Colorado LLC Operating Agreement: Why and How to Get One

Do I need an operating agreement in Colorado?

Legally speaking, LLCs in Colorado are not required to have an operating agreement. However, there’s a whole host of reasons for drafting and adopting one for your business, as it can afford certain legal, financial, and administrative benefits to an LLC.

Once signed, an operating agreement serves as a legally binding contract between the LLC members and the business itself—it isn’t required, but once established, it is legally enforceable.

Benefits of having a CO operating agreement

An LLC structure offers a wide variety of benefits to your business, and the operating agreement will outline many of them explicitly.

• Legal protection. One of the biggest benefits of organizing your business as an LLC is the distinct legal separation between the business’ assets or obligations and the personal liability of the business owners. A well-written operating agreement includes this separation explicitly, and shows exactly how these assets and obligations are handled independent of each other.
• Clarification of verbal agreements. Oftentimes, members of an LLC will have some type of relationship with each other beyond simply shared stakes in a business. With relationships like this, it can be tempting to rely on a handshake and shared goodwill to keep everyone on the same page. From a legal and financial standpoint, though, it’s best to codify how these sorts of agreements will work in a contract. When two or more members disagree on how to proceed, an operating agreement can be an invaluable resource for conflict resolution. 
• Operational guidance. Certain business decisions require a high level of consistency and should be goal-oriented for the mutual benefit of the business’ members. A well-drafted operating agreement will provide clarity when these sorts of decisions must be made, ensuring the company is staying true to its purpose through times of change.
• Banking and financial transactions. Just because the state does not require LLCs to draft an operating agreement doesn’t mean other institutions won’t. In many cases, banks will require an LLC to provide an operating agreement before they can open a business account.

Key components of a Colorado LLC operating agreement

An operating agreement should cover all the important information regarding the organization and operations of your LLC, from what your business actually does to how its finances are run and everything in between. Some of the most important details to include are:

• Business activities. Your operating agreement should clearly and concisely describe the primary purpose of your business, including goods or services offered, as well as goods or services offered by your business and any lesser services provided to customers either on their own or in conjunction with the primary purpose of the business.
• Transferable interest. Sometimes, a member will leave an LLC, a member will die or no longer be able to fulfill their duties, or a new member may wish to join. If and how a member’s interest in the business can be transferred to a new member should be clearly explained in your operating agreement in order to make the transition as smooth as possible.
• Decision-making processes. Certain members of your LLC may have more weight behind their vote when making important business decisions, and how this weight is determined may vary on a case-by-case basis. Your operating agreement should detail how these votes are weighted and what your decision-making process looks like.
• Contributions and distributions. Members of an LLC typically invest in the company from the outset and then make additional contributions on a regular or as-needed basis. However your LLC’s contribution schedule is structured, it should be included in the agreement. Likewise, the distribution of profits should be codified for all members.
• Management and administrative matters. The executive structure of the business is typically included in an LLC’s operating agreement, along with administrative details relating to bookkeeping and accounting. Details about the business and its members, like its employer identification number (EIN), registered agent, and names and addresses for the business and LLC members should also be included at this point in the document.
• Dissolution. Most LLCs have to eventually close down, and it’s important to have a structure in place to follow in the event the company can’t continue operating. Detailing the distribution of remaining assets and any other clean-up that needs to occur once the business closes its doors can make an often-difficult time that much easier. 

How to create a Colorado LLC operating agreement

Developing a functional operating agreement for your Colorado LLC is a five-step process which can vary significantly in its difficulty depending on the size and structure of your business.

1. Gather member information

Your operating agreement should outline all of the LLC’s members and their contributions to the business. This information should include names and addresses for LLC owners as well as their member responsibilities, their initial capital contributions and ownership percentages, as well as the structure of their future contributions if it differs from that of other members.

2. Decide on the management structure

Some LLCs choose to leave management decisions up to all of the members equally, using a structure known as a “member-managed” LLC. This type of structure typically suits LLCs that have a smaller number of members and businesses where all of the members are equally hands-on with the business’s operations.

Other LLCs use a “manager-managed” structure, in which certain LLC members or a third party handles the day-to-day operations of the business while other members maintain a more hands-off approach, contributing to the company instead through financial support or other means.

Whichever form of management your business chooses, it’s important to articulate it in the operating agreement.

3. Draft the agreement

Depending on how your business is structured and how large it is, you may be able to create an initial draft of an operating agreement on your own using a Colorado LLC operating agreement template. Other LLCs might choose to seek legal assistance in creating an agreement, either due to complexity or simply for convenience.

LegalZoom offers operating agreement assistance in either case, either through easy-to-use templates or in-depth reviews from our legal team to ensure your document will serve your business well going forward.

4. Review and revise

Once a draft has been created, it’s important to allow members time to review it and ensure they’re on board with its terms. An LLC is an inherently collaborative business structure, and fostering that collaboration is key in the early stages of the business to ensure your LLC gets off to a great start.

5. Sign and distribute

After all of your revisions have been made and approved by the members, all that’s left to do is sign off on the agreement. Remember, while it isn’t required by law in Colorado, an operating agreement is legally binding once members sign it. Take your time in reviewing its terms and be absolutely certain it reflects your role and the role of other members in the LLC before finalizing and approving the document.

Get a Colorado LLC operating agreement with LegalZoom 

While certain simple business structures may not require outside help, one option for LLC owners is to work with an experienced legal team to draft an operating agreement. This document will govern many high-level decisions for your company, and it’s important to get it right from the get-go.

Our most straightforward operating agreement service makes things as simple as possible for members—just provide some information about your business and we’ll handle the paperwork and draft your operating agreement for you. From there, it’s as simple as sharing the document with the other members of your LLC, making revisions, and signing off.

FAQs 

Does a single-member LLC in Colorado need an operating agreement?

As with any Colorado LLC, single-member organizations are not required to have an operating agreement, but it’s still a good idea to draft one. One of the biggest benefits of having an operating agreement, whether you’re working solo or the company employs more than one person, is the clearly established separation between business assets or liabilities and personal ones. An operating agreement makes this distinction crystal clear, which can help avoid legal issues in the future.

Can I change my operating agreement after forming my LLC?

Typically, yes, but the change must be approved by all the members of the LLC and must conform to the relevant Colorado state statutes governing operating agreements. Because it can be difficult to navigate the process of changing your LLC’s existing agreement, it’s highly recommended that you thoroughly review and revise the document when it’s originally drafted to reduce the need for these sorts of amendments.

Does a Colorado operating agreement need to be filed with the government?

There is no agency or department in the Colorado state government responsible for keeping track of business’ operating agreements, so it’s not necessary (or possible) to file the document with the government. Instead, it should be maintained by your business, and a copy should be given to each member for reference or review whenever necessary.