In today's litigious society, the limited liability protection offered by a LLC provides the entrepreneur an added layer of protection between their business and personal assets when they are sued for an amount above and beyond their insurance coverage (which frequently happens in the current marketplace). The following points should be used as indicators that your business should consider a legal entity formation in order to limit your liability risk. Legal formation is recommended if any of the following apply to your business:
An artist working from home (such as a photographer or painter) with no employees, no storefront, and very few personal assets may not need the liability protection. However, as their circumstances change and their business expands, liability protection would be a good idea. Furthermore, if the artist wanted to enhance their professional image, a legal entity can provide a small entrepreneur with more credibility in the marketplace.
The Articles of Organization is the document filed with the Secretary of State that establishes your entity in Colorado, as is required by law.
An Operating Agreement is a legally enforceable contract that governs relations between the members of the LLC.
The LLC Articles of Organization must been filed with Colorado Secretary of State. The Operating Agreement, which is an internal business agreement, does not need to be filed with any state or local government agency.
There is no ownership of stock in a LLC. Owners of a LLC own membership interests in the business.
No. The LLC structure can be utilized by a small business, a medium sized business, or a large business. Considering that the LLC only requires one person for formation, the LLC is particularly attractive to the small business owner who desires to operate as a single member entity. On the other hand, many large businesses choose to operate as LLCs.
At this point Colorado is not one of the states that allows Series LLCs. Although, an out of state resident that invests in Colorado real estate may want to consider creating a Series LLC in their home state that owns their Colorado real estate. A Series LLC may be a good choice for the cost conscious real estate investor who desires limited liability protection for multiple properties without having to pay multiple annual fees to the state. For more information please see "Series LLC" herein.
A business name must be distinguishable from any other active business name in Colorado the Secretary of State’s records. Buell & Ezell, LLP, will perform a business name availability search for you on the Secretary of State’s website before filing the Articles of Organization. The LLC name must contain the words “Limited Liability Company”, “Ltd. Liability Company”, “Limited Liability Co.”, “Ltd. Liability Co.”, “Limited”, or the abbreviations “LLC”, “L.L.C.”, or “Ltd.”.
A person may reserve the exclusive use of a LLC name, by filing a Statement of Reservation of Name application with the Colorado Secretary of State. If the proposed LLC name is available, the name is reserved for the applicant’s exclusive use for a period of 120 days. The application is available at: 4228.http://www.sos.state.co.us/biz/FileDocNameAvailCriteria.do?transTyp=RS
Yes. A LLC may elect to transact business under an trade name, as long as the name is distinguishable from any other active trade name. Trade names are also known as "fictitious" or "doing business as" (DBA) names. The right to use a LLC trade name is effective as long as the business is in good standing with the Colorado Secretary of State. A trade name might be particularly useful for a restaurant which desires to operate as a LLC but does not want "LLC" to appear on the menu and marketing materials. A trade name application provided by the Secretary of State may be found at the following website: (http://www.sos.state.co.us/pubs/business/helpFiles/TRDNM_RE_HELP.html).
For most Colorado entrepreneurs, the Centennial state is the best choice. If the business will be physically located in Colorado and primarily transact business in Colorado, the home state typically makes the most sense. Years ago, when the LLC was fairly new, states with strong LLC statutes on the books such as Delaware, Nevada, and Wyoming were good choices. However, considering the strength and liability protection offered by the Colorado Limited Liability Act, entrepreneurs today generally favor legal formation in Colorado. If the company has substantial operations outside of Colorado, a CPA should be consulted regarding complex taxation issues which could favor formation in another jurisdiction.
States universally require a "foreign LLC" (one not incorporated in that state) to "qualify" before "doing business" in such state. Qualification usually consists of the filing of documents, payment of a fee, and appointment of a resident agent for service of process. If the LLC elects to do business in another state, it will be required to qualify in that particular state. Failure to qualify may result in financial penalties as well as the inability to bring suit in the courts of the state with respect to acts and transactions in the state during the period of the violation. Specific exceptions may also apply. Each particular state should be contacted for additional information.
A LLC member can be an individual who is a U.S. citizen, a foreign individual, or another entity (trust, corporation, partnership, or another LLC). The LLC can have an unlimited number of members.
Only one member is needed to form a LLC. For more information see "Single Member LLC" herein.
If only one spouse owns all of the membership interests in the LLC, then the entity is considered a single member LLC. If each spouse owns membership interests, then the entity is considered a multi-member LLC (see "Single Member LLC" herein for more discussion). Therefore, each spouse would own their interests separately and they would be treated as partners for tax purposes. A partnership tax return would need to be filed in addition to the spouse’s personal tax returns. However, your CPA can typically prepare the extra tax return for a minimal fee. Please keep in mind that an added member-spouse must be treated as a legitimate member of the LLC, meaning they must have a right to share in the profits and losses of the LLC. Also, a 1% owner may not be viewed as legitimate. It is unclear what % is necessary for a legitimate owner, however, a very small % of ownership will not suffice. Furthermore, if the wife owns more than 51% of the LLC, minority owned business loans may be available. Of course, personal issues within the marital relationship would also need to be considered when making such a decision.
Furthermore, having a two-tiered structure for real estate investment provides the entrepreneur with even greater liability protection. This simply means that one LLC (or multiple LLCs depending on the number of properties owned) is created to hold title to the real estate as the "Holding Company" and anther LLC is formed to manage the property as the "Management Company". The Holding Company simply holds title to (owns) the real estate (See "What steps can be taken to maintain the corporate veil of liability protection; Re-Title Property into the LLC). The Management Company is responsible for managing the property, marketing the property, performing maintenance and repairs, paying taxes, collecting rent, and dealing with tenants. A property management contract between the Holding Company and the Management Company would specify the relationship between the two LLCs. Having a two-tiered structure in place simply creates an additional barrier between your personal and business/investment assets. The advantages would be increased liability protection and the disadvantages would include multiple LLC filing fees, multiple LLC annual fees, and increased tax preparation and accounting costs.
Please Be Advised: The use or non-use of multiple LLC entities should be fully discussed with your Certified Public Accountant. The tax consequences of using multiple LLCs may be favorable or unfavorable depending on the details of your situation.
For a real estate investment, a two-tiered structure as discussed above would provide the most liability protection. One LLC would be formed as the Holding Company to hold title the property and another LLC would be formed as the Management Company to manage the property. Again, increased liability protection advantages should be weighed against the disadvantages of multiple LLC filing fees, multiple LLC annual fees, and increased tax preparation and accounting costs.
A Colorado LLC may choose one of two forms of government: (1) member-managed, in which case the management of the LLC will be vested in its members; and (2) manager-managed, in which case the management of the LLC will be vested in a manager or managers.
In a member-managed LLC, the members have equal rights in the operation and management of the company. Therefore, the members make all of the business decisions typically by a majority vote of the membership interests owned (unless some other percentage is specified in the Operating Agreement). This form of governance is similar to a typical general partnership. The member-managed form is recommended unless the members are going to be passive regarding management decisions and will not be involved with the day to day operations of the business. Due to its ease of use, most LLCs choose the member-managed governance structure.
In a manager-managed LLC, the members give the manager or managers the authority to make management decisions. The manager(s) may be, but are not required to be members of the LLC. All matters related to the business are exclusively decided by the manger(s) who is appointed, elected, removed, or replaced, by a vote of the members. This form may be used when the members will not play an active role in the company and desire for a manager or managers to operate the business on a day to day basis.
Note: the same exceptions apply to corporations as well
Limited Liability protection is one of the primary advantages of the LLC. However, there are exceptions to limited liability which could cause an LLC member to be held personally liable for the debts and obligations of the company, such as:
As long as the LLC is properly formed and operated, the members will not be personally liable for the LLC's debts, obligations, and liabilities. In other words, if the LLC's debts exceed the value of the LLC's assets, the LLC's creditors should not be entitled to seek repayment from the members' personal assets. The exceptions above do apply, however, the LLC liability shield generally protects the individual member.
Yes. Any prudent business owner must carry business insurance to protect his/her business against fire, theft, flood, and other losses. Many types of insurance exist including: property insurance, general liability insurance, business interruption insurance, worker’s compensation, products liability insurance, internet business insurance, malpractice insurance, group health, life, disability insurance, "keyman" insurance, and others. The most common insurance mistake is not carrying enough liability coverage. It is unwise to believe that a judgment will not hurt you because your business has little revenue or assets. At a minimum, you will need property insurance and liability insurance (including motor vehicle insurance on all business vehicles). If you have a business loan, your banker also may require "keyman" insurance, which protects key individuals in the business.
Members of a LLC contribute capital to the LLC in exchange for Membership Interests in the company. Members can contribute cash, property, or services (rarely) to the capital account. The contribution does not need to be a large sum, but it should be enough to pay the initial start up expenses of the LLC. For some LLCs $100 per member would be a sufficient capital contribution, whereas a nominal fee of $1 would be insufficient. Please be advised that inadequate capitalization could later become a factor in disregarding the LLC entity and finding the members personally liable for the debts, obligations, or legal judgments of the company (under the piercing the corporate veil theory). Therefore, LLCs with inherent risks or liabilities should have greater capital contributions. Typically, the amount of a member’s capital contribution determines the members proportionate voting and financial rights unless otherwise specified in the Operating Agreement. For example, a member who contributes 50% of total LLC capital contributions will have a 50% stake in the financial rights and a 50% stake in the voting rights of the LLC. Capital accounts do not require a separate bank account. Capital accounts are tracked and maintained in the accounting records of the LLC. The LLC’s CPA will keep a record of each member’s capital account. On the dissolution of the LLC, capital accounts are distributed back to the members in order of priority after LLC debts have been paid.
A security is an investment in a common enterprise with the expectation of profit to be made through the management and control of others. A single member LLC that is not going to seek outside investors is not subject to securities laws. Also, a multi-member LLC where all of the members actively participate in the business is not generally subject to securities laws. In a multi-member LLC where one or more of the owners does not actively participate in the management of the business, the LLC membership interests may be classified as a security. If ownership interests are considered securities, registration with the state and the SEC are required, unless an exemption applies. Most small business LLCs fall under one of the exemptions. An "Intrastate Offering Exemption" applies where the business is formed in the state where the securities are being offered, the LLC carries out a significant amount of business in that state, and offers and sales of membership interests are only made to residents of that state. A "Private Offering Exemption" applies where the purchasers of the securities have enough knowledge and experience in finance and business matters to evaluate the risks and merits of the investment (i.e., they are sophisticated investors) or they are able to bear the investments economic risk, have access to the type of information normally provided by a prospectus, agree to not resell or distribute the securities to the public, and no form of public solicitation or general advertising is used in connection with the offering. For more information on securities laws, please visit the following website: (http://www.sec.gov).
Attorney’s fees you pay in connection with starting up your business are typically tax deductible. Please consult with your CPA for more information.
A LLC must have a registered agent and registered office in the state of Colorado. The registered office must be a physical address in the State of Colorado (no P.O. Boxes). A Registered Agent is a person or legal entity in Colorado that is designated to receive service of process (a document that initiates a lawsuit) and documents on behalf of the business. Failure to respond in a timely manner could result in a default judgment against your LLC. For your convenience, we provides annual registered agent service. Therefore, if your company is sued, we will receive service of process on behalf of your business, potentially saving you the time and embarrassment of being served at your principal office and/or storefront. We will promptly forward the service of process to your business without sharing any confidential information to third parties and, if possible, help you identify a competent local attorney to handle your litigation needs. Registered Agent fees are $200.00 per year which includes up to 10 pieces of mail forwarded to your principal office address. However, the first year of registered agent service is provided for free with each LLC formed with Buell & Ezell, PLLC. Thereafter, the LLC will be provided with a letter annually from us regarding the continuance of such services. Registered Agent services may be cancelled by the LLC at any time.
Yes. All LLCs must file an annual report to the Colorado Secretary of State in order to remain in good standing. Failure to adhere to these requirements could result in delinquent staus for the business. For an additional fee of $200.00 annually, we will file your periodic report for you so that you can focus your efforts on running your business. If periodic report service is requested, we will send you a letter/agreement each year which gives you the option to renew the service. If periodic report service is desired, your business will simply sign the letter/agreement and return it to our office with the $200.00 service charge and the appropriate annual state filing fee ($10). We will then file the annual report on behalf of your business.
An FEIN will be necessary for your new entity. With an FEIN your bank should allow
you to open a bank account for the company. You can obtain an FEIN on the IRS
website by completing and submitting a Form SS-4 application at the following
The instructions can be found at:
The LLC Post Formation Guide is a comprehensive tool which guides you through such issues as: government regulations, tax regulations, how to operate a Colorado Limited Liability Company in order to maintain the corporate veil, and other resources to help your business reach its potential. A LLC Post Formation Guide is provided to clients at no additional charge.
Every co-owned business needs a buy-sell, or buyout, agreement the moment the business is formed or as soon after that as possible. A buy-sell agreement is a binding contract between co-owners that controls when owners can sell their interest, who can buy an owner’s interest, and what price will be paid. These agreements typically come into play when an owner retires, goes bankrupt, becomes disabled, gets divorced, dies, or when there is a disagreement amongst the members. The best time to create a buy-sell agreement is now, when all parties are healthy and in agreement. When one of the events above occurs absent a buy-sell agreement, the parties will likely spend significantly more money hiring an attorney on day one then they will in drafting a carefully crafted buy-sell agreement today.
We are able to provide assistance with the following business legal services: