record.
No. No state requires you to file an operating agreement, even the states that require you to have one. Keep it with your business records instead.