Chapter 14 - § 14.2 • DISCUSSION OF TERMS

• Jurisdiction: Colorado

§ 14.2 • DISCUSSION OF TERMS

LLCs are perceived to be simple to form and simple to operate. Because of the (likely) unacceptable statutory default provisions on a number of important matters (for example, per capita voting and the unanimous vote requirement in most circumstances) and the contractual flexibility under C.R.S. § 7-80-108(4), this perception may not be reality should problems develop among the members and managers.

Before delving into the advantages and disadvantages of an LLC organized under Colorado law, and the specific rules governing the formation, operation, and dissolution of an LLC, it is helpful to briefly discuss and to understand the terms used in this chapter and in the LLC world. Although this discussion may seem a bit elementary, it is important that the practitioner and his or her clients use the proper terms so that there is no confusion regarding the type of entity that exists and, therefore, under what rules the entity is operating.

LLC Act

In Colorado, the formation, operation, and dissolution of an LLC, as well as the rights and obligations of the LLC's owners and management, are governed by the Colorado Limited Liability Company Act, referred to in this chapter as the "LLC Act," and found at C.R.S. §§ 7-80-101, et seq. The LLC Act was initially added to title 7 of the C.R.S. in 1990 and has been amended a number of times since then. It is important to note that LLCs are also subject to the Colorado Corporations and Associations Act, C.R.S. §§ 7-90-101, et seq.

LLC

The abbreviation LLC stands for "limited liability company," not "limited liability corporation." The LLC is not a corporation and should not be confused with one, either in name or in practice.

Formation of the LLC

Similarly, an LLC is "formed," not "incorporated." To form an LLC in Colorado, "articles of organization," rather than "articles of incorporation," are delivered to the Colorado Secretary of State for filing.²

Operating Agreement

This is the agreement that governs the management, operation, economics, dissolution, and liquidation of the Colorado LLC and is referred to, in Colorado and most other states, as an "operating agreement."³ As discussed below, the provisions of the operating agreement govern over the provisions of the LLC Act except in a few specific areas. Properly drafted, the operating agreement of an LLC takes the place of several documents necessary in the corporate context, including the articles of incorporation, bylaws, and a shareholder buy-sell agreement. Properly drafted, the operating...