Subscription Agreement Vs Operating Agreement

When it comes to forming a business, there are a number of legal documents that must be put into place to ensure that everything runs smoothly. Two of the most important documents are the subscription agreement and the operating agreement.

Both the subscription agreement and the operating agreement are designed to outline the terms and conditions of a business’s operations. However, they serve different purposes and should not be used interchangeably.

Subscription Agreements

A subscription agreement is a legal document used by companies when they wish to raise capital by selling securities to outside investors. The document outlines the terms of the investment, including how much money the investor is committing, how the funds will be used, and the rights and restrictions that come with the investment.

The subscription agreement typically includes details such as the number of shares purchased, the price paid per share, and the investor’s rights to dividends or profits. It is a binding agreement that is signed by both the company and the investor, and it is enforceable by law.

Operating Agreements

An operating agreement, on the other hand, is a legal document that outlines the structure and operations of a limited liability company (LLC). This document sets forth the rights and obligations of the members, including their ownership interests, management responsibilities, and profit distribution.

An operating agreement is not a requirement for an LLC, but it is highly recommended. The agreement can be customized to fit the specific needs of the business and can include provisions for voting, decision-making, and dispute resolution.

While the subscription agreement is used primarily to raise capital, the operating agreement is used to establish the framework for how a business will operate on a day-to-day basis.

Key Differences

The key difference between a subscription agreement and an operating agreement is their purpose. A subscription agreement is used when a company wants to raise capital from investors, while an operating agreement is used to establish the structure and operations of a business.

Another important difference is that a subscription agreement is a binding contract between the company and investors, while an operating agreement is a contract between the members of an LLC. The subscription agreement outlines the terms of the investment, while the operating agreement outlines the terms of the business itself.

In conclusion, both the subscription agreement and the operating agreement are critical legal documents for any business. They serve different purposes and should not be used interchangeably. If you are considering starting a business or raising capital, it is important to consult with a legal professional to ensure that you have the appropriate documents in place.