Colorado LLC Operating Agreement

Why should a Colorado LLC have an operating agreement?

A Colorado LLC should have an operating agreement because a company cannot act for itself. In order to operate, LLCs require real humans (and other entities) to carry out company operations.

In Colorado, per Colorado Revised Statute § 7-80-102, an operating agreement “need not be in writing.” So technically, your members could decide how your LLC will function on the chairlift, shake hands, call it an operating agreement and head down the mountain.

But any lawyer worth her salt will tell you to get that operating agreement down in writing. Here’s why.

1. Your operating agreement proves you own your LLC.

Colorado doesn’t require you to list your members on your LLC’s Articles of Organization. If you hire a registered agent to form your LLC to keep your information off the public record, your Articles of Organization won’t help you prove that you own your Colorado LLC. But an operating agreement will.

An operating agreement will list the names and addresses of your members, so you can show it to a bank, landlord, or potential investor to confirm who your LLC’s members are. Your bank will likely request to see a copy of your operating agreement when you open a business bank account.

2. An operating agreement can head off misunderstandings.

Even if you’re going into business with people you trust, miscommunication happens. Getting verbal agreements down in writing will ensure you have a document to refer to for answers, should a dispute arise.

3. An operating agreement can help reinforce your limited liability status.

The main benefit of forming an LLC in Colorado (rather than operating as a sole proprietor or a general partnership) is the personal liability protection your members will gain. But that limited liability isn’t invincible. For your limited liability status to hold up in court, you’ll need to be able to show that you’ve maintained a legal separation between you and your business. Doing so requires taking steps like keeping personal and business finances separate and—you guessed it—having and following a written operating agreement.

4. An operating agreement can override Colorado’s default laws.

Your operating agreement is your chance to take control of your LLC. In the absence of an operating agreement, your LLC will be governed by Colorado’s LLC statutes. It’s important to have an operating agreement that fits your LLC’s needs.

Colorado Case Law

We asked our lawyers for an example of how an operating agreement can make or break your LLC. Here’s what they said.*

“Consider the case of LaFond v Sweeney, where the failure to actually adopt and maintain an operating agreement led to disputes between the members when trying to dissolve the LLC resulting extensive and expensive litigation. Because the members failed to adopt an operating agreement, the courts were forced to look to the statutes for the default rules on how to resolve the members’ dispute. Such valuable resources could have been preserved had the members of the LLC taken the time to plan ahead, discuss potential pain points, and distill their collective understanding into a written operating agreement.”

What is included in a Colorado operating agreement?

Your operating agreement should cover how your business will handle “big picture” scenarios and procedures, like how you’ll distribute profits or dissolve the business if—knock on wood—things go sideways. Here are some common topics operating agreements cover:

• Transfer of membership interest
• Voting rights and decision-making powers
• Initial contributions
• Profits, losses, and distributions
• Management
• Compensation
• Bookkeeping procedures
• Dissolution