Colorado LLC Operating Agreement Tips
Establishing a Colorado LLC can be one of the best investments a small business owner can make. Limited Liability Companies (LLC) offer owners (members) many protections. An LLC can enter into legal contracts, hold property, and sue others. C.R.S. 7-80-104. Forming an LLC is relatively simple. A limited liability company is formed when its articles of organization become effective. C.R.S. 7-80-207. In Colorado, an LLC can be owned by a single individual. C.R.S. 7-80-203. But forming the LLC is only half the battle. Members should seriously consider drafting and signing an operating agreement. What is an Operating Agreement; Why do I need an Operating Agreement; and, How do I write an Operating Agreement? Glad you asked.
What is an Operating Agreement?
An Operating Agreement is any agreement between all the members of the LLC regarding the LLC’s affairs and the conduct of its business. C.R.S. 7-80-102. Simply put, the Operating Agreement is your playbook on how the mangers and members are going to interact regarding the operation and management of the LLC.
Why are Operating Agreements Important?
Although there are exceptions to every rule, anyone forming an LLC should consider entering into an Operating Agreement.
Operating Agreements Can:
1. Overrule certain default rules relating to the operation of your business. C.R.S. 7-80-108;
2. Establish a level of formality which can help to protect your business status;
3. Lay the foundation for future growth;
4. Allocate Profits and Losses;
5. Serve as required documentation for both state and IRS purposes;
6. List ownership percentages;
7. Set boundaries for management and members;
8. Lay out procedures for bringing on or removing members or managers; and
9. Define Voting Percentages
Legal Disclaimer: The information provided on this page is not legal advice. It is meant to provide readers with things to consider when forming and operating an LLC. It is in no way an exhaustive list of all the requirements needed to form and operate an LLC. Larranaga Law cannot represent you until a formal engagement letter has been signed. Please consult with an attorney regarding your specific circumstances.
What Options Do I have?
In many situations, you may not need an attorney. While not recommended, there are numerous resources on the internet to help point you in the right direction. There are a ton of sites that offer cheap generic resources. That may suffice.
But if you have any doubts, contact an Attorney. Starting a small business can be a big investment that can require allot of time and resources. Creating the proper forms, drafting the proper documents, researching the law, and everything else that goes into starting a LLC can take allot of time and energy away from other aspects of your business. Contact a legal professional today to discuss your options.
Things to Consider When Writing An Operating Agreement For A Colorado LLC.
1. Business Purpose and Limitations
An LLC can be formed to conduct any lawful business within the state subject to any applicable laws. C.R.S. 7-80-103. Although the LLC can conduct any lawful business, should it? Consider imposing limitations on management relating to the type of business which the LLC may engage in. Consider checking with an attorney to determine if any special limitations need to be added in either your Articles of Organization or Operating Agreement to comply with applicable state laws.
2. Notification and Filing Requirements
Certain member and management decisions require notifying the appropriate state agencies, other members, and so on. Considering adding provisions that require such notification to occur prior to or after a certain action is taken. Presumably, you know you industry and what is required.
3. Duration of the LLC
An LLC is considered a separate business entity. So long as the law allows and nothing occurs that would in effect end the LLC, in theory, there is nothing to stop the LLC from continuing forever. If your LLC has a specific purpose, consider listing the events that would trigger a vote on the dissolution of the LLC.
4. Business Operation and Management Structure
Member v. Manager Run: Who runs the day-to-day operations? Consider what you stated in the Articles of Organization.
Current manager or managers: Who are the current managers.
Areas of Responsibility: Do certain managers dictate the actions in certain areas of the business?
Divisions: Is the business broken up into section or divisions?
Replacement: How do you relace managers? Are their certain actions that would trigger an immediate vote to remove a manager?
5. Member Rights
Insurance: Is the LLC required to carry insurance on the members or managers?
Profit and Loss: How would you like to allocate your profits and losses? Is it by ownership percentage or some other method?
Distributions: Is the LLC required to pay the owners a certain amount of income each year or is it reinvested in the LLC? How is that decided?
Ownership Interest: How much ownership interest does each individual member hold in the LLC? Is it by capitol contribution or some other method?
Reimbursements: Do members get reimbursed for out-of-pocket expenses or do they count as contributions to the LLC?
Guaranteed Rights: In addition to your statutory rights, do members have additional rights?
Voting: How is voting conducted? Does each member get a single vote or are voting rights based on ownership percentage?
Sale and Transfer of Ownership Interests: Are their reasonable limitations on the transfer or sale of the business? What if someone dies? If you are imposing restrictions, do they comply with applicable state laws?
New Members: How much does it cost to become a new member? What procedures must be followed to admit a new member?
Taxes: Any applicable tax provisions.
6. Voting Requirements
Quorum: How many members are required to make certain decisions regarding the LLC?
Record Keeping: How are decisions recorded? Consider maintaining written minutes.
7. Other:
An Operating Agreement can cover allot of aspects of the business. Be creative and think specifically of your LLC’s particular needs.
Legal Disclaimer: The information provided on this page is not legal advice. It is meant to provide readers with things to consider when forming and operating an LLC. It is in no way an exhaustive list of all the requirements needed to form and operate an LLC. Larranaga Law cannot represent you until a formal engagement letter has been signed. Please consult with an attorney regarding your specific circumstances.
Things to Remember When Drafting
1. Know the Law:
Check state statues
Check applicable case law
Check industry specific rules
Etc…
2. Be Simple and Clear:
Simple and clear drafting will save you allot of headaches in the future. Consider defining unclear terms and avoid using abbreviations unless you have made it abundantly clear of what they mean.
3. Agreement:
The initial Operating Agreement requires agreement by all of the members of the LLC prior to become effective.
4. Documentation:
It is generally a good idea to record all your actions in writing. Create a paper trial that helps others to identify what you have done.
Conclusion
Establishing a Colorado LLC can be one of the best investments a small business owner can make. You should avoid using templates and samples when drafting your LLC’s Operating Agreement unless you completely understand what is contained in that template or sample. Operating Agreement allows you to alter many aspects of you LLC including ownership, management, and voting. Both Single Member LLCs and Multiple Owner LLCs should consider entering into an Operating Agreement. If you are considering forming a LLC in Colorado and you would like help with your Articles of Organization, writing your business’s operating agreement, or would like someone to review your filings, contact an attorney today.
For an additional article on how to Form A LLC In Colorado click here.