What's the difference between an LLC agreement and an operating agreement?
When forming a limited liability company (LLC), you will see that there are mentions of an "LLC agreement" and an "operating agreement." What are these terms and how are they different from each other? Here's an explanation:
An LLC Agreement
An LLC agreement is in fact the first document that officially establishes the LLC. At the initial stage of forming an LLC, you file what are called "articles of organization" (which are also known as an "LLC agreement") with your Secretary of State.
This paperwork includes basic information about the LLC such as:
- The LLC's name
- The registered place of business address is the one that the business has on its records.
- The names and addresses of the members (owners) are the ones that are not easy to change due to the fact that they are already made public.
- The LLC (with or without the limitation of the certain deadline) duration is the topic of this sentence.
The LLC contract defines the LLC as a legal business entity and the basic ownership structure is specified in it. Most of the states demand you to submit the articles of organization before the LLC can be legitimately registered.
An Operating Agreement
The operating agreement is not an external document that is filed with any state agency unlike the LLC agreement. The operating agreement is a document that specifies the ownership and the way of the LLC members' operation. Typical components of an operating agreement include:
- The ownership percentages of each member are the result of the division of the emotion and feelings of the fellow classmate.
- The members' voting and management rights are the main issues that they are given.
- Member rules for the entrance of new ones.
- Policies for the LLC's termination are the procedures to be used for the dissolution of the LLC.
- The guidelines and the regulations for the meetings and the archives of the organization.
- A profit and loss distribution plan, which is a strategy that outlines how the profit and loss will be distributed among the partners of the business, is an important factor to consider in a partnership.
Although the actual law doesn't prescribe operating agreements except in some states, they are very advisable for multi-member LLCs to avoid the conflicts about how the business is run and how the profits/losses are to be distributed. The even single-member LLCs are also benefited by the fact of having an operating agreement for the succession planning purposes.
Hence, the LLC agreement is the one that creates the legal entity, and the operating agreement is the one that takes care of the operations within it. The owners thus have both making the LLC is established the right way and there are written policies of the business smoothly carrying on.
