Chapter 14 - § 14.4 • ORGANIZATION OF A COLORADO LLC — THE GOVERNING DOCUMENTS
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§ 14.4.1—Articles of Organization
Initial Articles
An LLC is formed in Colorado by delivering articles of organization to the Colorado Secretary of State for filing.121 This delivery must be done online at www.sos.state.co.us and carries a $50 filing fee. Upon such delivery and payment of the filing fee, the LLC is formed and may conduct business in Colorado.
Required Provisions
As noted above, there are now very few items that must be included in the articles of organization of a Colorado LLC. Pursuant to C.R.S. § 7-80-204(1), the articles of organization must contain only:
1) The name of the LLC;
2) The principal place of business of the LLC, if any;
3) The name and mailing address of the person forming the LLC;
4) An indication of whether management of the LLC will be vested in its members or managers; and
5) A statement that there is at least one member of the LLC.
Thus, the information required is minimal and the articles of organization form provided by the Secretary of State on its website is sufficient to form a Colorado LLC.
Optional Provisions
Additional information may also be included in a Colorado LLC's articles of organization.122 Although this option is available, caution should be used before including additional information in the articles of organization, as later it may be harder to amend the articles of organization than it would be to amend an operating agreement to remove such information.
Amended Articles
Any item set forth in the articles of organization may be amended, but it should be noted that the articles of organization must be amended if the LLC changes its name or if there is a "false or erroneous statement in the articles of organization."123 The articles of organization of a Colorado LLC may be amended by the unanimous vote of its members or by such other method set forth in the LLC's operating agreement.124 Once such proper procedure is followed for the approval of the amendment, the actual amending of the articles of organization is accomplished through the delivering of articles of amendment to the Colorado Secretary of State online for filing, which document must include, at a minimum, the name of the LLC and the amendment.125
§ 14.4.2—Operating Agreement
An operating agreement is any agreement among all of the members of an LLC, regardless of whether in writing (although there are certain provisions, according to the LLC Act, that will not be valid unless in writing),126 or, in the case of a single-member LLC, any writing signed by such member or written agreement between the member and the LLC, relating to the "company's affairs and the conduct of the [LLC's] business."127
Even in the absence of a writing, an operating agreement may be established by the custom and practice of the members and managers of an LLC in the way they do business and manage the entity. At least with respect to certain economic issues, the tax returns filed by an LLC may constitute an operating agreement.
Although Colorado law contemplates the possibility of an operating agreement that is not in writing, such an operating agreement is likely not enforceable under the statute of frauds, as was determined to be the case in the Delaware case of Olson v. Halvorsen.128 In that case, the Delaware Supreme Court noted that the Delaware limited liability company act expressly permitted oral and implied LLC agreements, and provided for "maximum effect" to be given to LLC agreements in § 18-1101. The court went on to say:
The General Assembly offered the limited liability company as an alternative to the corporate form for entrepreneurs and investors. In keeping with this legislative intent, we construe the "maximum effect" of LLC agreements as allowing governance terms not permitted under the more restrictive corporate paradigm. It is in that sense that the General Assembly intended to give "maximum effect" to the LLC, business entity formation and agreement.
Because we can construe the statute of frauds and the LLC Act together and the General Assembly did not clearly intend the LLC Act to render the statute of frauds inapplicable, there is no implied repeal of the statute of frauds. As the Vice Chancellor stated, the statute of frauds should "protect defendants against unfounded or fraudulent claims that would require performance over an extended period of time." The legislature enacted the statute of frauds over a century ago, and its purpose remains valid. If the General Assembly intends to limit the application of the statute of frauds by removing LLC agreements from its scope, the General Assembly must say so explicitly. "[We] will not do by judicial implication what the General Assembly itself has declined to do by express legislation." Accordingly, we hold that the Delaware LLC Act does not preclude application of the statute of frauds to LLC agreements. Therefore, the statute of frauds applies to LLC agreements, and the Vice Chancellor correctly so held.129
In other words, the LLC statute makes an LLC operating agreement a contract, and a contract is subject to the Delaware statute of frauds.130 In Olson v. Halvorsen,131 the Delaware Supreme Court held that, although the Delaware Limited Liability Company Act132 (like Colorado's LLC Act) expressly permitted oral and implied LLC agreements133 and provided for "maximum effect" to be given to LLC agreements,134 Delaware's statute of frauds applies to LLC agreements. Similar arguments could be made under Colorado's statute of frauds,135 especially given the fact that operating agreements tend to provide for performance over a period greater than one year. While requiring a written agreement can sometimes frustrate the parties' expectations, one of the purposes of the statute of frauds was to require a provable document since oral operating agreements can significantly increase litigation costs as the parties try to prove the oral understanding. To remedy this problem, in 2010, the Delaware legislature amended the Delaware limited liability company and partnership statutes to provide that the Delaware statute of frauds did not apply to operating agreements or partnership agreements.136
Operating Agreement Versus Colorado LLC Act
The provisions of the operating agreement may cover a wide range of topics, including who will (and how they will) manage the affairs of the LLC; who the initial members of the LLC are; how members may depart or be forced to leave the LLC; the addition of new members or new classes of members; the ability, if any, of a member to transfer a membership interest to another member or to a third party; the economic relationship among the members; how the LLC may be dissolved; what is to happen upon dissolution; and how the operating agreement may be amended.
Because of the nature of an LLC as an agreement among its owners to operate a business, the terms of that agreement govern, for the most part, over the LLC Act. Specifically, the LLC Act provides, in general, that
1) The "operating agreement governs the rights, duties, limitations, qualifications, and relations among the managers, the members, the members' assignees and transferees, and the limited liability company";
2) The provisions of the operating agreement shall control over any provision of the LLC Act; and
3) Only to the extent that "the operating agreement does not otherwise provide," will the LLC Act control.137
However, there are four specific provisions of the LLC Act that the Colorado legislature has deemed important enough that the members may not "restrict," "unreasonably restrict," or "eliminate" them in the operating agreement.138 These items are known as the "non-waivable provisions" and are discussed below.139
Statutory Voting Provisions in the LLC Act
The operating agreement may grant to all or a stated group of the members the right to consent, vote, or agree, on a per capita or other basis, upon any matter.140 Absent any agreement to the contrary, the LLC Act contemplates voting by the members of an LLC on a per capita basis.141 This means that if there are three members, two of whom own a 1 percent interest and one of whom owns a 98 percent interest, under the default rules of the LLC Act, the two can outvote the one 98 percent member. This is seldom the intention of the parties and points out the importance of having an operating agreement defining the expectations of the members.
The statute provides that any member may vote in person or by proxy,142 although this can be changed in the operating agreement if the parties desire to do so. Although the statute provides that any member may vote in person or by proxy, the same is not true for managers of a manager-managed LLC. The statute provides that a manager of a manager-managed LLC is an agent of the LLC.143 This brings the law of agency to the LLC context. Appointing a proxy is the same as a manager appointing a subagent. Section 3.15 of the Restatement (Third) of Agency provides:
(1) A subagent is a person appointed by an agent to perform functions that the agent has consented to perform on behalf of the agent's principal and for whose conduct the appointing agent is responsible to the principal. The relationships between a subagent and the appointing agent and between the subagent and the appointing agent's principal are relationships of agency as stated in § 1.01.
(2) An agent may appoint a subagent only if the agent has actual or apparent authority to do so.
Thus, a manager may appoint a subagent as proxy to cast his or her votes as a manager only if the manager has actual or apparent authority to do so. Actual authority must be granted by the operating agreement or other LLC action; apparent authority must be established by the facts and circumstances. In any event, a manager would be responsible for the actions of his/her subagent unless exonerated by the operating agreement.
In the absence of an operating agreement...
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