§ 14.5.1—How Many Members Must There Be?

There is no maximum number of members that an LLC may have. A Colorado LLC may have as few as one member.201 Similarly, the Treasury Regulations, since the promulgation of the check-the-box rules, do not require a minimum (or maximum) number in order to be taxed as a pass-through entity. Instead, for tax purposes, the Treasury Regulations look to the number of members that an LLC has only in order to determine if the entity is a "disregarded entity" (and, therefore, need not file a separate tax return), or a "partnership" (requiring it to file a partnership information return with the IRS and deliver K-1 statements to its members202 ).

§ 14.5.2—Who Can Be a Member?

Unlike for shareholders of an S corporation, neither the Internal Revenue Code nor the Treasury Regulations set forth any limitations on who can be a member of an LLC. Similarly, the LLC Act has no such requirements, such as a minimum age. Rather, when the articles of organization of the LLC are delivered to the Colorado Secretary of State for filing, there must be at least one member,203 and, after the articles of organization are delivered for filing, one or more additional members may be added.204 A "member" is defined in the LLC Act as "a person with an ownership interest in a [LLC],"205 and a "person" is defined as any individual, estate, trust, entity, or state or other jurisdiction.206 Thus, under both federal and Colorado law, any person or any entity can be a member of a Colorado LLC.

§ 14.5.3—Classes of Membership

As noted, one of the biggest advantages of using an LLC over an S corporation is the ability to assign different rights and responsibilities to different members or groups of members. Borrowing from the corporate vernacular, these different rights and responsibilities are often referenced in an operating agreement as a different "class" of membership interest. The types of rights that may differ between members are many and various, including:

• Voting rights;
• Indemnification rights;
• Preemptive rights to contribute additional capital to the LLC prior to third parties;
• Disproportionate rights to allocations of profits and losses;
• Disproportionate rights to distributions of cash;
• Rights to approve or disapprove of new members;
• Rights to appoint, remove, and replace managers;
• Rights to prevent other members from transferring their membership interests;
• Rights to require other members to sell or purchase membership interests;
• Rights to cause the dissolution of the LLC; and
• Obligations to contribute additional capital to the LLC, if needed.

However, it is important to remember that, if the rights of members to receive allocations of the profits and losses of the LLC or distributions of cash from the LLC are disproportionate to the amounts that were contributed by each member to the LLC, the LLC operating agreement must contain specific language dictated by the Treasury Regulations promulgated under I.R.C. § 704, a sample of which is included in Exhibit 14B to this chapter.

Also, one thing that may not be eliminated for some members but not others is the members' access to the books and records of the LLC. One of the non-waivable provisions is that all members (and managers) must have access to the LLC's books and records.207 This requirement is discussed in detail in § 14.5.4.

Finally, classes of membership interests should not be confused with series LLCs. A series LLC is a type of LLC permitted in certain jurisdictions, including Delaware. In this type of LLC, one LLC is formed with different membership interests that enjoy "separate rights, powers or duties with respect to specified property or obligations of the [LLC] or profits and losses associated [therewith],"208 similar to the differing classes of membership interests described above. However, each series of membership interests can also have different business purposes or investment objectives.209 In addition, each series can be treated, for state law purposes, as a separate LLC. Thus, judgment creditors of a certain business venture conducted through a series LLC can only make a claim against the assets of that business venture, not of the entire LLC.210

§ 14.5.4—Member Rights

As with shareholders of corporations and partners in partnerships, LLC members enjoy certain rights, given to them either under the LLC Act or under the LLC's operating agreement. Some of these rights are mandatory (including the right to access the LLC's books and records), but most are subject to negotiation among all of the members (such as the right to call meetings of the members; to appoint, remove, and replace managers; and to receive allocations of profits and losses and distributions from the LLC).

Sharing of Profits and Losses

The LLC Act provides that the profits and losses of the LLC "shall" be allocated among the members.211 Thus, each member has a right to share in the profits and losses of the LLC. If the operating agreement does not provide for how such profits and losses will be allocated, the LLC Act states that they should be allocated pro rata according to the relative "contributions made by each member" to the LLC.212 The Internal Revenue Code, on the other hand, provides that, unless otherwise stated in the operating agreement, the profits and losses of the LLC will be allocated to each member according to the member's relative "interest" in the LLC, "determined by taking into account all facts or circumstances."213 Thus, it is important to provide in the operating agreement exactly how the profits and losses of the LLC will be shared, so as not to invoke either provision.

Access to LLC's Books and Records

Each member and manager of an LLC has the right to "inspect and copy" the records of the LLC.214 This right is mandatory, as it is listed as a non-waivable provision.215 The specific records that the members (and managers) have a right to inspect and copy are as follows:

Business and Financial Records

The LLC must maintain "true and full information regarding the business and financial condition of the [LLC], including written resolutions and minutes, if any, of the [LLC]."216 Unfortunately, neither the LLC Act nor case law defines what information falls within this requirement, and the LLC members and managers should proceed with care when deciding to what extent business and financial records should be kept. Also, there are no requirements set forth as to when it is appropriate or necessary to hold meetings or gather consent resolutions. As mentioned above, though, the holding of such meetings or gathering of such consent resolutions may help in showing that the LLC form is being respected by the members and that the veil of limited liability should not be pierced.

Income Tax Returns

A copy of the income tax return (federal, state, and local) "for each year" must be retained by the LLC.217 It is important to note that this requirement that all income tax returns be retained, and not just those of the past few years, is a 2004 change to this statute,218 and many Colorado LLC operating forms used previously and currently available have not made this change. The practitioner should ensure that the books and records section of each operating agreement provides for the retention of all income tax returns, or the LLC could be in violation of this non-waivable provision.

Member and Manager Roster

"A current list of the name and last-known business, residence, or mailing address of each member and manager" is also required to be kept on hand.219 This provision has changed, and all operating agreements should be reviewed to ensure compliance.

Governing Documents

The LLC will also need to maintain "a copy of the [LLC's] articles of organization and a copy of any written operating agreement of the [LLC]."220 Thus, it is imperative that not only the current version of the LLC's operating agreement be on hand, but that all previous versions be retained. Depending on the age of the LLC, this could become a formidable task.


"True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each member and that each member has agreed to contribute in the future, and the date on which each became a member,"221 is also required. As mentioned above, it will be valuable to include this information in the LLC's operating agreement and to draft and have signed consent resolutions stating when new...

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