Why Every LLC in Colorado Needs More Than Just Articles of Organization

Forming a limited liability company (LLC) in Colorado is relatively easy. You file Articles of Organization with the Secretary of State, pay a small fee, and you’re officially in business. But many small business owners stop there, and that’s where costly problems can begin.

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While Colorado law doesn’t require you to have a written operating agreement, skipping this crucial step can leave your business exposed to internal disputes, legal uncertainty, and even litigation. An operating agreement is more than a formality, it’s the backbone of how your LLC functions, makes decisions, and protects its members.

In this post, we’ll explain why your LLC needs an operating agreement, what it should include, and what could go wrong if you don’t have one in place.

What Is an Operating Agreement?

An operating agreement is a legal document that outlines how your LLC will be managed. It governs the relationships between members (owners), defines their responsibilities, and sets rules for important matters such as profit distribution, voting rights, and dispute resolution.

Think of it as a prenuptial agreement for your business; it helps prevent misunderstandings, protects everyone involved, and ensures that the business runs smoothly even if circumstances change.

Key Provisions to Include in Your Operating Agreement

A strong operating agreement should be tailored to your business’s unique needs. That said, there are several essential elements that every operating agreement should contain:

Member Roles and Responsibilities: Clearly define who the members are and what roles they play in daily operations. If you have a manager-managed LLC, specify who the managers are and what authority they hold.
Capital Contributions: Outline each member’s initial investment and clarify whether additional contributions may be required in the future.
Profit and Loss Distribution: State how profits and losses will be divided among members. This doesn’t always have to follow ownership percentages, but it must be explicitly agreed upon.
Voting Rights: Specify how voting will work. Do all members have equal votes, or is voting power tied to ownership interest? Address what types of decisions require a vote.
Decision-Making Procedures: Set rules for how the LLC will make both routine and major decisions. Will decisions require a simple majority or unanimous consent?
Membership Changes: Include procedures for adding new members, removing existing members, or transferring ownership interests. This is critical for succession planning and avoiding disputes.
Dissolution Terms: Detail what will happen if the LLC needs to shut down, how assets will be distributed, how debts will be handled, and who’s responsible for wrapping things up.
Dispute Resolution: Define how disagreements between members will be handled, whether through mediation, arbitration, or court. Clear processes help prevent business-ending conflicts.

Other optional but useful clauses include non-compete agreements, confidentiality terms, and guidelines for member meetings or annual reviews. If your LLC is in a specialized industry (e.g., tech, real estate, or professional services), your agreement may need additional provisions to address regulatory or operational concerns.

What Happens If You Don’t Have an Operating Agreement?

If your LLC doesn’t have an operating agreement, the business will default to the rules established by Colorado’s Limited Liability Company Act. While this law provides a basic framework, it’s a one-size-fits-all approach, and it often doesn’t reflect the intentions or goals of your business.

Here’s what can go wrong when you operate without a formal agreement:

Disputes Over Ownership and Control: Without a written agreement, verbal agreements and assumptions can quickly lead to confusion. Who’s in charge of daily operations? What happens if a member wants out? The answers may not be clear.
Unequal Effort and Compensation: If one member works full-time and another contributes capital but not labor, there could be resentment unless contributions and expectations are clearly spelled out.
No Exit Strategy: Members leaving or passing away can cause chaos. Without rules for buyouts or succession, you may end up in court, or worse, stuck with a member you can’t work with.
Involuntary Dissolution: In the absence of an agreement, major disagreements can lead to legal actions that dissolve the LLC entirely, even if some members want to keep it going.
Loss of Liability Protection: Courts are less likely to respect the LLC’s liability shield if there’s no formal operating agreement and you’re operating more like a partnership.

Simply put, not having an operating agreement leaves your business vulnerable. It also gives you less control over how decisions are made, how profits are shared, and how conflicts are resolved.

Do Single-Member LLCs Need Operating Agreements?

Yes. Even if you’re the only member of your LLC, an operating agreement is still valuable. It helps prove to banks, investors, and courts that your business is legitimate and separate from your personal finances. This separation is critical to maintaining your liability protection and avoiding “piercing the corporate veil.”

In addition, a written agreement clarifies what happens if you bring on a partner, sell the business, or become incapacitated. It’s a smart legal foundation, even for solo entrepreneurs.

Contact Lohf Shaiman Jacobs Today for Legal Representation

Your operating agreement isn’t just a legal document; it’s a tool for building trust, minimizing risk, and running your business with clarity and confidence. Taking the time to create one (or improve the one you already have) can save you from major legal headaches in the future.

At Lohf Shaiman Jacobs, we help entrepreneurs and business owners in Denver draft customized operating agreements that meet their exact needs and future goals. Whether you’re starting fresh or reviewing an existing document, we’re here to ensure your business is legally protected from the start.

Contact us today to schedule a consultation and take the next step toward building a stronger, more secure foundation for your business.