Avoid Costly Legal Mistakes When Drafting Your Colorado LLC Operating Agreement
What is an LLC Operating Agreement
A limited liability company operating agreement helps business owners to form the company with documentation about the business relationships between the partners. Without it, many business owners find themselves involved in costly litigation due to an abuse of power or simple violations of Colorado LLC laws.
For example, issues come up about expelling current business partners. How do you accomplish this task? Do you resort to the courts?
38 % of business owners start an LLC in Colorado without drafting the proper operating agreements and business contracts. Out of those 80% spend thousands of dollars defending a lawsuit when a business dispute arises.
These a but a few common issues where business owners can make costly mistakes when forming an LLC in Colorado.
- The importance of having a viable LLC Colorado operating agreement cannot be over emphasized.
- When business partners have disputes, the LLC operating agreement should be the first source.
- Relying on the Colorado LLC statute to resolve the problem may not get the results that you intended.
Why Do You Need a Business Operating Agreement?
In addition to LLC bylaws, having a Colorado LLC Operating Agreement is the central business document that will protect your legal rights in the event of litigation. Not only does it define business operations and governance of the business, it can also be used as a source to minimize legal disputes. Colorado LLC laws do not require you to draft or execute an operating agreement.
No wise business owner runs a business without one. If nothing else understand the when there is business litigation, your Colorado Limited Liability Company operating agreement will be legal proof to show that the business is a separate legal entity. Why is this important?
- This document can be a key factor in protecting personal assets from judgment.
Personal liability protection: Your Colorado operating agreement and LLC bylaws can be critical when the issue of protecting your assets from personal liability is at issue. It can also be a key factor in protecting personal assets from judgment. Furthermore, LLCs without an Operating Agreement will be governed by default rules in the Colorado Limited Liability Company Act.
- The results may not be favorable if you have to resort to the statute.
Can you assign your rights under your limited liability company operating agreement?
In Condo v. Conners, three people were forming an LLC in Colorado and signed an operating agreement that said: “a member shall not sell, assign, pledge or otherwise transfer any portion of its interest in [the Company] without the prior written approval of all of the Members”.
After getting a divorce, one of the LLC members got a divorce and then tried to assign his membership interest to his ex-wife in the settlement agreement. The existing LLC members did not consent to the assignment per the terms of you Colorado LLC operating agreement. This court handed down a brutal outcome in its decision.
The Court ruled that under Colorado law, an “ ‘[o]perating agreement’ means any agreement of all of the members as to the affairs of a limited liability company and the conduct of its business.” § 7–80–102(11)(a), C.R.S. (2011). An LLC’s operating agreement serves as a multilateral contract among the members, who agree that the exercise of their membership and management rights and duties will be bound by the terms set forth. 51 Am.Jur.2d Limited Liability Companies § 4 (2011); see also In re Seneca Invs. LLC, 970 A.2d 259, 261 (Del.Ch.2008)..Thus, the Agreement itself is framed in terms of a multilateral agreement among the members and it is appropriate to interpret it in light of prevailing principles of contract law.
Each document should be carefully drafted and address other financial obligations and authority, plus the day-to-day operations and levels of authority.
Profits and Shares: Your partnership agreement contract should also cover rights and responsibilities level of liability when it comes to profits and shares, and company debts. The basic agreement should also cover partnership terminations.
Reasons Why You Need an Operating Agreement
Although some states do not require you to have a basic LLC operating agreement form, creating an LLC without one can be dangerous. Even if you are the only business owner, LLC agreement for single members is highly encouraged. You still want to consider a court’s perception of following wise business practices.
Like a business partnership agreement, operating agreements for LLC companies in Colorado play a large role in protecting your from personal liability and protects you from defaulting to the Colorado LLC Act to resolve business disputes. Examples of liabilities include company debts and amounts of money owed to creditors.
Contents of LLC bylaws and Your Colorado Limited Liability Operating Agreement
Besides having Colorado corporate bylaws or LLC operating agreement, you want to make sure that your Colorado agreement at least covers the basic requirements.
It is always wise to have a professional to draft or review your business contracts. The following are only the basic requirements in Colorado.
- Percentage of members’ ownership
- Each member’s voting rights and responsibilities
- The Powers and duties of members and managers during business operations
- How profits and losses are handled
- LLC Holding meetings
- Buyout and buy-sell rules (procedures for transferring interest when members chose or in the event of death).
LLC Documents and Personal Liability Protection
When third parties seek to pursue company debt or enforce business laws to their advantage, having a Colorado limited liability company operating agreement and other legal documents can play a huge role in protecting you from personal exposure.
- Colorado courts tend to respect your personal legal protections if you have an operating agreement in place.
Often, a number of damages may not be available in the LLC’s business assets. Without this LLC company contract, you can become fertile ground for personal exposure.
For help drafting your business contracts and Colorado LLC bylaws, LLC operating agreement for single member, call our Denver small business lawyers at 1-866-601-5518 for a FREE Initial Consultation.