The limited liability company, or “LLC,” is the most popular type of business entity in Colorado. Some of the advantages of LLCs are pass-through tax treatment, limited liability for all owners, and flexibility in assigning rights and responsibilities between different members. However, an LLC is not the “best” entity for every business situation.
The inherent flexibility of LLCs can create a great deal of complexity as the relationships negotiated among members need to be set forth in the LLC’s operating agreement, which can become a long, drawn-out process.
It is important to note that an LLC is a “pass-through” entity and its members are taxed on their proportional share of the LLC’s entire profits, even if no cash is actually distributed to the members. This is sometimes referred to as “phantom income.” The members receive a tax bill for their proportional share of the LLC’s profits, without receiving any corresponding cash from the LLC to cover it.
Additionally, a member’s proportional share of the LLC’s net profits is included in self-employment income, which is subject to FICA and FUTA taxes totaling 15.3%.
The governing documents of an LLC include the Articles of Organization and the Operating Agreement. An LLC is formed by delivering Articles of Organization to the Colorado Secretary of State for filing.
The Operating Agreement governs the economics, management, operation, and dissolution of the LLC. Among other things, it should include provisions governing the LLC’s operation and management, the rights and responsibilities of its members, and the transferability of membership interests.
HOW WE CAN HELP
Dennis M. Lanphier, Esq., CPA, LL.M., is an experienced business attorney and certified public accountant who can help you determine whether an LLC is the most appropriate entity for your business, and both prepare and file the necessary documents for your LLC.