What is an LLC Operating Agreement?

When you create an LLC in Colorado, one of the things you need to consider as part of setting it up is drafting an operating agreement. This is the document that describes specific situations and how the company plans to handle them. For instance, it may cover:

• Basic decision-making processes, both financial and operational
• Roles, rights, and responsibilities, e.g. members and managers
• Meeting times and formats
• Investment contributions, ownership structures, and taxes
• Major changes to business structure or ownership
• How to handle crises and disputes

Because the operating agreement so clearly outlines the rights and responsibilities of everyone involved, it protects them by putting all the agreements in written form. That way, any verbal agreements can’t get twisted or lost in the shuffle when a dispute arises.

Why is an Operating Agreement Important for Colorado LLCs?

Operating agreements provide a number of critical benefits for Colorado LLCs. For one thing, it creates a layer of separation between the individual member(s) and the business, so that bankruptcy or legal disputes have a harder time bleeding over into the personal lives of member(s).

For another, an operating agreement can provide important guidance on how to run the company and make decisions that can prevent headaches, disputes, or unnecessary gridlock down the road. It can also ensure that verbal agreements remain in force rather than morphing over the years into contrary understandings.

Lastly, because banks and investors often want to see this document before proceeding with a financial transaction, it’s a good idea to put it in place ahead of time. That way, you don’t have yet one more chore when you’re trying to obtain funding.

Key Components of a Colorado LLC Operating Agreement

Which elements you weave into your Colorado operating agreement depend on what type of business you’re running, with whom you’re working, and what concerns you foresee. Typically, though, there are a few basic components you’ll want to include:

Ownership structure

LLCs can be structured pretty much any way you want to structure them. Some of the most common approaches are to break up ownership by the percentages of capital contributed, though other LLCs decide to split ownership evenly, no matter who brought what to the table.

That is, of course, in the case of multi-member LLCs. You can also create a single-member LLC in Colorado, in which case you will be the primary owner of the company. There are special rules for single owners regarding how they claim the business’s profits and losses on their taxes, simplifying it compared to other types of entities.

Member roles and responsibilities

Your operating agreement should also define the duties and rights of each member. Sometimes these are equal, while other times they’re parceled out differently depending on the role that member will play. Either way, make them as detailed as you can to avoid misunderstanding, disagreement, and dispute.

Voting rights and decision-making

Again, the members of an LLC might have equal voting rights and decision-making power, or they might be different. Make clear who has the power to do what at the business. Also, clearly dictate how the business as a whole will make major financial and operational decisions, so that no one has to war about it when the time comes.

Profit and loss distribution

Profits are relatively self-explanatory: When the business makes money, where will it go? How will it be disbursed, in what amounts, when, and to whom?

Losses are similarly important, because members of the LLC can claim business losses on their taxes and use them to get breaks. Decide upfront how you will distribute both profits and losses among the members of the LLC.

Dissolution terms

Sometimes you don’t want to keep the business anymore, in which case you can either sell it or dissolve it. Both of these are legal processes with their own sets of rules and regulations, but your operating agreement should set parameters around how you can make these decisions and what will happen if you do.

Keep in mind that, while single-member LLCs do follow different rules than multi-member ones, each of these components applies equally well to them. Even if you’re going into business as a sole proprietor, it pays to lay a solid foundation with an operating agreement.

How to Create an LLC Operating Agreement in Colorado

Creating an operating agreement isn’t hard, but there are a number of steps you’ll want to ensure you follow. Firstly, make sure you consult everyone with a stake in the LLC, as the document isn’t legally binding without all members’ agreement. Working in tandem, draft a set of rules that reflect how you want your company to run.

Once everyone agrees, you can all sign the document and put it on file, or you can get it notarized for an extra layer of legitimacy. If you’re not sure what approach is best, you might want to consult a legal professional.

Colorado-Specific Considerations

Colorado has laws in place to govern disputes or legal entanglements for LLCs. In the absence of an operating agreement, the state will default to its code on how to handle such disputes. This may not reflect how you, the LLC members, wish to deal with the situation, which is why it’s best to put a legal document in place.

Pay special attention to which aspects of the state code seem contrary to your aims, because those are the areas around which you want to draft highly specific legal content. If that sounds difficult, it’s okay to get professional help.

Final Thoughts & Next Steps

Operating agreements are valuable because they provide clear, consistent, detailed instructions about how to proceed with big business decisions or even crises. If you don’t have one already, it’s a good idea to get one going today.

If you’re ready to take action, you can always draft an LLC operating agreement yourself, but it’s easier to get help from a knowledgeable professional who knows what they’re doing. An LLC formation service knows exactly what kind of information to include in your operating agreement to keep you and your fellow members (if applicable) safe.

Interested in learning more? We’re happy to help, so get in touch today!

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