When starting a business, one of the crucial steps is deciding on the type of legal entity you want to form. In the United States, the two most common types of legal entities for businesses are corporations and limited liability companies (LLCs). Both corporations and LLCs require specific documents to be filed with the state and have distinct agreements that govern their operations. In this article, we’ll explore the differences between two important documents – Corporate Charter and Operating Agreement.
A Corporate Charter, also known as Articles of Incorporation, is a legal document that creates a corporation. It outlines the purpose of the corporation, the number and types of shares of stock that can be issued, and the rights and responsibilities of shareholders. The Corporate Charter also identifies the board of directors and officers, and it sets the framework for how the corporation will operate.
The Corporate Charter is a public document that is filed with the state where a corporation is incorporated. Once the state approves the Corporate Charter, the corporation officially exists. A Corporate Charter is a legal document that establishes the corporation`s existence, but it does not govern the day-to-day operations of the company.
An Operating Agreement is a legal document that outlines the rules and regulations for an LLC. It is similar to the Corporate Charter for corporations, but it is specific to LLCs. The Operating Agreement specifies how the LLC will be managed, how profits will be distributed, and how the LLC will be taxed. It also outlines the rights and responsibilities of its members.
Unlike a Corporate Charter, an Operating Agreement is a private document that is not required to be filed with the state. This provides added flexibility as LLCs are typically smaller and more flexible than corporations. The Operating Agreement is a critical document because it establishes the ownership structure, member responsibilities, and management structure for the LLC.
Differences between Corporate Charter and Operating Agreement:
The primary difference between a Corporate Charter and an Operating Agreement is the type of legal entity they govern. Corporate Charters are for corporations, while Operating Agreements are for LLCs. A Corporate Charter is a public document that is filed with the state, while an Operating Agreement is a private document that is created by the members of an LLC.
Another significant difference between these two documents is their purpose. A Corporate Charter establishes the corporation’s existence. It sets out the corporation`s purpose, stock structure, and governance framework. The Operating Agreement, on the other hand, sets the rules that govern how the LLC will operate and how the LLC members will interact with each other.
In summary, Corporate Charters and Operating Agreements are both essential documents that play critical roles in the establishment and operation of a business. Corporate Charters are used to create corporations, while Operating Agreements are used to establish and govern LLCs. The primary difference between these two documents is that a Corporate Charter is a public document that must be filed with the state, while an Operating Agreement is a private document created by the LLC members.
If you are starting a business, it is essential to seek legal advice to determine if your company should be a corporation or an LLC. Your legal counsel can help you draft a Corporate Charter or Operating Agreement that fits your specific business needs. Remember, these documents are critical to the success of your business, so it is essential to take the time to get them right.