Start-up Business Agreements from A to Z: What to Include in Every Colorado Partnership and LLC Agreement

You wouldn’t build a house or pursue an advanced degree without having a blueprint and a plan in mind. The same holds true when forming a Colorado business. Generally, knowing what you want to achieve is a great start. However, you need to draft a partnership, operating agreement, or bylaws to start your business properly. Without this type of agreement in place, you may not be able to conduct your business the way you want. You’re pouring your heart, soul, and bank account into your business; take the time to protect your investment with a formation agreement.   

The Importance of Business Formation for Entrepreneurs  

Business formation is relatively easy in the State of Colorado. The statutory defaults will apply unless you modify them with an operating agreement. You might be surprised to learn what the default rules are. An operating agreement can be written or oral; however, written agreements are much easier to enforce. 

Hackstaff, Snow, Atkinson & Griess, LLC’s skilled and knowledgeable business lawyers will be an invaluable asset to your LLC or partnership. Your attorney can help you draft or revise your partnership or operating agreement to make sure it is ironclad.  

Necessary Elements in a Partnership  

Your agreement should address several essential business matters. Leaving even one of those elements out or not being specific enough can negatively impact your business in the future. A well-versed business lawyer knows what to include and can present you with your options when forming your business. Be sure you address the following matters.  

Determining the Percentage of Ownership  

It’s common for more than one party to contribute financially to the business in services, property, or cash. In return for their contribution, they typically receive a percentage of ownership in the business.  If not determined in the agreement, the ownership (and voting) rights will be determined by the statutory defaults. In Colorado, economic rights are determined by the amount of the contribution. The default for voting rights is per capita, one vote per owner regardless of contribution.   

Limited liability companies should determine each owner’s percentage and document it in the agreement. Making this determination will help allocate the profits and losses of the relationship. It also highlights which parties are making what contributions to the partnership.  

Allocation of Profits and Losses  

The agreement must set out how the profits and losses will be allocated among the partners. You should include whether or not the company’s allocated profits will be distributed to the owners each year, and if so, how much. Will they be made regularly, or can owners make a draw at any time? Don’t forget to document if the LLC or partnership will pay the owners enough to cover their income taxes on the annual profits.  

Parameters for Binding the Partnership  

A written operating agreement should specify the LLC arrangement. It should also set the parameters for binding the partnership regarding the company’s affairs and the conduct of the business. A great question to ask your partners is, can one partner make business decisions for the entire company?  

 Decision Making  

Your operating agreement should detail which type of LLC you are forming. An LLC can either be managed by its owners or by hired managers whom the LLC members select. The manager(s) will have the authority to bind the LLC to contracts for which the LLC members are liable.  

Resolution for Disputes or Business Divorce  

Even if your business partners are your best friends, don’t assume that there won’t be conflict during the life of your business. You need a plan for how the business will handle conflicts. Specify how your LLC  plans to deal with disputes in your operating agreement. Doing so provides a clear framework for how the company will conduct its affairs. It also ensures that each dispute will be dealt with in the same fashion. Addressing this matter upon the business formation will help you avoid ending up in court and ultimately dissolving the partnership altogether.  

What Happens After the Death or Disability of an Owner

The operating agreement should also include plans addressing what happens if an owner passes away or becomes disabled and can no longer function as an owner. The remaining owner(s) should have the option to buy from a disabled or deceased owner instead of being stuck with the spouse or heirs in their place. 

Choosing the Right Lawyer Can Help Avoid Drama Long-Term  

The most profitable business owners seek an experienced business attorney’s professional advice to form an LLC and draft an operating agreement. When you choose a skilled lawyer, who can envision the big picture while attending to all the small details, you secure your company’s future. Having an attorney by your side to draft your operating agreement will preempt future litigation or conflicts. A  reliable agreement will help the business owners navigate any disagreements or confusion within the partnership.  

Drafting an operating agreement is kind of like an insurance policy for your business. Hiring a seasoned business attorney to help you draft the agreement ensures that this “insurance policy” includes all the necessary aspects of an agreement and that they are a good fit for the owners and the business alike.  Invest in your business’s prosperity and future and avoid drama by teaming with an attorney to create your operating agreement. 

Call Hackstaff, Snow, Atkinson & Griess, LLC attorneys to discuss how to form a Colorado business correctly at (303) 534-4317.