Colorado LLC Operating Agreement

Last updated on: August 28, 2021

Forming a Colorado LLC is only the first step of running a business in the state. Registering an entity is an early stage that may be only the beginning of a wide-spanning career, but it’s no less vital.

After all, the initial formation stage is where you are expected to handle most of your formation paperwork and startup costs. Once your company has been registered and/or approved for operation, you can finally begin the development of your business. 

But before you can set more lucrative business strategies in motion, it’s always best to ensure all parties involved have a clear understanding of the company’s rules. Some of the key points you should look into include:

  • What are the rights and responsibilities of LLC members?
  • What are the procedures involved in the decision-making processes and voting?
  • What is the nature of liability allocation, specifically the distribution of profits and losses between the owners?

If you plan to set up an LLC in Colorado, one of the first things you should do is draft an Operating Agreement that outlines the aforementioned aspects of your company and more.

Formulating the LLC Operating Agreement that is both comprehensive and coherent can help conduct business in the long run, not to mention provide clear guidelines of member conduct. 

Most companies draft the agreement in the early stages of registration given that this document determines the future stability and efficiency of the entity as a whole.

This article will explore the drafting process of the Operating Agreement for your Colorado LLC as well as the main points of its execution, plus its relevance and various advantages.

What is an LLC Operating Agreement?

The first thing you need to understand about the Operating Agreement is that it doesn’t need to be filed with the state as it isn’t a mandatory requirement. This is an internal document that outlines the official procedures and operational structure of an LLC. 

In other words, the agreement is an instructional guide for running a specific company, broadly scoping potential scenarios that may occur in the entity’s future. 

Some of the key points an agreement typically covers include:

  • Allocating the profits and losses between the owners;
  • Outlining a stable internal scheme that establishes operations that determine the stability of the business internally;
  • Describing internal holding procedures, i.e. the clause that designates ownership;
  • Assigning member responsibilities and rights.

The Operating Agreement, sometimes called a membership agreement, is not a compulsory step. In the state of Colorado, you can legally start an LLC without this agreement. 

That being said, experienced entrepreneurs and attorneys generally advise in favor of drafting an Operating Agreement. Creating the agreement comes with no filing or fees involved, yet at the same time, you will have something to fall back on in cases of internal conflicts.

The agreement will give you significant procedural certainty regardless of whether you operate as a multi-member or single-member LLC, providing legal protection and ensuring the stability of your LLC.

Am I Required to Have an Operating Agreement in Colorado?

Although LLCs are not required to maintain an Operating Agreement in Colorado, the U.S. Small Business Administration (SBA) strongly recommends drafting one.

It’s true that creating the agreement may take up a bit of your time, but the effort is more than worth it. Working with a valid Operating Agreement is above all beneficial to your business and its growth. 

If you draft an Operating Agreement, your company will have protection in potential legal disputes thanks to the operational guidelines of the LLC previously established by your internal document. 

In order for the LLC to run smoothly, the agreement details key procedures and internal processes aimed to increase the overall efficiency.

Benefits of Creating an Operating Agreement in Colorado

Creating a written Operating Agreement comes with a fair share of advantages, including:

  • Earn favor with the Colorado courts: should you need to defend your entity’s LLC designation in court, an Operating Agreement can be used as concrete evidence in your favor;
  • Limited liability benefits: an Operating Agreement draws a clear distinction between the entity’s legal personal assets and the personal assets of the owners, reinforcing the protection of the so-called corporate veil. It’s crucial to keep the veil intact if you want to retain each member’s personal asset protection in the event of litigation since creditors are only legally allowed to pursue the business assets of the company and not the personal assets of the LLC owners;
  • Circumventing the default state laws: if a certain procedure is not outlined in the Operating Agreement, its resolution stems from the “default law,” most commonly when it comes to entity dissolution or voting processes. It’s generally best to avoid default laws as they can often go against your company’s best interests; 
  • Helping you get investors for your LLC: a well-composed Operating Agreement can only solidify the stability of your LLC while attracting potential partners and outside investors;
  • Assigning duties: careful allocation of rights and responsibilities for the ownership group ensures that no disputes or operational conflicts can disrupt the inner working of your company;
  • Formulating procedural aspects: more operational stability can be achieved by providing very clear outlines to the procedures for member additions and resignations as well as other business solutions;
  • Financial clarity: the Operating Agreement is also designed to set up the allotment of startup capital between the owners as well as subsequent distributions of profit shares and investments.

All in all, an Operating Agreement is a crucial piece of documentation aimed at facilitating the smooth development of your business regardless of its size.

How to Draft an Operating Agreement

While the majority of LLC formation or maintenance documents are in public access, usually available on the Secretary of State website, the Operating Agreement template is an exception to the rule. 

The state does not provide a ready form mainly due to the optional nature of this document. This means that you might end up creating your own Operating Agreement from scratch down to its structure and contents which should be outlined in relation to the individual requirements of your company. 

The good news is, no official form brings with it certain independence of action as you can use any of the free templates online for drafting the Operating Agreement for your LLC.

Keep in mind that the majority of these online templates are broad in scope and do not cater to any specific niche. A workable solution to this would be searching templates for your specific field within the industry which you can then use as your foundation.

Another excellent solution would be hiring an LLC service that can not only form your company on your behalf but also create an Operating Agreement based on the demands of your company.

Services like Northwest Registered Agent or ZenBusiness include free templates for the agreement in all of their LLC formation packages.

Regardless of your preferred course of action, your Operating Agreement should include the following points:

  • Company Information: LLC’s name, registered office, and principal office addresses;
  • LLC Formation: the date you filed or will file your Articles of Organization;
  • Owner or Member Information: contact information of the company’s owners, including names and mailing addresses;
  • Business Purpose: type or nature of your LLC;
  • Registered Agent Information: name, address, contact information;
  • Term: how long your company will be valid, i.e. its duration period. An LLC can be perpetual until its members choose to end it by means of voluntary dissolution or it can have a limited duration with a predetermined dissolution date;
  • Capital Contributions: the amount of money each member contributes to the company;
  • Ownership Percentage: the percentage each participant has in the company;
  • Member Additions: the procedure for admitting new members, their rights and obligations;
  • Member Withdrawal: procedures for leaving LLC membership, including resignation, expulsion, retirement, or death;
  • Profits, Losses, and Distributions: how income, losses, or debts are allocated among members;
  • Management and Roles: the owner of a single-member LLC is often the sole manager of the company, while a multi-member company can be operated by the ownership group, a few select members, or a group of hired managers;
  • Compensation: procedure for the payment of compensation to owners and managers;
  • Bookkeeping: accounting procedures;
  • Tax Treatment: choosing the tax plan for your company. An LLC can be taxed as a sole proprietorship, partnership, S-corporation, or C-corporation;
  • Amendment Procedures: the procedure for making changes to the Operating Agreement. Changes are accepted through a majority vote unless otherwise specified by the members;
  • Dissolution: closure procedures and the allocation of the remaining assets or debts between the members.

Including all of the above in your Operating Agreement is not at all mandatory, especially if some of them are not applicable in your case.

It’s still a good idea to include as many sections as possible, encompassing a wider scope of issues that could lead to future structural changes.

Making Changes to Your Colorado LLC Operating Agreement

While doing business in Colorado, it’s natural to see the change in your priorities in response to the requirements of your company.

Depending on how the LLC will grow and evolve, its structure will also become more complex, expanding the volume of its daily procedures.

The ever-evolving nature of entrepreneurship makes updating your Operating Agreement rather inevitable. After all, the written guidelines of your company should accurately reflect its actual state of affairs.

The Colorado law makes the process of amending the Operating Agreement fairly simple, though there are still a few vital rules to adhere to, for instance, the general rule of keeping it simple. It’s best to avoid unnecessarily complex phrasings that could be construed equivocally. 

Once the changes have been made in the agreement’s Word or PDF file, print it out for each member so they could acquaint themselves with new revisions.

Make sure that all LLC managers/members have read and signed the new version of your Operating Agreement, making it legally binding.

For example, changing your registered agent should also lead to the amendment of your Colorado LLC Operating Agreement. If your current registered agent resigns and you hire a replacement, simply change the information in the Operating Agreement and get the signatures of the owners to approve the revision. 

The old version of the agreement can be archived as evidence, specifically if the state requests information for the past activity of your LLC.

Engaging a specialist outside the company

Hiring an Attorney

If you hire an attorney to help you with drafting an Operating Agreement, you are guaranteed to get a well-composed document that lives up to the highest of standards. 

Legal professionals tend to formulate the agreement with clarity and great detail which could help you solve potential outcomes and disputes in the future, keeping your LLC reliably stable.

The biggest downside of hiring a professional attorney is their steep service rates. Some of them work for a flat rate, while others charge by the hour and help with entity formation as a whole. 

A more affordable option would be hiring an attorney to proofread and edit an already existing Operating Agreement rather than paying them to draft one from scratch.

If you’re unsure where to look for an attorney, services like Avvo can help you find a reliable professional through their database. The website offers plenty of options, including dozens of Colorado lawyers that specialize in LLCs, plus their search tool lets you filter the results by pricing, experience, location, and more.

Hiring an LLC Formation Service

Another popular option for your LLC is hiring an online service that assists with LLC formation and its further maintenance.

The average prices of these service providers are much more affordable than your average attorney rates, making them a more attractive option for small businesses. 

Services like ZenBusiness or Northwest Registered Agent offer affordable packages that include overseeing the LLC formation process as a whole as well as taking care of necessary filings and other requirements. 

All of their formation packages also include a customized Operating Agreement, meaning they can create this document specifically for your company. 

References

Even though the Operating Agreement may not be a required filing in Colorado, the state law still defines the scope of this document’s legal power. 

According to the Colorado Revised Statutes Section 7-80-108, an Operating Agreement can cover every aspect of an LLC, including:

  • The rights and responsibilities of all LLC members;
  • Distribution of capital, profits, losses, and other funds;
  • Operational procedures, entity’s statement of purpose, etc.

Every aspect not outlined in the Colorado LLC Operating Agreement will fall under the state’s default rules designed to regulate business structures with a general approach rather than exercise a more nuanced judgment. 

So if you plan to open an LLC, always make an effort to draft a customized and detailed Operating Agreement while at the same time adhering to state law. 

For instance, it would violate the state’s legal guidelines to include a clause that an LLC is exempt from filing a periodic report. It’s also illegal to limit the plenary powers of the court as well as third-party and member rights.

Senior Business Tax Writer, etc
Jean Wilson Murray
https://bestllcservices.co/
(323) 789-5289
Senior Business Tax Writer, etc
Jean Wilson Murray

In this IncFile vs ZenBusiness review, we're going to compare two of the most popular LLC formation services based on pricing, features, and drawing out differences and similarities to let you see which is most suitable for you and your business.

You can learn more about @Mike here.

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