When starting a business, it is important to establish the legal structure that will best suit your needs. Two common types of legal documents used by businesses are charters and operating agreements. Although both documents serve a similar purpose, they have distinct differences that every business owner should understand.
Charter
A charter, also known as articles of incorporation, is a legal document that establishes a corporation as a separate legal entity from its owners. It describes the company`s purpose, its shareholders or members, and how it will be structured and managed. A charter is filed with the state in which the business is located.
The main advantage of having a charter is that it can provide liability protection for the business owners. By establishing the business as a separate legal entity, the owners are not personally liable for the company`s debts or lawsuits. Additionally, a charter can make it easier for a business to raise capital by issuing stocks.
However, there are some disadvantages to having a charter. One is that it can result in higher legal and administrative costs. Additionally, a charter may not be suitable for small businesses that do not intend to issue stocks or have a large number of shareholders.
Operating Agreement
An operating agreement is a legal document used by partnerships and limited liability companies (LLCs) that outlines the management and ownership structure of the business. Unlike a charter, an operating agreement is not filed with the state. It is a private agreement between the business owners and is used to define the roles and responsibilities of each partner or member.
An operating agreement can provide flexibility in how the business is structured and managed. It can also establish the rules for distributing profits and losses among the partners or members. Additionally, an operating agreement can provide liability protection for the business owners, similar to a charter.
One disadvantage of an operating agreement is that it may not provide the same level of liability protection as a charter. Additionally, if the business is ever sued, the operating agreement may be subject to interpretation by a court, leading to potential legal disputes.
Conclusion
When deciding between a charter and an operating agreement, it is important to consider the size and structure of the business, the level of liability protection needed, and the administrative and legal costs involved. A business attorney can help you determine which document is best suited for your needs. By understanding the differences between the two, you can make an informed decision that will benefit your business in the long run.