The ABCs of LLCs: How to Start Your Small Business Today
What is an LLC?
A limited liability company (LLC) is a business structure in the United States that limits the liability of its members. This means that normally, the individual members will not be personally responsible for the legal responsibilities of the company itself. This requires the members not to intertwine their personal expenses and business expenses, meaning the members will have to create a separate bank account and get a separate credit/debit card for the business.
LLCs combine the characteristics of a corporation with those of a partnership or sole proprietorship. Under Colorado state LLC laws, the company must register with the state, file annual paperwork, and pay annual fees in order to keep the LLC title with the state.
How do I create an LLC?
To create an LLC, you must file Articles of Organization with the Colorado Secretary of State and pay a $50 fee. In some circumstances you may have additional steps to obtain the LLC title for your entity. First, if you plan for your LLC to have more than one member then you must obtain a free Employee Identification Number (EIN) from the IRS.
Second, you may have to register with the Colorado Department of Revenue if you have employees or plan to sell merchandise. Furthermore, depending on the type of business you are planning and its location, you may have to register with the local government to obtain a business license.
What are the Articles of Organization and what is its purpose?
The Articles of Organization is a document that you must complete and file with the state to start an LLC. The documents require you to provide information about both the company and the company’s managers to the state before you can register your company as an LLC. The Secretary of State’s office provides instructions as well as a sample document.
Most importantly, the Articles of Organization requires you to provide your name and address, the name of the LLC and the LLCs address, the management or business structure of the LLC, and the name and address of the LLC’s registered agent. Some problems can emerge with the name of the LLC, the management type, and picking the correct registered agent.
First, the name of your company must be unique so you will have to come up with a name that is not already in use in the state. You can check the status of a potential company name on the Secretary of State’s website.
Second, you must describe the management type. The state will provide for two options when it comes to management types: a member managed company and a manager managed company. Member managed companies are managed by the members (meaning by the owners), putting the members in charge of running and making decisions for the company. Member managers will also be agents of the company. This allows the members to take actions, such as entering contracts or firing employees, on behalf of the company.
In contrast, manager managed company means that you (the owners) do not plan to take part in the operations of the company and will instead designate a manager to run the company. In manager managed companies, the owners will not be considered agents of the company and will not have the binding authority on the company’s actions. Instead, this ability will be granted to those that have been listed as the manager.
Lastly, you must designate a registered agent for the company. This person may be a:
Full-time Colorado Resident;
Business entity with its primary place of business located in Colorado; or,
Foreign entity registered to do business in the state and that regularly does so.
What is an Operating Agreement?
Operating agreements are contracts that describe the layout of the company’s internal affairs, the interactions between the LLC and its members and managers, who has control of the company, and help to distinguish the business from the owner for the purposes of protecting the owner from liability. While not required to do so by law, operating agreements are highly encouraged. If an entity does not have an operating agreement in place, its internal affairs will be governed by the Colorado Limited Liability Company Act. If you decide to create an operating agreement, you must file it with the Secretary of State separately from the Articles of Organization.
What is a buy-sell agreement, and why do I need one in my LLC?
A buy-sell agreement can be added to the operating agreement. Buy-sell agreements allow you to decide how shares of the company will be split up should a member get a divorce, die, or retire. Buy-sell agreements should address three main topics. First, they should specify what happens to the shares once that member no longer has control over them. Whether they are split by the remaining members, open to purchase from the public, or go to the member’s family is up to you to decide. Second, the agreement should address the circumstances that would prompt the buyout. Third, the agreement should address the price of each member's interest in the company.
You should have a buy-sell agreement for your LLC especially if there is more than one member. In the case of a member dying, divorcing, or retiring, a buy-sell agreement will ensure that the shares of the company will not be sold to a party who may have different interests in the company than you and the other members. For example, if a member were to die and you didn’t have a buy-sell agreement in place, the shares would go to that member’s heirs who could then attempt to run the company in a way that is not approved by the other members or sell the shares on the open market. Buy-sell agreements stop this from happening and allow you to have control over the future of your business shares.
What do I do after I create an LLC?
After you create the LLC, you must file a “periodic report” with the Secretary of State every year. Your LLC will have a three-month window to file the periodic report that will start three months prior to the month when the LLC was first created, and the period closes the beginning of the month when the LLC was first created. For example, this means if an LLC was created on December 30th, then the company would have September, October, and November to file this report with the Secretary of State before the December 1st deadline. You must then pay a $10 fee to file the report.
You can have notifications emailed to you from the Secretary of State’s office by signing up on their webpage. This will notify you about the deadline to file your periodic report. If the deadline is missed, the LLC will be “noncompliant” and you will have 30 days to cure the failure by filing your report and paying a $40 fee.
If you fail to file the report while your business is “noncompliant,” then your business will become “delinquent.” A status of delinquent indicates that the documents to keep the company in statutory compliance were not filed. Your business would then have 400 days to cure the delinquency with the Secretary of State’s office and pay a $100 fee. If you fail to file the documents in the 400 days, your LLCs name will become open to use by new LLCs.
If you live in Colorado and are starting a business, have already formed an LLC, or have any questions about limited liability companies and if they are right for you, fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.