What Is An LLC Operating Agreement?
An Operating Agreement is an internal document serving as a contract between the owners, called members, of an LLC. It contains all the necessary information to identify the company and its members and describe its internal processes.
Does Colorado require all LLCs to have an Operating Agreement?
Colorado does not require LLCs to have an Operating Agreement, but CO Code Section 7-80-101, also known as the “Colorado Limited Liability Company Act,” encourages them to have one in place.
The state code also expressly says that an Operating Agreement does not need to be in writing. However, it’s always a good practice to have agreements written on paper for members to sign.
What Are The Advantages Of An Operating Agreement In Colorado?
An Operating Agreement brings many benefits to an LLC in Colorado. Here’s a quick look at some of them:
It allows you to override default laws
An Operating Agreement allows you to avoid running your company according to Colorado’s default laws for LLCs. While it won’t allow you to create rules and regulations contrary to the state’s existing laws, it lets you customize how you can run your business.
For example, Colorado laws dictate that any member of an LLC has the right to vote when it comes to company decisions. The members can then vote personally or by proxy in case they are physically absent. You can modify this mechanic to your preference using your Operating Agreement.
It cements your limited liability status
Your Operating Agreement can help strengthen the protection your LLC gives to your personal assets. It does this by formally separating you from your company’s obligations. This provision is already included in Colorado’s state laws, but expounding on this principle using your Operating Agreement reinforces it.
It helps prevent and resolve disputes
The detailed instructions in your Operating Agreement remove the confusion members may have about your company’s procedures. They also help prevent potential disputes from arising and bring resolution to problems that might occur during the course of business. This document allows your LLC to operate smoothly.
It can attract investors to your LLC
Your Operating Agreement can be used as a tool to get investments for your LLC. Investors look for reasons to invest in a company. These include a transparent and trustworthy financial accounting system, quick return on investments, and a company with reliable management. If your company can offer these, your Operating Agreement will show it—and investors who read the document will be convinced to put their money in your LLC.
Create a customized operating
What Are The Limitations Of An Operating Agreement In Colorado?
Although an Operating Agreement brings many advantages to your LLC, it is by no means a solution to all problems your company might face. It has some limitations preventing it from doing certain things. Below are a couple of them.
It cannot control external factors
An Operating Agreement has no jurisdiction over things outside of your LLC. The document can be used to govern your business, but it does not have a hold on external factors such as weather conditions, the stock market, or even the rental fees you pay for your business. These things are truly out of your hands.
It can still be violated
A poorly-written Operating Agreement contains loopholes or vulnerabilities that could be exploited by those with malicious intent. And while the document is binding once signed, it can still be violated by those who have the guts to do so. Make sure that your Operating Agreement is carefully worded so that there won’t be any loopholes in it, and those who dare abuse its provisions can be sued in court.
It is difficult to create and maintain
Creating a comprehensive Operating Agreement is no easy task. For example, you need to consider all aspects of your business so that you can insert provisions covering them. The process might become too challenging, to the point where you spend your funds hiring a lawyer to help you draft the document. Moreover, once it is finished, you will need to keep updating it so that it stays useful.
What Should You Include In A Colorado LLC Operating Agreement?
Your Operating Agreement must contain all relevant information pertaining to your Colorado LLC. This includes details identifying your company and its members, your business purposes, guidelines regarding the internal processes your business has, and instructions on how to handle specific concerns such as those related to membership and company closure.
How To Form An Operating Agreement
Your Operating Agreement has to be customized to suit the needs of your LLC. When creating it, you must consider how the members of your company want to operate it. You also need to think of the possible issues you might face so provisions can be made for them ahead of time.
Before starting, research and read the Colorado Limited Liability Company Act. Use the statute as the basis for your Operating Agreement, then tweak the details according to your preference. You can personally draft the document by following our tips below or with help from a lawyer.
Identifying your LLC
Begin by providing details about your LLC. Specify your company’s name and business address, and indicate details about your registered agent. This person represents you during interactions with the state, so make sure to provide details identifying them.
Purposes and goals
After this, specify your purposes for forming your LLC in Colorado. These will serve as your mission and vision statements and will act as the goals your company aims to achieve. It is imperative that you do this to give your business a direction.
Next, provide details identifying the members of your LLC. Indicate their names and registered addresses. Also, specify their capital contributions and interest percentages in the company. This serves as proof of your ownership and also helps to prevent disputes with regard to the profits you receive from your business.
Management style and member roles
Indicate how your LLC will be managed. Your company can be managed by its members (member-managed) or by a manager appointed for the task (manager-managed). It’s important to specify this because this will determine what kind of roles the members will have.
In a member-managed LLC, the members personally oversee the daily operations of the company. If you choose this setup, you must specify the rights, roles, and responsibilities that each member will have. This will set boundaries on what the members can and cannot do with regard to their authority, their tasks, and what is expected of them.
Meanwhile, in a manager-managed LLC, all matters pertaining to the daily operations of the business are entrusted to a person the members appointed as the manager. There can be more than one manager in an LLC. They have full authority when it comes to making decisions affecting the business’s daily routine. Major decisions impacting the company, however, are still made by the members.
Profits and Losses
After that, include provisions on the distribution of profits and losses. These are usually divided among members according to interest percentages, but you can change this according to your members’ preferences. Indicate how and when distributions will be made to clarify payout schedules.
Next, you must provide a detailed description of your company’s accounting system. Include information about your cash flow monitoring, record keeping, and financial reporting. This part is necessary to convince investors to invest in your LLC.
Amendments and modifications
Your Operating Agreement must have provisions allowing modifications to be made to the document. This is important because your business will see changes over time, and your Operating Agreement needs to be updated to reflect these changes. Failure to update the document in time can render it useless.
Lastly, your Operating Agreement has to provide guidelines on the closure of your LLC. There are several reasons why your company can be dissolved, including the untimely departure of a member. Your Operating Agreement has to provide instructions on the dissolution process so that your company closes without any remaining debt or obligation.
Why is an operating agreement needed?
Enforceable in Court
The terms outlined in a written LLC operating agreement is usually enforceable in a court of Law.
Opening Bank account
Certain financial institutions require you to produce an operating agreement to verify whether you have “signing power” for the LLC.
If the terms of compensation, roles, and responsibilities are mentioned in the operating agreement, it avoids disputes among LLC members in the future.
Preserve limited liability status
Especially if you are a single-member LLC, having an operating agreement helps ensure your liability status is upheld in court.
Create a customized operating
How Much Is A Colorado LLC Operating Agreement?
It technically costs nothing to create an Operating Agreement for your Colorado LLC. You also won’t have to pay filing fees since the state doesn’t require it. However, if you hire a lawyer to help draft an Operating Agreement for your LLC, you must pay hundreds of dollars, depending on the size and industry of your company.
Frequently asked questions
Colorado does not require LLCs to have an Operating Agreement, but these companies will benefit from having one regardless of the size of their membership. Single-member LLCs will need to secure their limited liability status using the document. They will also need an Operating Agreement to standardize the processes inside the company.