- CO LLCs
- CO LLC: Getting Started
- Colorado Entity Comparison
- CO LLC: Advantages
- CO Entity Types & Descriptions
- CO LLC: Key Terms
- CO LLC: FAQ
FREQUENTLY ASKED QUESTIONS : LLC FAQs
- Q Is RockyMountainStartUp™.com a Good Fit For Me?
- Q When Should I Consider Forming a Legal Entity?
- Q What Is a Good Example of a Business That May Not Need a Legal Entity?
- Q What are the Articles of Organization?
- Q What is an Operating Agreement?
- Q What Are the Typical Provisions Included In an LLC Operating Agreement?
- Q Does my Colorado LLC Have to be Recorded Anywhere?
- Q Does a Person Own Stock in a LLC?
- Q Is the LLC Only for the Small Business?
- Q Do I Need a Series LLC?
- Q What Should I Name My LLC?
- Q How Can I Reserve a LLC Name Prior to Formation?
- Q Can My Colorado LLC Operate Under A Trade Name?
- Q Should I Form My LLC In Colorado or Some Other State?
- Q What Are the Requirements for Doing Business In States Other Than Colorado?
- Q How Long Will the LLC Formation Process Take?
- Q Who Can Be A Member of a LLC?
- Q How Many People Are Needed To Form a LLC?
- Q When Husband and Wife Own a LLC, Is a Multi-Member Colorado LLC Created?
- Q If I Own More Than One Business or I Own More Than One Piece of Real Estate, Do I Need Multiple LLCs?
- Q Should I Form Multiple LLCs For a Single Property?
- Q What Type of Management Structure is Best for My LLC?
- Q What Are the Exceptions to Limited Liability Protection?
- Q What Steps Can Be Taken To Maintain the “Corporate Veil” of Liability Protection?
- Q Do I still need Business Insurance to Protect Me?
- Q What is a Capital Account?
- Q Does My Colorado LLC Need to Register with the U.S. Securities and Exchange Commission (SEC)?
- Q Are the Legal Fees for My Business Start-Up Tax Deductible?
- Q Does RockyMountainStartUp™.com Offer Registered Agent Service?
- Q Does RockyMountainStartUp™.com Offer Periodic Reporting Services?
- Q Does My Colorado LLC Need a Federal Employer Identification Number?
- Q What Is Included In the LLC Post Formation Guide?
- Q Does My New Colorado LLC Need a Buy-Sell Agreement?
- Q What Advanced Services Does RockyMountainStartUp™.com Provide In Addition to Standard LLC Formation and State Trademark Registration?
Is RockyMountainStartUp™.com a Good Fit For Me?
For the majority of Colorado entrepreneurs, the answer is yes. Our system is designed to provide professional and efficient LLC formation for various types of businesses. Our system may not be the proper forum in the following circumstances:
- Your business name will include the word “mortgage,” “bank,” “banks,” “banking,” “credit union,” or “trust”. In such cases, written approval must be first obtained from the Colorado Division of Financial Services before documents can be accepted for filing with the Secretary of State. Our system is not designed to form entities if your name will include any of the aforementioned words.
- If your LLC will include more than six (6) members, our system is not designed to provide this service. However, if you are interested in speaking to us about creating a complex LLC, we are able to provide such services through our separate law firm. For more information, please e-mail advancedservices@RockyMountainStartUp.com.
- If you desire a Series LLC (SLLC) as described herein, our system is not designed to provide this service. However, if you are interested in speaking to us about creating a Series LLC, we are able to provide such services through our separate law firm. For more information, please e-mail advancedservices@RockyMountainStartUp.com.
- If you desire to set up a non-profit or charitable business, RockyMountainStartUp™.com is not the proper forum for your business set up.
- If your business will be operating a cemetery, RockyMountainStartUp™.com is not the proper forum for your business set up. Cemeteries are subject to complex state law requirements.
- If you will be operating a liquor store or a marijuana dispensary, RockyMountainStartUp™.com is not the proper forum for your business set up. Complex state law requirements will apply to your business, and our system is not designed to provide the start up services necessary to open a liquor store or a marijuana dispensary.
Of course, any entity formation decisions should be made in conjunction with your CPA or tax professional.
When Should I Consider Forming a Legal Entity?
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:
- You are concerned about personal exposure: Sole Proprietorships and Partnerships expose themselves to unlimited legal liability regarding the debts and obligations of the business. The LLC separates the owner’s personal assets from their business assets and obligations.
- You have or will have a partner: Partnerships expose themselves to unlimited legal liability for the debts and obligations of the business. Furthermore, each partner is personally responsible for the acts of other partners who act in the name of the business. Before taking on a partner, or if you are already in a partnership, a legal entity with limited liability protection is highly recommended.
- You have or will have employees: Employees acting on behalf of your business increase your liability exposure, especially if that employee interacts with the public or drives an automobile while acting in the scope of the business. Even if you only have one employee, entity formation is recommended.
- You will be signing contracts:Before taking on significant risks or obligations under a contract, a legal entity is recommended.
- You will be raising capital for your business: In order to limit their liability exposure, investors will likely be seeking ownership in the form of stock (Corporations) or membership interests (LLC).
- The business has inherent risks: If there are any inherent risks associated with the business, liability protection is recommended. A few examples may include: mining, construction, blasting, tree removal, medical procedures, and where vehicles of any kind (including automobiles) will be used within the scope of the business.
- You have a storefront or the public will be invited to your office: Inviting the public into your retail store or office increases your exposure to a slip and fall lawsuits and other negligence actions.
- You want the professional image associated with a legal entity: The professional image associated with a legal entity formation can legitimize your business in the eyes of your customers, clients, and suppliers.
What Is a Good Example of a Business That May Not Need a Legal Entity?
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.
What are the Articles of Organization?
The Articles of Organization is the document filed with the Secretary of State that establishes your entity in Colorado, as is required by law.
What is an Operating Agreement?
An Operating Agreement is a legally enforceable contract that governs relations between the members of the LLC and defines the business operations and governance structure of a Limited Liability Company. This internal agreement describes the members’ rights, obligations, and ownership interests in the company. Though it is not required under the Colorado LLC Act, no serious business owner would operate an LLC without an Operating Agreement in place. A formal written operating agreement lends credibility to your LLC’s separate existence. In business related lawsuits, an Operating Agreement is used to prove that the LLC structure is separate from the individual owner. Therefore, when building a record for litigation, the Operating Agreement can 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.
What Are the Typical Provisions Included In an LLC Operating Agreement?
The provisions in an LLC Operating Agreement vary depending on individual facts and circumstances. However, our standard LLC Operating Agreement typically includes the following provisions
Article 1: Formation
Article 2: Name
Article 3: Purposes
Article 4: Place of Business
Article 5: Term
Article 6: Capital Contributions
Article 7: Loans and Advances by Members
Article 8: Allocations and Distributions
Article 9: Books, Records and Tax Returns
Article 10: Bank Accounts
Article 11: Management of the Limited Liability Company
Article 12: Meetings of Members
Article 13: Assignment of Interests
Article 14: Right of First Refusal
Article 15: Admission of New Members
Article 16: Withdrawal Events Regarding Members
Article 17: Dissolution and Liquidation
Article 18: Representations of Members
Article 19: Notices
Article 20: Arbitration/Mediation; Christian Conciliation
Article 21: Amendments
Article 22: Miscellaneous
Does my Colorado LLC Have to be Recorded Anywhere?
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.
Does a Person Own Stock in a LLC?
There is no ownership of stock in a LLC. Owners of a LLC own membership interests in the business.
Is the LLC Only for the Small 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.
Do I Need a Series LLC?
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.
What Should I Name My LLC?
A business name must be distinguishable from any other active business name in Colorado the Secretary of State’s records. RockyMountainStartup.com, 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.”.
How Can I Reserve a LLC Name Prior to Formation?
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
Can My Colorado LLC Operate Under A Trade Name?
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).
Should I Form My LLC In Colorado or Some Other State?
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.
What Are the Requirements for Doing Business In States Other Than Colorado?
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.
How Long Will the LLC Formation Process Take?
The standard LLC formation process takes about 10-14 business days. The process can take longer if there are government delays in processing the paperwork (rarely) and if the client does not approve the draft of the LLC Operating Agreement in a timely manner. The average processing time from start to finish is 10-14 business days. Expedited service is available for an additional $150.00 flat fee. Expedited orders are given priority for internal handling. The average turn around time for an expedited order is 5-7 business days (subject to the client’s timely approval of the Operating Agreement). Due to potential (but rare) government processing delays, we make no guarantee regarding the above turn around times. However, we will use our best efforts to complete all orders within the stated times. We believe that our service provides clients with a more efficient LLC formation process. Especially when you consider that the average turn around time for a standard service LegalZoom™ LLC is 20-35 business days. Furthermore, it may take that long just to schedule an in office consultation with an attorney.
Who Can Be A Member of a LLC?
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.
How Many People Are Needed To Form a LLC?
Only one member is needed to form a LLC. For more information see “Single Member LLC” herein.
When Husband and Wife Own a LLC, Is a Multi-Member Colorado LLC Created?
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.
If I Own More Than One Business or I Own More Than One Piece of Real Estate, Do I Need Multiple LLCs?
Business Interests: As a general rule, an entrepreneur should form a separate LLC for each business he/she owns in order to limit the liability exposure of each business. Therefore, if an entrepreneur owns Business 1, Business 2, and Business 3, he/she should have 3 separate LLCs. If all three businesses were operated under one single LLC and someone sued Business 1, then the assets of Business 2 and Business 3 could be reached to satisfy a judgment (assuming the corporate veil was pierced). With 3 separate LLCs, a lawsuit against Business 1 should not affect Business 2 or Business 3. Essentially, you are isolating any legal damages to the business which was sued.
Real Estate: Likewise, a real estate investor should place each of his/her properties into separate LLCs. For example, if a real estate investor owns 6 rental cabins in the Rocky Mountains, they should have 6 LLCs. Otherwise, a lawsuit judgment involving rental cabin 1 could cause the real estate investor to lose cabins 2 through 6 as well. The real estate investor could also cut down on accounting fees and annual LLC filing fees by forming 3 separate LLCs and placing 2 rental cabins in each LLC. This does not provide the same liability protection as placing each cabin in its own LLC, however, it does spread the liability risk out somewhat. For the cost conscious real estate investor who is located outside of Colorado, the Series LLC (if allowed in the persons home state) is another option which spreads out the liability risks of each property in a cost efficient manner (see “Series LLC” herein). If you are interested in forming a Series LLC outside of Colorado which will do business in Colorado, please e-mail: advancedservices@RockyMountainStartUp.com.
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 another 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.
Separate Liability Risks: Mixing various types of risks in one LLC is discouraged. Keeping certain types of liability risks separate from others is a sound principle of asset protection. Rental real estate, commercial real estate, an active business, and a medical practice, all have very different risks associated with them. Therefore, such risks should not be grouped together under one single LLC. Likewise, mixing various types of liability risks in one Series LLC is discouraged, even if the risks are isolated into separate series. For example, you would not want to have one LLC own both residential and commercial real estate. Two separate LLCs (one for residential real estate and another for commercial real estate) would provide greater asset protection. Likewise, you would not want a Series LLC to own 2 pieces of residential real estate and 2 pieces of commercial real estate. Instead, you would create 2 Series LLCs, with one owning the 2 residential properties each in their own series and the other owning the 2 commercial properties each in their own series.
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.
Should I Form Multiple LLCs For a Single Property?
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.
What Type of Management Structure is Best for My LLC?
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.
What Are the Exceptions to Limited Liability Protection?
(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:
Member’s Own Actions in Tort and Contract: A member will always be individually liable for their own torts (an act that injures another; e.g., professional malpractice, negligence) whether acting in an individual capacity or acting in the scope of the business. A member may also be personally liable under a contract if the contract was made by the member individually as opposed to by the LLC or on behalf of the LLC. Furthermore, many lenders will require the members of a new LLC to personally guarantee their business loans and mortgages. Whenever a personal guarantee is made, the member is voluntarily agreeing to accept liability and the LLC offers no liability protection regarding such transactions. Please keep in mind that if a member commits a tort or malpractice, then the other LLC members’ personal assets are still protected from the claims made against the member who committed the tort or malpractice.
Criminal Acts: A member is always liable for their own criminal acts, including fraudulent and illegal behavior.
Liability on Distributions: A member is liable for any distributions received from the LLC that the member knows is a wrongful distribution.
Tax Obligations: Members can be personally liable when they fail to pay employee withholding taxes or state sales taxes.
Failure to treat the LLC as a Separate Entity: Members may be personally liable if they simply treat the LLC as an extension of their personal affairs and not as a separate legal entity (see “Piercing the Corporate Veil” below).
Piercing the Corporate Veil: When an LLC is sued for an amount above and beyond its insurance coverage, the plaintiff will typically try to “pierce the corporate veil” in order to reach the member(s) personal assets. Members may be personally liable for the LLC’s obligations if creditors and other third parties successfully pierce the corporate veil of LLC protection. The courts will look at each circumstance on a case by case basis and consider several relevant factors. The factors include: whether the entity had been used for fraudulent purposes or purposes against public policy, whether there was a failure to collect capital, whether the company was adequately capitalized, the use of the company as a mere conduit for an individual or another company, the manipulation of assets, the use of the company for illegal transactions, and the failure to maintain arms length relationships among related entities. The courts have also expressed that liability protection is extended to the members even after the LLC is dissolved or merged (assuming that the corporate veil has not been pierced).
LLC Assets: When a lawsuit is brought against the LLC entity itself, the assets of the LLC may be used to satisfy a judgment. In other words, if the LLC entity is successfully sued, any property owned by the LLC (real estate, cash, equipment) may be at risk. However, many LLCs (especially those in a service industry) distribute most of their assets as cash to their members and do not hold significant assets.
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.
What Steps Can Be Taken To Maintain the “Corporate Veil” of Liability Protection?
Have a Written Operating Agreement:
An Operating Agreement is a legal document which defines the business operations and governance of a Limited Liability Company. This internal agreement describes the members’ rights, obligations, and ownership interests in the company. Though it is not required under the Colorado LLC Act, no serious business owner would operate an LLC without an Operating Agreement in place. A formal written operating agreement lends credibility to your LLC’s separate existence. In business related lawsuits, an Operating Agreement is used to prove that the LLC structure is separate from the individual owner. Therefore, when building a record for litigation, the Operating Agreement can 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.
Properly Execute the LLC Operating Agreement:
In order to be legally binding, the LLC Operating Agreement must be signed and dated by all of the parties. Failure to sign and date could lead to unintended consequences in the event your LLC becomes subject to a lawsuit.
Properly use the LLC Name:
Anytime that you use the company name, you must use the words “Limited Liability Company”, “Ltd. Liability Company”, “Limited Liability Co.”, “Ltd. Liability Co.”, “Limited”, or the abbreviations “LLC”, “L.L.C.”, or “Ltd.”. Never use the words “partners”, “partnership”, “corporation”, or “incorporated”.
Conduct Business in the Name of the LLC:
Everything that you purchase for the business should be purchased by the LLC and through the LLC’s bank account. Also, all sales should be conducted in the name of the LLC. Furthermore, any property that you lease should be leased in the name of the LLC. In short, business should always be conducted in the name of the LLC and not in your personal name(s) (on the contrary, lenders will often require a personal guarantee on business loans).
Re-Title Property into the LLC:
Property held by title (real estate, automobiles) should be acquired in the name of the LLC. However, if such property is already owned by the members and the member’s desire for such property to be held in the name of the LLC (in order to reduce liability exposure), the members will need to transfer the property by deed from their personal name(s) into the name of the LLC. Failure to either originally purchase or re-title such property by deed into the LLC means that the property will not be protected by the limited liability shield of the LLC. Additionally, if such property is encumbered by a mortgage, the member(s) should check with the lender to make sure that transferring real estate from a personal name into the LLC will not trigger the “due on sale” clause in the mortgage contract (deed of trust). Lenders are very familiar with this process, therefore, it is unlikely that their will be any issues with them. However, receiving authorization beforehand is always prudent.
Hold Annual Meetings and Document Business Decisions:
Unlike a corporation, LLCs are not required to provide written notice of meetings, hold annual meetings, or record meeting minutes. However, this does not mean that LLC members are completely free to ignore the separate legal identity of the LLC. It is recommended that your LLC hold an annual meeting, record meeting minutes periodically, and document the company’s management decisions in writing (in the form of member resolutions signed by each member) in order to build a record of business activities which could be used as evidence that the corporate veil was maintained should your business be sued in the future. At the very least, written records should be kept regarding all major LLC decisions. Such records should be kept in a safe place with other company documents (articles of organization, operating agreement, etc.).
Separate LLC and Personal Assets:
The separation of your personal assets from the lawsuits, liabilities, debts, and obligations of your business is one of the primary benefits of forming an LLC. Although the Colorado LLC statutes provide a strong basis for the separation of business and personal assets through the “corporate veil”, entrepreneurs should follow some basic principles in order to maintain the protection that the corporate veil provides. It is important for any company to respect the difference between the company’s bank accounts, property, equipment, and other assets and personal assets owned by the company’s owners. An LLC, like a corporation or other legal “person,” is a separate legal entity with assets that are owned by the LLC. Any attempt by an LLC member to dispose of or use LLC property would be no more proper than an attempt by that member to dispose of or use another member’s personal property. Members must respect the fact that the LLC’s assets are the property of the LLC, not the members. Similarly, an LLC member should not co-mingle such member’s personal assets with the company assets of the LLC. The Company’s books, records, and financial statements should be maintained clearly to reflect the separation of the Company’s assets from the personal assets of the members. The Company must conduct business in its own name (not in the individual name of any manager or member). All letterhead, business card, bills, checks, invoices, and other Company forms should show the Company’s full legal name (and fictitious business name, if any), and the Company’s current address, telephone number, and fax number. As a statement of sound business practice the observations made about separation of personal assets from company assets are fairly obvious. There is an additional, less obvious reason to follow those rules. Creation of an LLC shield from liability for LLC members inevitably gives rise to attempts to pierce that shield by creditors of the LLC. This has long been the case for the liability shield of corporations. As long as there have been corporations, there have been attempts to “pierce the corporate veil.” Published cases in which such attempts have been successful usually involve a recitation by the court of a dozen or so factors in support of the court’s ruling that the shareholders of the corporation should be held personally liable for the debts, obligations, or other liabilities of the corporation. At the top of this list of factors are (1) failure by the shareholders to respect the corporation’s separate identity (by co-mingling corporate and personal assets) and (2) some other form of misconduct by the shareholders with respect to the corporation. Although the failure of an LLC to respect corporate formalities generally cannot be considered a factor “tending to establish that the members have personal liability” for any LLC debt, obligation, or liability, this is not to say that LLC members can ignore the many years of corporations law developments in this area. LLC members and managers are well advised to bear in mind the foregoing observations about piercing-the corporate-veil.
Adequately Capitalize the LLC:
The Company should be adequately capitalized to carry on the Company’s business activities. This is of course an obvious statement of sound business practice. A less obvious reason to assure that the Company is and remains adequately capitalized concerns the piercing-the-corporate-veil case law discussed above. One of the factors enunciated by some of the courts that have ruled that creditors of a corporation should be allowed to hold the shareholders (or members in the case of the LLC) personally liable for debts and obligations of the corporation is that the corporation was not adequately capitalized. Hence, adequate capitalization is an additional, very important factor relating to the shield from personal liability provided by the LLC for its members.
Follow the Operating Agreement When Making Decisions:
Members should make all LLC decisions according to the specifications (necessary voting percentages) in the LLC Operating Agreement. Key decisions should be documented in writing (by a signed and dated company resolution) and such documentation should be kept with other company documents.
Sign Documents in the name of the LLC:
When signing any business document, do not sign in your personal name(s) (nevertheless, lenders may require a personal guarantee for a loan). Instead, sign documents in a representative capacity as an agent of your business. Failure to do so may lead, in the context of litigation involving a signed document, to including the person who signed the document in the lawsuit in his or her individual capacity.
Do I still need Business Insurance to Protect Me?
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.
What is a Capital Account?
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. Other LLCs may need a capital contribution of several thousand dollars to cover the startup costs and the initial operating expenses of the business. 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.
Does My Colorado LLC Need to Register with the U.S. Securities and Exchange Commission (SEC)?
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. If you plan on offering LLC securities to the public, RockyMountainStartUp™.com is not the proper forum for the creation of your LLC. For more information on securities laws, please visit the following website: (http://www.sec.gov).
Are the Legal Fees for My Business Start-Up Tax Deductible?
Attorney’s fees you pay in connection with starting up your business are typically tax deductible. Please consult with your CPA for more information.
Does RockyMountainStartUp™.com Offer Registered Agent Service?
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, RockyMountainStartUp™.com provides annual registered agent service. Therefore, if your company is sued, RockyMountainStartUp™.com 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. RockyMountainStartUp™ 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 $150 per year which includes up to 10 pieces of mail forwarded to your principal office address. However, the first calendar year of registered agent service is provided for free with each LLC formed with RockyMountainStartUp™. Thereafter, the LLC will be provided with a letter annually from RockyMountainStartUp™.com regarding the continuance of such services. Registered Agent services may be cancelled by the LLC at any time.
Does RockyMountainStartUp™.com Offer Periodic Reporting Services?
Yes. All LLCs must file an annual report and pay an annual fee to the Colorado Secretary of State in order to remain in good standing. Failure to adhere to these requirements could result in delinquent status for the business. For an additional fee of $150.00 annually, RockyMountainStartUp™.com will file your periodic report for you so that you can focus your efforts on running your business. If periodic report service is requested, RockyMountainStartUp™.com will send you a letter/agreement each year which gives you the option to renew the service. If periodic reporting service is desired, the LLC will simply sign the letter/agreement and return it to our office with the $150.00 service charge and the appropriate annual state filing fee ($10). We will then file the annual report on behalf of your LLC. To request annual report services and the annual report agreement please e-mail advancedservices@RockyMountainStartUp.com.
Does My Colorado LLC Need a Federal Employer Identification Number?
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 address:
The instructions can be found at:
What Is Included In the LLC Post Formation Guide?
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.
Does My New Colorado LLC Need a Buy-Sell Agreement?
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. For more information about buy-sell agreements, please e-mail firstname.lastname@example.org
What Advanced Services Does RockyMountainStartUp™.com Provide In Addition to Standard LLC Formation and State Trademark Registration?
RockyMountainStartUp™.com is able to provide assistance with the following advanced legal services by request for an additional flat fee:
- Series LLC Formation
- Stand Alone Operating Agreement (when we have not created your LLC)
- LLC Formation when there are more than six (6) members
- Registered Agent Service
- Annual Report Filing Service
- Registration of Trademarks for your business name and logo
- Non-Disclosure Agreements: protects a business idea when talking to prospective investors
- Non-Compete and Non-Solicitation Agreements
- Purchase, Sale, Merger, or Acquisition of a Business
- Real Estate Transactions: deeds, review of leases, real estate negotiation/contracts
- Employment Agreements
- Independent Contractor Agreements
- Business Succession Planning
- Personal Matters: Wills & Estate planning (www.rockymountainWills.com)
- Joint Venture Agreements
- State Trademark Infringement Cease and Desist Letters
- Federal Trademark Registration
- Buy-Sell Agreements: 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.
Please e-mail inquires regarding CO LLC (s) and advanced services to:
A Colorado legal assistant and/or attorney will contact with more information.