When starting a business, one of the most important steps is forming a legal entity. This can be done through articles of incorporation or an operating agreement. While both serve a similar purpose, they are different legal documents with their own unique characteristics.
Articles of Incorporation
Articles of incorporation are documents filed with the state government when incorporating a business. They establish the legal existence of the corporation and provide general information about the company, such as its name, purpose, and the number of shares it will issue. They also outline the powers and responsibilities of its shareholders, directors, and officers.
One of the most important benefits of incorporating a business is that it limits the personal liability of its shareholders. This means that if the corporation incurs debts or legal judgments, the shareholders are not personally responsible for paying them.
Operating Agreement
An operating agreement, on the other hand, is a legal document that governs how a limited liability company (LLC) operates. It outlines the rights and responsibilities of the owners, also known as members, and establishes the procedures for making decisions, distributing profits, and resolving disputes.
Operating agreements are not required by law, but they are highly recommended for LLCs. They provide a level of flexibility that articles of incorporation do not, allowing members to tailor the agreement to the specific needs of their business. This is especially important for businesses with multiple owners, as it helps to avoid conflicts and ensures that everyone is on the same page.
One of the biggest advantages of an operating agreement is that it allows LLC members to avoid double taxation. Unlike corporations, which are taxed at both the corporate and individual levels, LLCs are only taxed once, at the individual level.
Which One Should You Choose?
The decision to choose articles of incorporation or an operating agreement ultimately depends on the legal structure of your business. If you are forming a corporation, you will need to file articles of incorporation. If you are forming an LLC, you will need an operating agreement.
However, even if an operating agreement is not required by law, it is still a good idea to have one in place. It provides a clear understanding of how the business will operate and can help to avoid disputes and legal issues down the road.
In conclusion, while articles of incorporation and operating agreements are both important legal documents, they serve different purposes depending on the legal structure of your business. It is important to consult with a legal professional to determine which option is best for your business.