Why Operating Agreements Are Critical When Forming A Colorado LLC
As a Colorado business lawyer, I often find that starting a business with friends can be an exciting thing–however, the excitement and anticipation of jumping in and getting the business off of the ground often overshadows the little details that are necessary when forming your company. Unfortunately, when starting a new business, it is the “little things” that become very big things later!
There are two popular forms of doing business in Colorado: the stock corporation (“Inc.”) and the limited liability company (“LLC”). Both forms, if properly formed and administered, limit the liability of the shareholders or members—often the most critical reason to choose one of these forms of doing business. The LLC does offer a degree of flexibility that makes it an extremely popular choice for new businesses.
Once organized, an LLC’s affairs are governed by an operating agreement, which, while similar in many respects to a stock corporation’s by-laws, contains the agreement of the members as to how the LLC will conduct its day-to-day business. Think of an LLC’s operating agreement as its constitution—the operating agreement governs the rights, duties, limitations, qualifications, and relations among the members, the members’ assignees and transferees, and the limited liability company. The operating agreement may also contain provisions concerning its enforcement, interpretation, construction, and application. Importantly, however, the operating agreement is a “contract” between the members – an “agreement” as to how the LLC will operate.
Colorado courts have consistently held that the provisions of an LLC’s operating agreement control over any provision of the Colorado state statutes governing limited liability companies to the contrary, subject to some exceptions. The intent of the Colorado Limited Liability Company Act is to give the maximum effect to the principle of freedom of contract and to the enforceability of operating agreements.
While some companies may seldom find it necessary to have to refer to the LLC’s operating agreement, the reality is that most businesses with multiple members will need to consult the operating agreement to answer a question or solve disputes – questions such as: what becomes of the LLC if a member (or, the sole member) dies? What do you do when a member decides to exit the LLC or retire? What if the LLC decides to bring in a new member? How to go about winding up the operations of the LLC and closing the business – how are the assets to be distributed? A well drafted operating agreement should answer all of these questions and serve as the roadmap by which your LLC conducts business.
Contact A Colorado Business Lawyer Today
The Colorado Business Lawyers at LaszloLaw, a Boulder, Colorado based law firm, provide legal counsel to for-profit and non-profit businesses on a variety of business needs including corporate formation, risk management, corporate protection and legal compliance. Contact us today to discuss your business needs.
