A Colorado LLC Operating Agreement is an internal document used by LLC members to outline the system of governance and ownership details of an LLC entity.
The document defines the procedures for decision-making on financial matters, governance, responsibilities, and conflict resolution in the LLC. Other details regarding the composition of the management hierarchy and policies guiding day-to-day activities within the company are also included in an operating agreement.
All the LLC members must agree on the agreement’s contents, and once signed, it becomes legally binding. An operating agreement is also used to legally protect the LLC members’ assets by separating the business from the owners.
The use of an operating agreement is not mandatory for all Colorado-based LLCs; however, the following laws are applicable in its implementation:
Limited Liability Companies: Title 7, Article 80
Operating Agreement Laws: § 7-80-108
State Definition: § 7-80-102(11)(a)
Types of Operating Agreement
It is essential to use the type of LLC operating agreement suitable for the particular type of LLC. The two types of LLC operating agreements applicable in Colorado are:
Single-member LLC operating agreement
LLCs owned by one person use a single-member LLC operating agreement to emphasize the company’s limited liability status. The owner’s assets remain protected.
Download: Microsoft Word (.docx)
Multi-member LLC operating agreement
A multi-member LLC operating agreement is meant for LLCs owned by more than one individual. It consolidates each member’s expectations and documents them as policies and regulations to be observed within the company.
Download: Microsoft Word (.docx)
Importance of Operating Agreement
Besides an operating agreement being a state requirement in Colorado, it is a crucial document for running an LLC. Some of the benefits that come with an operating agreement are as follows:
Written document
An operating agreement highlights any agreements made between LLC members and lays them out in writing. Therefore, having the obligations, financial rights, duties in writing provides a good reference source to determine the appropriate way to handle different situations within the LLC.
Exemption from state laws
Most states, Colorado included, have LLC governing laws, which apply to all LLCs without an operating agreement. Default state laws might not be in the LLC members’ best interest of the LLC members; an operating agreement is thus an opportunity for the members to protect their interests.
Get investors
With an operating agreement in place, the integrity of an LLC increases as the intentions of the LLC members are laid out. It also shows how well-organized an LLC is and other details related to the company. These qualities appeal to potential investors and thus increase the chances of getting them to invest in the business.
Reinforce the LLC Status
Using an operating agreement to run an LLC solidifies its attribute as a limited liability company. The operating agreement can be presented to support this claim if the business’s limited liability status is questioned by external parties such as a court or financial institution. Tax benefits accorded by a limited liability company structure are also protected.
Recommendation by state
Through the Colorado Statutes, § 7-80-108, the state of Colorado recommends that all Colorado LLCs use an operating agreement to exercise autonomy of governance accorded by the agreement in running a business.
Freedom to run the business
There are state limitations as to what can be included in an operating agreement; therefore, through the agreement, LLC members can be flexible as possible when setting out the rules and guidelines of running the LLC. Thus, an operating agreement can reflect the members’ expectations and preferences as much as possible and still be legally enforceable.
Harmonization
An operating agreement presents an opportunity where all proposed policies, rules, or suggestions can be consolidated and translated into one comprehensive roadmap to run an LLC. In addition, it promotes inclusivity in laying out a guide for an LLC entity regardless of the ownership percentage held by a member.
Conflict prevention
A standard operating agreement will outline how different issues can be resolved without intensifying the situation. Therefore, at the emergence of conflicts between members or between members and management, a Colorado LLC operating agreement can be consulted to seek the appropriate resolution.
Information to be Included
An operating agreement should be unique to the specific LLC entity it is being designed for. This means the specifics of one operating agreement will vary from those of another. However, there are essential sections of an operating agreement that ought to be presented for the document to be feasible. These are:
LLC name
An LLC name is an identifier of the company. The LLC name written in the operating agreement must have “Limited Liability Company” or “LLC” attached to it for the state of Colorado to legally recognize the LLC as a limited liability company. The LLC name must be exactly the same as indicated in the LLC’s Articles of Organization.
Owners
A list of all the members with ownership in the LLC must be named in a Colorado LLC operating agreement, and their interest in the company declared. A single-member LLC operating agreement will have the sole owner’s name only with 100% ownership, but a multi-member LLC operating agreement must have each member’s name and ownership distributions.
Management structure
The members or appointed managers can manage a Colorado LLC operating agreement. LLC members are responsible for choosing a management structure that suits their business model. The selected structure must be stated together with the roles and powers bestowed on the members and managers.
The two management structures include, a member-managed LLC management structure where the LLC members opt to take up managerial roles within the company and a manager-managed LLC management structure where the LLC members appoint third-party managers or a select few members to oversee operations within the LC.
Responsibilities and duties
Everyone involved in forming an LLC and top management has specific responsibilities and duties designated to them. Therefore, a Colorado LLC operating agreement needs to define these responsibilities to avoid mixing up duties and responsibilities. Additionally, spelled out duties and responsibilities enhance accountability as issues can be traced back to the responsible party.
Voting rights and processes
Significant decisions, especially in a multi-member LLC, have to be agreed on or decided with a cast of votes. Therefore, the voting rights awarded to each LLC member and voting procedures must be declared in an operating agreement. Voting rights can be issued equally or distributed based on ownership which ultimately means some members will have more voting power or influence.
Contribution
Since capital will have to be provided to start up an LLC business, the operating agreement is expected to state the fraction or percentage contribution invested by each member. Capital contributions are vital due to their impact on voting rights, profit allocations, etc.
Distributions
An LLC is ideally meant to be a profit-generating venture. Therefore, it is only suitable to state how the profits will be shared among the members. Losses are also supposed to be shared with the same rule as profits.
Thus, a sole member in a single-member LLC will typically be entitled to the total profits and losses. Still, a multi-member LLC can be distributed either equally or based on investments margins or other criteria.
Meetings
Meetings are essential in decision-making within a company. Therefore, it is essential to have well-defined procedures for holding different meetings in a company spelled out in an operating agreement. In addition, details such as specific dates, facilitators, schedules, and participating members can also be indicated.
Succession planning
Sometimes, the transfer of interest or ownership may be inventible. A Colorado LLC operating agreement is an excellent place to declare if ownership can be conveyed to a member’s beneficiaries and, if so, what powers are transferable that are not if a member passes away, retires, or any other.
Buy-out and buy-sell rules
LLCs should anticipate the addition or withdrawal of members when preparing a Colorado LLC operating agreement. The correct procedure to be adopted to carry out the buy-out or buy-sell reasonably must be declared.
A buy-out is a provision that allows the LLC members to be prioritized by the departing member before an external buyer is a sort after. A buy-sell is a provision that defines how ownership in the LLC can be reassigned according to the need.
Dissolution
Dissolution marks the end of operations of an LLC. Accordingly, an operating agreement should anticipate dissolution and state how the decision to dissolve the LLC will be made, minimum votes required, and the person designated to oversee the process by filing an Articles of Dissolution, final tax statements, settling pending debts, and distributing assets.
Modifications
Changes are bound to happen as the LLC grows and consequently necessitating the modification of the operating agreement. Accordingly, a formal procedure for adding, removing, or altering sections of the operating agreement should be declared to ensure the agreement remains enforceable and inclusive.
Severability clause
An error in the text or the inclusion of a legally unenforceable term can compromise the enforceability or validity of a Colorado LLC operating agreement. Therefore, it is essential to add a severability clause that declares that the operating agreement remains valid and legally enforceable even a part of it is found to be invalid or unenforceable.
Operating Agreement Template
An operating agreement can be created from scratch or prepared using a template, the latter being less involved. To help our readers write an operating agreement, we have designed Colorado LLC operating agreement templates that can be downloaded for free and personalized to suit any Colorado LLC. Download them from the website and modify them accordingly for your convenience.
How to Start Operating Agreement?
The formation of a Colorado LLC is a procedural process involving a few steps discussed in this article. The LLC must first obtain a unique LLC name to start its operation. A business name can be obtained by conducting a name search with the Colorado business names database.
They can reserve the name with a Statement of Reservation of Name for 120 days as they continue with other LLC formation procedures. The procedure below is a general guide for anyone intending to start an LLC entity in Colorado:
Submit the application
The first step is registering the LLC with the state. This involves submitting an online application to the Colorado secretary of state. Domestic LLCs register using Articles of Organization, while foreign LLCs use a Statement of Foreign Entity Authority. Note that Colorado only uses online applications.
Fee
Next, pay the application fee charged for the particular type of LLC. For example, domestic LLCs pay $50 while foreign LLCs pay $100. Payment is prompted once the application is submitted.
Operating agreement
Once the filing fee has been paid, the Colorado operating agreement can be prepared. All the provisions deemed necessary by the LLC members, such as member and manager duties, financial distribution, LLC ownership, and other pertinent details, should be included. The more provisions the document has, the more effective it is.
All the LLC members must sign a multi-member LLC operating agreement to be legally binding. The operating agreement is essential in separating the owner(s) from the LLC.
EIN
To conclude the process, the LLC should get a nine-digit IRS EIN (Employer Identification Number) either online or filing Form SS-4. The EIN is essential for filing state and federal taxes, opening a business bank account, and hiring employees. Once the LLC is operational, the Colorado LLC operating agreement can be implemented.
Frequently Asked Questions
Not at all. A Colorado LLC operating agreement does not have to be filed with any state or government agency. However, it is expected that each LLC member will have a copy of the document, and one will be kept with company files.
In Colorado, an operating agreement is not compulsory for LLCs, but its use is endorsed, or else the LLC would be subjected to default state laws.
No. LLC members can write an operating agreement for themselves and sign to validate it without the input of an attorney. However, it is prudent to have a lawyer go through it to polish it up and ensure legal provisions are accurately captured in the document.
Not at all. The Articles of Organization is used to register an LLC with the state. At the same time, an operating agreement is an internal document meant to direct how an LLC will be managed and identify the company’s owners and other provisions worth noting.
