Limited liability companies, or LLCs, are business organizations that are similar to partnerships and corporations in certain ways. The IRS typically taxes an LLC like a partnership, which usually pays lower taxes than corporations, a benefit for LLC members. But like a corporation, the LLC protects the owners from personal liability because the LLC is considered a separate legal entity under state law with its own assets and debts. Colorado, like most states, allows business owners to form and register LLCs in the state.
A Colorado LLC can be formed with one or more members. Members each typically make a capital contribution with money or provide some services to the LLC. Capital contributions may dictate each member’s voting rights and how the members share profits. In LLCs, members decide the issues of voting rights, capital contributions and profit sharing as they see fit. Also, members have the option to run the company similar to a partnership by managing the company’s day-to-day affairs. Members may also appoint or hire an outsider who does not have an ownership stake in the company to manage the company’s daily operations.
To form an LLC members must file articles of organization with the Colorado Secretary of State. The articles of organization must include the name of the LLC, the LLC’s address, the name and address of all LLC members and the names and addresses of any non-member managers. Colorado LLC members must also provide a statement in the articles of organization as to whether they intend to manage the organization or hire or appoint managers who have no financial ownership of the LLC. All members must be over 18 years old. Finally, the members must provide the name and address of a designated registered agent, a person or business that can accept important legal notices and government correspondence on behalf of the LLC. The agent must reside in Colorado and be over 18 years old. The LLC itself, or an individual within the LLC, may act as the LLCs registered agent so long as the agent's address is a physical location in Colorado.
The IRS does not use a specific tax classification for LLCs. Accordingly, Colorado LLCs can elect flow-through taxation or corporate taxation. Flow-through taxation means that the LLC is taxed like a partnership where the members report the income and profits from the LLC on their personal tax returns. Corporate taxation requires the LLC to file a separate tax return and pay taxes on company profits. Under corporate taxation, the members must also report any income or dividends from the LLC, which essentially means that they pay taxes twice under corporate taxation. For state taxes, Colorado LLCs must elect the same form of taxation with the Colorado Department of Revenue that it elects with the IRS.
LLCs provide certain limitations on member liability. Because the LLC is a separate legal entity, LLC members are not typically liable for the debts of the company. For example, if a judgment was awarded against the LLC, individual members would not have to use their personal assets to pay it -- only the assets of the LLC would be at risk. In addition, members may not be liable typically for negligent acts of other members. However, these limitations do not apply if members engage in fraudulent behavior or willfully break the law.