The Lowdown on LLC Articles of Organization
The LLC articles of organization are designed to serve as the legal basis for an LLC. They allow you to establish a limited liability company for the purpose of creating a new business venture. In other words, an LLC articles of organization file allows you to create a corporation, but as an LLC, rather than as a more rigidly structured corporation.
These are considered to be the most important component of forming an LLC. Just about all states have their own forms and fees for this process. In many cases, simply putting the name of your LLC on a standard form and submitting it is sufficient. In some states, you might also submit a reason for creating the LLC, although that is not always necessary.
The LLC articles of organization will contain some basic information about your business . This includes the name of the LLC, the principal address, the type of business it will conduct, the duration with which the LLC and its members agree to continue the venture, and the names and addresses of members and managers if it is a manager-managed LLC.
Essentially, what these articles do is create a legal entity. In basic terms, this separates the responsibility and liability of the business and its owners, so that if the LLC acts in ways that create liability for it or in ways that can incur debts, any creditor cannot go after the individual owners or members of the LLC. LLC articles of organization allow you to create a business presence in the state where the articles are filed and to receive all of the benefits that come with that.
What is an LLC Operating Agreement?
The LLC Operating Agreement is a contract among the owners of an LLC that sets forth the rules and internal procedures for that LLC. While an LLC can be created without an operating agreement, doing so typically represents a missed opportunity to address important issues within that LLC and set forth rules for how the owners will govern the business going forward.
Every LLC operating agreement should address the following provisions, at a minimum: the business purpose of the LLC, the LLC ownership percentage that each member holds, capital contribution (cash and/or property) the members make to the LLC, the management of the LLC, roles of the members and managers, meetings and voting procedures, compensation of managers, distributions from the LLC, tax treatment of the LLC, dealing with new members and transferring ownership interest in the LLC, dealing with problem members and resolving disputes within the LLC.
The members of the LLC have some control over what is included in the operating agreement. For example, in Illinois, the members may disregard the default statutory language governing the rights and obligation of the members of an LLC as set forth in the Illinois Limited Liability Act if the LLC operating agreement contains express provisions addressing those topics. In addition, members of an LLC can supplement the default statutory authority by including additional provisions in the operating agreement to address certain issues such as whether or not cash or property contributed to the LLC can be withdrawn and if such withdrawals will change an ownership interest.
However, even if the members of the LLC decide to exclude certain topics for which Illinois statutes provide statutory defaults, the members may want to address these items in an LLC operating agreement to avoid internal unintentional disputes over these issues.
How Articles of Organization Differ from an Operating Agreement
Legal Function:
The LLC Articles of Organization is the foundational document required to form a Limited Liability Company. The document creates the actual LLC and gives it structure. The Operating Agreement on the other hand is not required to create the LLC, but it is optional and highly recommended. The Operating Agreement provides the structure for how the LLC will function and lay down rules for operation, in the absence of any laws to the contrary.
Contents:
The LLC Articles of Organization usually contains: name, address, operating company, LLC type, members, management structure, and the duration of the LLC.
The Operating Agreement usually contains: name, address, principal place of business, place of registration, knowledge of the parties, purpose of the LLC, assets, contributions, ownership percentages, management structure, distributions, debt and other obligations, voting rules, formation, amendments, admissions and removals, terminations, in the case of a cause or dissolution, and miscellaneous provisions, such as waiver of rights to a jury trial and/or of fiduciary duties.
Implications:
The Articles of Organization lays out a basic framework to your LLC. The Operating Agreement fleshes out the details of that framework, and covers all of the possible scenarios that may arise. For example, what happens if one of the owners dies or wants to leave the LLC? Or what happens if the LLC incurs a large amount of debt, but one of the members wants to bail out before paying his share?
If you only have the Operating Agreement and no Articles of Organization, a court may find that a partnership exists rather than an LLC. An LLC must file its Articles of Organization in order to have limited personal liability protection. If you have an LLC operating agreement, but no Articles of Organization, the document is worthless. The LLC must file its Articles of Organization before the agreement becomes relevant. It is always advisable to set up the LLC and file the Articles of Organization first, in order to protect yourself.
Filing and Drafting Legalities
State-specific rules often govern the requirements for filing LLC Articles of Organization. Practitioners must be mindful of such rules to ensure compliance. For example, in certain states, LLC Articles of Organization must identify both the initial members and managers, if any. The required information is often available on the website of the applicable state agency responsible for receiving the filings. Failure to comply with state-specific filing requirements can result in administrative dissolution of the LLC or forfeiture of the right to do business in the state.
Drafting an Operating Agreement is generally not required by law; however, the consequences of failing to adopt such a document can be severe. Depending on the state in which the LLC is formed, courts or administrative agencies may be required to look beyond the LLC Operating Agreement to applicable state rules and regulations that govern similar unincorporated organizations, other than partnerships. In this instance, the LLC may be treated like a limited liability partnership or a general partnership where assets are at risk due to court-imposed fiduciary duties. For example, the fiduciary duty that one partner owes to another partner can be extended to the duties that a manager and member of an LLC owes to other members.
Why You Need Both for Your LLC
The Articles of Organization and Operating Agreement serve two distinct, but equally important functions in your LLC’s structure. While the Articles of Organization are the backbone of your LLC, the Operating Agreement is what makes your LLC a fully-functioning business entity. Together, the Articles of Organization and the Operating Agreement are the twin pillars that support your LLC.
The LLC Operating Agreement:
Requires all members to voluntarily enter into a legally-binding contract with one another, generally before formation of an LLC or in tandem with formation.
Sets forth the rights and duties of the members and managers, as well as the framework for the day-to-day operations of the LLC.
Provides a crucial mechanism for dispute resolution, including buy/sell provisions.
May supersede the default statutory provisions of each state’s LLC statute, provided that it is not contrary to state law.
The LLC Articles of Organization:
Is a state-mandated document that must be filed with the Secretary of State (or other appropriate state authority) , either before your LLC can legally begin doing business or shortly after formation of the LLC.
Serves as a public disclosure tool and directory of the parties involved in an LLC, along with relevant information about the company, including:
The company name.
The agent for service of process and address for the agent in that state.
The book and record-keeping (office) address of the LLC.
The names of the members of the LLC.
Any other information that is required to be disclosed by the state.
In the above examples of LLC documentation, the reference to a company "Agreement" is with respect to an LLC Operating Agreement. As a rule, the terms "Operating Agreement" and "Company Agreement" are interchangeable. However, when referring to the basic LLC documents, which also include the Articles of Organization, there must be a clear differentiation between the documents. Therefore, instead of saying LLC Agreement, it is advisable to say LLC Operating Agreement.
Common Myths Surrounding LLC Paperwork
There are many misunderstandings that entrepreneurs have about the paperwork associated with becoming an LLC. A common misconception is that either the Articles of Organization or Operating Agreement are unnecessary to operate an LLC. Both documents serve important purposes that, like the LLC itself, should not be neglected. An alternative misconception is that because an Operating Agreement is not a public document, LLC members have greater flexibility in deciding how they wish to structure their enterprise and in making ownership changes. Because an Operating Agreement is not a public document, LLC members enjoy greater flexibility in structuring an enterprise or in making ownership changes — subject to any contractual obligations they may have with creditors or with other LLC members under the terms of the Operating Agreement.
The most common myths about the Articles of Organization are beliefs that:
The most common myths about the Operating Agreement are beliefs that:
There is little room for misunderstanding about the fact that both the Articles and the Operating Agreement are necessary documents. It is important that the person creating an LLC not mistakenly believe that filing the Articles of Organization is the only document necessary to form an LLC. Rather, the Articles of Organization serve only as the first step to becoming an LLC. After preparing and filing the Articles of Organization with the appropriate state agency, an LLC must prepare a corresponding Operating Agreement. An LLC should also prepare an Employer Identification Number and any state tax registrations.
In summary, an Operating Agreement and an Articles of Organization are both required to create and maintain the protective benefits associated with an LLC and ensure an LLC adheres to the legal requirements for tax treatment and responsibilities.
Best Practices for Drafting and Filing
When it comes to drafting your corporate documents, a little extra attention to detail can save you a massive headache down the road. This is particularly true when writing the Operating Agreement for your LLC or filing its Articles of Organization.
"Standing out through formatting can help you avoid potential issues in the future," says Wong Butte, real estate attorney at Anand Law Group. "You want the formatting of the document to make sense, but you don’t need to reinvent the wheel. Following the same layout as similar documents allows the reader to easily understand the content of the document." You may choose to include charts or tables to illustrate points. In this case, be sure to label all visual components chronologically, as this will make it easier for you and others to read.
A frequent mistake for LLC Articles of Organization is accidentally omitting the number of members that will run the entity . Always be sure to include the number of members to avoid any confusion in the future.
"One critical aspect of the Articles of Organization is its cover page," says Ben Stewart, a corporate and energy lawyer at Scott, Douglass & McConnico, LLP. "Some people, understandably, think that having a cover page is unnecessary because the cover page is not actually part of the Articles of Organization. However, I find that getting the contact information correct for the Registered Agent is very important, and that this detail is easily overlooked if it is not included on the cover page. As a personal preferred practice, I think it’s always a good idea to fully list out the contact information, including the Registered Agent’s name, street address, mailing address, phone numbers, and email address."
To help you create the best possible Operating Agreement for your LLC, consider working with a business attorney to ensure that the document fulfills your needs.