Colorado Enacts Limited Liability Company Legislation
| Publication year | 1990 |
| Pages | 1029 |
| Citation | Vol. 19 No. 6 Pg. 1029 |
1990, June, Pg. 1029. Colorado Enacts Limited Liability Company Legislation
Colorado recently became the third state to create a new business entity---the Limited Liability Company ("LLC").(fn1) Wyoming, Florida and Kansas are the only other states which provide for this type of entity.(fn2) LLCs, like S corporations and limited partnerships, combine the favorable tax treatment of partnerships with the limited liability of corporations. However, LLCs are more flexible than these more traditional entities and present an inviting alternative to new and existing businesses.
This article first covers the advantages of LLCs over limited partnerships and S corporations. It then discusses the formation, operation and management of the Act, followed by the treatment of LLCs for federal and state tax purposes. Finally, this article sets forth some open questions that should be considered by practitioners in assessing the impact of the Act.
While S corporations, like LLCs, enjoy both limited liability and pass-through tax advantages, LLCs avoid several restrictive and burdensome S corporation requirements. S corporations may not have more than thirty-five shareholders, and these may not include other corporations, nonresident aliens, general or limited partnerships, trusts, pension plans or charitable organizations. In addition, S corporations may not own more than 80 percent of the stock of another corporation.(fn3) No such limitations exist for LLCs. In contrast to a shareholder in an S corporation, a member will be entitled to contribute property to an LLC in exchange for a membership interest without the recognition of gain, regardless of whether the member (together with any other members who are simultaneously contributing property) is in "control" of the entity.(fn4)
More significantly, although both S corporations and LLCs provide the benefit of one level of taxation, the LLC, which is treated as a partnership, provides tremendous flexibility in planning distributions and special allocations,(fn5) as compared to the one class of stock limitation imposed on S corporations.(fn6) As a partnership, the LLC obtains the benefit of basis adjustments for entity-level liabilities(fn7) and the availability of an adjustment in the LLC's basis in its assets
Limited partnerships, like LLCs and S corporations, also enjoy pass-through tax advantages. However, only the limited partners of a limited partnership are afforded the benefit of limited liability, and even the limited partners may risk losing their limited liability protection if they actively participate in control of the business of the partnership.(fn9) Although the amendments to the Uniform Limited Partnership Act have greatly expanded the list of activities which a limited partner may undertake without being deemed to be involved in the "control of the business" of the partnership, the issue of potential liability is still a source of concern in both the planning and operation of a limited partnership.(fn10) By contrast, all members of LLCs are granted limited liability protection.
The formation and operational provisions of the new Colorado Limited Liability Company Act ("Act") are modeled after the Colorado Uniform Limited Partnership Act of 1981(fn11) and the Colorado Corporation Code.(fn12) Under the Act, LLCs may be formed to conduct any business which a Colorado limited partnership may conduct. An LLC is formed when one or more "organizers" file articles of organization ("Articles"), similar to corporate articles of incorporation, with the Colorado Secretary of State.(fn13) The Articles must set forth the following:
1. The name of the LLC.
2. The period of its duration (which may not exceed thirty years). There is an essential difference between articles of incorporation and Articles. If no other duration is specified in the articles of incorporation for a corporation, the duration of the corporation is perpetual.(fn14) However, if the period of duration is not specified in the Articles for an LLC filing, the document will be rejected.
3. The name and business address of the registered agent. The Secretary of State requires that this address be the street address of the registered agent in Colorado. If the registered agent has both a street address and a post office box where mail is delivered, the post office box should also be included. Inclusion will aid the Secretary of State's office in ensuring that LLC reports are correctly delivered.
4. The names and business addresses of the initial manager or managers. This address should be the mailing address(es) of the manager(s). The Secretary of State will mail any delinquency notices to the business address of the LLC on the assumption that the original report was never received by the registered agent because of death, resignation, removal or change of address and there was no notification to the Secretary of State.
5. Any delayed effective date.(fn15) The Articles may, but are not required to, set forth any other provisions for the regulation of the internal affairs of the LLC.(fn16) Filing fees for Articles will follow the fee schedule for profit corporations. Foreign limited liability companies will be treated as foreign corporations for purposes of fees.
To provide notice of the LLC's limited liability, the name of every Colorado LLC must contain the words "limited liability company," although the words "limited" and "company" may be abbreviated.(fn17) An LLC may use any name which is not the same as or deceptively similar to a name used by any other domestic or foreign LLC, domestic or foreign corporation, domestic or foreign limited partnership, or any name reserved or registered in the Secretary of State's office.
After August 1, 1990, the Secretary of State will also advise the applicant as to whether a sole proprietorship or general partnership is registered with the Department of Revenue with a name the same as or deceptively similar to the name requested by the applicant. This advice is for the applicant's information only, and the Secretary of State will not deny the applicant's requested name solely on the basis of a similar registration at the Department of Revenue.(fn18)
An opinion or statement regarding the availability of an LLC name is a conditional statement by an employee of the corporations section of the Division of Commercial Recordings. Such an opinion is merely tentative and is not a final determination that the name will or will not be available, or that a legal instrument employing the name will or will not be accepted for filing. No opinion regarding the availability of a name is final until a properly submitted legal document containing the name has been accepted and stamped "Filed" by the office of the Secretary of State.(fn19) LLC names may be reserved in the same manner as corporate names. Foreign limited liability companies which have not qualified to do business in Colorado may register their names in the same manner as provided for foreign corporations.
The owners of an LLC are called "members." Members have certain statutory voting rights, including the right to vote for managers of the LLC,(fn20) the right to approve unanimously transfers of interests by other members,(fn21) and, if granted in the Articles, the right to consent unanimously to continuation of the LLC on the death, retirement, resignation, expulsion, bankruptcy or dissolution of a member.(fn22) In addition, the members have the right to vote on any other matter provided in the operating agreement, subject to the provisions of the Act which require a majority or unanimous vote, consent or agreement of the members.(fn23) Once the Articles are filed...
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