Colorado LLC Operating Agreement: Drafting Checklist

When launching a limited liability company in Colorado, the first question you may have is: “What documents do I need to register my Colorado LLC?”

According to state law, you must provide the Articles of Organization for your small business. This document contains your primary business information, registered agent, and other crucial details.[1] 

Another document known as an LLC operating agreement is vital in the formation process. It’s the cornerstone of your enterprise, setting the stage for how your business will operate in the foreseeable future. This article provides a breakdown of operating agreements and an in-depth guide to filing one.

Key Takeaways

• An LLC operating agreement outlines the roles and responsibilities of all members.

• Operating agreements aren’t mandatory in Colorado, but they’re incredibly beneficial.

• Swyft Filings can help you create and submit an operating agreement within minutes.

What Is an LLC Operating Agreement?

According to U.S. Small Business Administration, an LLC operating agreement is a legal document specifying how you’ll conduct business.[2] It outlines the decision-making process regarding different aspects of your organization, such as finances, profit division, and management.

An operating agreement is crucial for every limited liability company. It should go hand in hand with your Articles of Organization during your Colorado LLC formation to ensure your business journey runs smoothly.

When you start an LLC, you do so mainly because you want to reduce or eliminate personal liability. An operating agreement can help you capitalize on the benefits of having an LLC by clarifying the following factors:

• What’s the percentage of the company owned by each member?

• How are voting rights and responsibilities determined?

• How will you share profits?

• What will you do in the event of losses?

• What authorities do your managers and other members have?

• Where, when, and how will you hold meetings?

• How will you terminate the organization or transfer interest in the worst-case scenario?

As you can see, an operating agreement is primarily about members and defining their powers. As a result, they’re the key players involved in drafting and signing your document. Be sure to bring them up to speed on any changes you implement in your document.

State Requirements

Although launching an LLC is similar in most states, there are many notable differences. For instance, starting a Colorado LLC isn’t the same as founding a New York LLC. One of the main differences is that Colorado law doesn’t require you to have an operating agreement.

However, this doesn’t mean you shouldn’t take the time to create one. According to the Colorado Limited Liability Company Act in Colorado revised statutes, every LLC should have an operating agreement.[3] It can be pivotal in preserving your good standing with the Colorado Secretary of State. Plus, it eliminates the risk of default state laws applying to any disputes, which rarely consider your LLC specifics.

Therefore, don’t take a gamble. 

LLC Operating Agreement Benefits

We’ve hinted at the benefits of having a Colorado LLC operating agreement. Now’s the time to give you a complete picture of what makes it advantageous. Here’s why creating an operating agreement is one of the best pieces of legal advice you can receive when starting your business entity:

• Eliminating personal liability — With an operating agreement, you can practically say goodbye to personal liability associated with disputes. The state looks at your agreement and sees that your entity is separate from its members. This way, it’s less likely to hold you accountable for various issues and put your private property at stake.

• Preventing future uncertainties — When writing a business plan for your LLC, you may not consider what happens to your company if you cannot run it. That’s where an operating agreement comes in. It establishes who assumes your role, ensuring you leave your firm in good hands. Furthermore, an operating agreement can specify how you’ll handle future investors.

• Keeping you in the driver’s seat — The last thing you want is for your managers to take on critical roles without your permission. An operating agreement can be a proper ace up your sleeve here. It clearly defines managerial responsibilities to help prevent any conflict. It also allows you to delegate some of your duties to your managers, enabling you to focus on strategic growth opportunities.

Who Needs an Operating Agreement?

Legally, state law doesn’t require your business entity to have an operating agreement. Whether you’re a single-member or multi-member Colorado LLC, you won’t get fined for not having this agreement during or after your business formation.

Still, business owners who want to make the state of Colorado their place of business shouldn’t do business without one. It makes sense to have an operating agreement in several situations:

• You want your Colorado LLC to reap all the rewards of being an LLC, including removing personal liability.

• You wish to avoid state default rules ruining your chances of growing your company.

• You want to claim your share of your firm’s earnings without causing a dispute among your members.

Therefore, having an operating agreement is a must for every entrepreneur. It serves as your North Star and helps lower the chances of conflicts and legal issues.

Even if an LLC formation isn’t your forte, and you want to set up a different type of company, an operating agreement can make a difference. Whether your goal is S-corp incorporation or sole proprietorship, an agreement can protect your assets and lay the foundation for a successful business.

Drafting Your Colorado LLC Operating Agreement

There are several ways to draft an operating agreement that helps you remain in good standing with the Colorado Secretary of State. For example, a business attorney can prepare this legal document from scratch. Alternatively, you can find an online LLC operating agreement template, provide the required information, and pay a filing fee.

But what exactly do you need to mention in your written operating agreement? The upcoming sections will lay down every bit of information this document should include.

Step 1: Provide Business Information

An operating agreement needs to have your business information first and foremost.

You shouldn’t have too much difficulty drafting this part of your agreement since you already include it in the articles of organization. It consists of the simplest of details:

• Your LLC name — Write the full business name of your Colorado LLC. Be sure to include the term “limited liability company” or “limited company.” An abbreviation (LLC or LC) is another option.

• Place of business — Include the street physical address of your LLC. You will receive legal documents there unless you have a registered agent.

• Registered agent — Provide the most important information about your registered agent, such as their name and address. If you haven’t appointed one, try to do so as soon as possible. This individual or entity receives service of process on your behalf and other critical documents so that you can turn your attention to strategic responsibilities.[4]

• Employer identification number — Don’t forget to add your employer identification number (EIN) to your operating agreement. It’s a crucial part of your company, as it lets you pay federal taxes and apply for various business licenses.[5]

Step 2: List LLC Members

Don’t put your feet up after providing the basic facts about your Colorado company. You must also list the members of your firm in your LLC operating agreement.

You might think this is unnecessary for a single-member LLC operating agreement, but that’s not true. Even if you’re a single-member LLC, you need this agreement to separate your personal assets from company property. Doing so helps prevent authorities from claiming your house or other personal assets when solving disputes.

Hence, listing all business owners is crucial, whether you’re a single-member startup or a multi-member LLC. Here’s what exactly you should include in this section:

• Names and physical addresses of your LLC members

• Ownership interest/membership interest for each business owner (aka member contributions)

• Voting rights of all members of an LLC

• Roles and responsibilities of each business owner

Step 3: Decide Member-managed vs Manager-managed

We finally arrive at the crux of your operating agreement. Whether you’re a multi or single-member LLC, you must decide who will manage your Colorado LLC. The most common LLC management structure is member management, but manager management is also an option. Let’s dive into the specifics of both solutions.

Member-Managed

The structure of a member-managed LLC is pretty intuitive. It requires you and other members of your LLC to manage the day-to-day activities of your enterprise:

• Implementing processes to improve productivity

• Communicating with partners

• Managing employees

The voting rights depend on how much ownership each member brings in. For instance, if you own 60% of the LLC, your vote counts twice as much as that of the member with 30% ownership.

A member-managed LLC makes sense if you want to ensure every member has total control over their vote in decision-making. With managers out of the picture, no one can cast your or another member’s vote on that person’s behalf.

However, remember that running your own LLC is time-consuming. You’re in charge of all your operations, even those that may seem mundane. Consequently, you might not have enough time to focus on areas you excel in.

Pros

• Simple management structure

• Every member has a say in decision-making

Cons

• Requires regular involvement

• Doesn’t make sense for passive investors

Manager-managed

On the opposite end of the spectrum is a manager-managed LLC. As the name suggests, these companies have managers who handle day-to-day activities. Members can take on managerial roles or recruit third-party managers (aka professional managers).

A manager-managed LLC is beneficial if you want to be a passive investor. In other words, you have an ownership stake in the company but don’t have the time to perform all the responsibilities. It’s also great if you wish to streamline the management of a large enterprise.

That said, caution is advised when forming this type of LLC. Professional managers may not understand the essence of your company as much as you do. Plus, they may often overstep their authority, like when signing contracts without your knowledge.

Pros

• Frees up time

• Perfect solution for large organizations

Cons

• Managers require some monitoring

• Managers might clash with your outlook

Step 4: Lay Out Administrative Operations

Administrative duties are just as essential as your overall business plan. Envisioning these operations in your operating agreement helps you pre-empt various problems and ensures every member knows what happens in specific situations, such as dissolutions.

Therefore, consider your operating agreement as a vital internal document of your startup that lays down these essential duties:

• Profit allocation/distributions according to capital contributions

• Voting rights

• Day-to-day responsibilities of each member, such as filing tax returns with the IRS, communicating with other financial institutions, and managing your business bank account

• How to customize your ownership structure in case a member leaves according to other members’ capital contributions and specific needs

Step 5: Add and Remove Members

Your LLC might not have the same lineup today five years from now. Some business owners may leave, requiring you to recruit new members.

To accommodate these changes, be sure your internal document provides a roadmap:

• The effect of a buyout on other members of an LLC

• How ownership percentages and membership interest change when adding or removing members

• New member contributions and their impact on remaining members’ voting rights

• How to handle indemnification according to ownership interest

Create Your Operating Agreement Through a Filing Service

A Colorado LLC operating agreement should be the staple of your small business. Even though state laws don’t require it, smart business owners always have one. It keeps your personal liability intact and guides your business to succeed in its vision.

The easiest way to create and file your operating agreement is to partner with Swyft Filings. We’ve helped thousands of entrepreneurs easily draw up detailed documents and start an LLC. You can become one of them. Contact us today, and leave your LLC documentation to our trusted experts.

FAQs

Is an LLC Operating Agreement required in Colorado?

No. The law doesn’t require you to create an operating agreement in Colorado. Nevertheless, you and other LLC members should develop one for several reasons. It helps remove personal liability and tells you how you’ll make critical decisions in the future.

How does an LLC Operating Agreement help protect my assets?

An LLC operating agreement protects your assets by establishing that your company is separate from its members. Judges and experts can examine your operating agreement, and they’ll undoubtedly know that you’re a legit LLC by looking at the responsibilities and structure defined within.

Who needs access to this document once it’s drafted?

In most cases, only the parties mentioned in the operating agreement need to have access to it whenever necessary. Otherwise, you only need to present it to others when dealing with legal issues, such as court disputes.

How do I edit information on this document if membership changes?

You can’t simply rewrite your operating agreement when making changes. Instead, you’ll need to draft a new one containing your amendments. Also, all members must sign the new document, get it notarized, and file it internally.

What other legal documents do I need to draft for my Colorado LLC?

The only mandatory legal document you must draft is your Articles of Organization. Swyft Filings can do this on your behalf. Once the state approves your submission, they’ll send you a certificate, which allows you to apply for your EIN via the IRS and your business license.

Bibliography

1. Colorado Secretary of State Jena Griswold. “Articles of Organization.” Accessed June 7, 2023.

2. U.S. Small Business Administration. “Basic Information About Operating Agreements.” Accessed June 7, 2023.

3. Colorado Revised Statutes 2018. “Title 7: Corporations and Associations.” Accessed June 7, 2023.

4. Colorado Secretary of State Jena Griswold. “Business FAQs.” Accessed June 7, 2023.

5. U.S. Small Business Administration. “Get federal and state tax ID numbers.” Accessed June 7, 2023.