Your LLC and Estate Planning

by | Jun 19, 2024

In Colorado, starting a limited liability company (LLC) is relatively straightforward. To create an LLC, you need to file your articles of organization with the Secretary of State and submit a minimal fee. Unlike some states, Colorado does not mandate strict adherence to LLC formalities for registration. However, understanding and following these formalities is crucial, especially in the context of estate planning. At Axis Law Group, our estate planning lawyers understand the intricacies of LLC formation and can explain why these formalities matter. 

What does an LLC do? 

As the name implies, a limited liability company provides business owners with liability protection, among other benefits. Specifically, an LLC separates business assets from personal assets, shielding the owner’s personal estate from business-related risks. 

Consider the following example: Robin Hood enjoys making hoodies and decides to sell them without the use of an LLC. Red Riding Hood, one of his customers, buys a hoodie but is injured by a faulty drawstring that constricts her breathing while running from a wolf. She sues Robin Hood for her injuries. Without an LLC, Robin Hood’s personal assets, including his bank accounts, are at risk. If Robin Hood had an LLC, only his business assets would be vulnerable to the lawsuit. 

LLC Formalities 

Creating an LLC by filing articles of organization is merely the first step among many to becoming a responsible business owner. To be afforded the above-mentioned liability protection, the law requires you to follow three formalities: 

  1. Operating Agreement: This document outlines how your business functions. It is essential for defining the roles and responsibilities within the company and can include provisions for what happens to the business in the event of your incapacity or death. 
  1. Business Account: You must establish a separate business account. All business funds should flow through this account before reaching any personal accounts, ensuring that personal and business finances are not commingled. 
  1. Annual Minutes: Keeping detailed annual minutes about your business operations is necessary. These minutes typically include notes on the business’s performance and future goals. 

By following these formalities, you ensure that your LLC is legally recognized as a separate entity, providing you with liability protection. 

Importance of Estate Planning 

 Our clients often have the goal of avoiding probate, with good reason. Probate is required to last a minimum of six months and can cost your estate thousands of dollars. Such a process can be burdensome for your loved ones during a time of mourning. 

What many do not know is that probate can be triggered by your business account. Financial institutions do not let you designate a beneficiary for a business account. As a result, your operating agreement is crucial in avoiding probate. It can stipulate what happens to business assets upon your incapacity and death. Neglecting to address this in your operating agreement can force your family to go through probate, even for a relatively small amount of money in the business account. 

  

LLCs offer significant liability protection when you follow the required formalities. Let Axis Law Group, your local Colorado Springs estate attorney, equip you with the best tools to manage your business and avoid probate. Book a free estate planning consultation today!