LLC Information

Colorado Limited Liability Company: One Pitfall to Be Aware Of

The primary purpose of forming a Colorado limited liability company is to protect your personal assets against any liabilities that could be awarded to due to a suit brought by a business with whom you deal. The LLC protection can fail you though in certain circumstances.

More than one of the standard ways LLC owners find themselves directly responsible in a lawsuit are explained in this Article.

A Colorado LLC owner lost a court battle in 1997 and was held personally responsible for what was a LLC business liability.

The personal liability stemmed from the fact that although he was working for the LLC, he did not state this fact at any time during his business dealings with the other company. That company assumed he was a sole proprietor.

The Colorado court held him liable stating that he did not properly disclose that his business entity was an LLC. This is very important to know because often in the business of growing a business, you may not focus on this requirement.

In Colorado, the LLC laws provide this protection but only if the business obligation was truly one of the LLC entity and not your personally. You must always fully disclose that it is the Colorado limited liability company and not you personally that is engaging in business. You are merely the agent of the legal entity.

First, make sure you always enter into legal contracts with your LLC as the contracting party. Second, make sure your signs, business cards and letterhead all contain the full LLC business name showing the legal entity designation.

When participating in meetings or discussions with representatives of other companies or customers, always introduce yourself as a representative of your LLC.

Colorado courts have interpreted to LLC laws of the state to mean that if the other party had the impression that they were dealing with you as an individual on your business matters, the courts may decide that their impression holds sway over your organizational setup. The burden falls on the LLC representative to make the customer aware.

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Operating Agreement LLC: Key Document for an LLC

The Operating Agreement LLC is the most important document after the formation certificate for an LLC business.  This is because it evidences ownership and sets forth the rights and responsibilities of the owners.

This agreement will contain instructions and directions for how the LLC becomes authorized to enter into transactions and how it will operate on a daily basis.

All the participants involved in the business, whether it be an owner, a manager or an employee, will need to consult with this agreement to know what their roles and responsibilities are.  By having a clear set of rules, this will reduce the chances of later disputes and problems.

The limited liability company laws provide some default rules that apply in the event that an operating agreement is not adopted or one does not address a specific issue.  However, it is never recommended that you rely on the default rules of your state.  Many of them are not fair and do not make sense in a real business setting.

The better method is for the stakeholders in your business to get together and determine a set of rules that makes the most sense given your particular situation.  One great thing is that the law acknowledges that there is no one size fits all solution to how a limited liability company can be operated.  As a result, owners have great flexibility to determine what rules and limitations apply to their business.

Operating Agreement LLC- 3 Must Include Provisions

While an operating agreement can be very simple or very complex, there are a few matters that should be addressed in every one of them. 

The first matter is ownership.  Every LLC should make clear how ownership is established and who owns what in the business.  Believe it of not, ownership is one of the largest dispute matters that lead to costly litigation for small business.  Avoid this fate by ensuring your document sufficiently outlines ownership matters.

TWO, every legal entity needs rules for how it becomes authorized to transaction business.  This is known as a management structure and there are 2 structures that apply: member and manager managed.  When an LLC is managed by members, the owners of the business have decision making authority.  If manager managed, the owners are passive and do not have authority unless they have been elected to serve as a manager.

After a structure is determined, voting requirements need to be spelled out in the document.   Many businesses require that owners holding a majority of the ownership need to approve major business decisions, but this percentage can be higher or lower based on each situation.

Third, an operating agreement LLC should address distributions which is when an LLC is authorized to distribute profits of the business out to its members.  This typically requires a vote by the members.  However, some businesses will create provisional limitations when it is important for a business to conserve capital to grow or others will require mandatory distributions.

CONCLUSION

Above is only a summary of three major matters.  A standard document will cover many more matters and sometimes, with more complex businesses, this agreement can be hundreds of pages.  Because of its importance, this is one area where hiring a lawyer to help is worth the expense.

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LLC Agreements: Why You Cannot Do Business Without One

An LLC cannot conduct business for long without someone asking to review its LLC Agreement.  Avoid any delays or even losing customers or partners by having a proper agreement in place from inception.

This article describes common situations where this need for an llc agreements review arises:

Identity of Members

LLC Agreements establish the ownership of the business by evidencing who the members are. While ownership of a small business LLC is a private matter and not disclosed with the state, sometimes a business partner or supplier may have a legitimate need to see proof of ownership.  It is important to always keep your member information up to date.  This includes name, address and specific ownership details.

Confirmation of Contributions to LLC

In most circumstances, a person becomes an owner in a limited liability company by contributing money, property or services to the business in exchange for a membership interest.  Written LLC agreement signed by the members and the company are where the details and requirements for these contribution transactions are set forth.

In financial and strategic business activity or for accounting and tax purposes, there may be a need for other parties to see evidence of what was contributed to the business in exchange for ownership units.

Who Has LLC Authority

Another unknown for third parties are who within the organization has the real authority to do business with them. The official governance document will include management structure provisions and rules to ascertain this.

Transactional Authority

This is the most important third party purpose of LLC Agreements. Parties who want to do business with your limited liability company will sometimes want or need to see proof that the transaction they are entering into with the LLC is validly authorized.

The operating agreement will have specific sections outlining what formalities need to get completed for certain decisions and actions to be authorized.

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Sample Operating Agreement Pitfalls

The operating agreement provides the fundamental structure of an LLC business.  It is important when seeking out a sample operating agreement to make sure you find a proper one.  Beware of the many out there that are incomplete, improper or not protective enough for you and your business.

A SAMPLE OPERATING AGREEMENT SHOULD ADDRESS MAJOR BUSINESS MATTERS

When it comes to operating a business, there are several major issues to address including membership, voting, governance, tax, and dissolution.  Beware of sample operating agreements that are very short as they are likely not comprehensive enough to cover the necessary issues.

The operating agreement is also the primary governance document for operating the business. As a result, it serves as a user manual for the stakeholders in a business.  Because it serves a practical purpose, the language in the document must be easy to read and understand. Stay away from those sample documents that use too much legalese type language.

AVOID NEGOTIATED SAMPLE OPERATING AGREEMENT

Many times existing LLC operating agreements for other businesses are made available a sample ones.  The worst mistake you can make is using one of these negotiated documents for your business.

A final agreement for another business has likely been negotiated and customized.  If you use one as a starting point, you will not be in the best position to know or understand what the typical provisions are.  Even worse, there is a big risk you will be accepting provisions that are hurtful to you and your position and rights in the business.

The lesson here is to never use the final agreements of a different business.  When looking for a sample operating agreement, insist on using a model form document as a starting point.

LOOK FOR A DRAFTER THAT IS A LAWYER AND HAS LLC EXPERIENCE

The Internet is full of purported form agreements that clearly were never drafted by competent attorneys. These are the ones that would never be used by lawyers who practice in the area.

The problem is if you are not a lawyer, how can you tell?  In many cases you cannot, but by insisting on only using forms drafted by practicing business attorneys, you can reduce the changes of ending up with an improper form.

ANY SAMPLE OPERATING AGREEMENT NEEDS TO BE STUDIED AND CUSTOMIZED

Even if you find a proper and model agreement, this is just the starting point.  It needs to be customized for your particular business situation. 

While a single member LLC or a spouse owned company does not require the same level of detail in an operating agreement as others, there still needs to be enough governance requirements to evidence the LLC as a separate entity.  Without this, liability protection is put at risk.

For those business with multiple owners and investors, it is recommended you get a lawyer to help customize the business operating agreement.  However, if resources are limited, and you are the majority owner, make sure you control the decisions as this is one practical way to handle potential disputes later.

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