I played baseball growing up in Niwot. Loved it. Still do. And one thing you learn pretty early is that nine guys showing up with gloves and enthusiasm is not actually a team. Somebody has to decide who's pitching, who's catching, and who covers second when the runner's going. You do that before the game, not during it.
I think about that a lot when clients come in after forming an LLC on their own. They filed the paperwork, got their EIN, maybe opened a bank account. They're ready to play. Nobody has talked about who's in charge of what, how profits get split, or what happens if one of them wants out. They're nine guys with gloves.
That's what an operating agreement is for. It's the lineup card.
Colorado Will Fill In the Blanks. You Won't Like It.
Here's the thing about forming an LLC without an operating agreement: Colorado doesn't leave you with nothing. It fills in the blanks with default rules from the Colorado Limited Liability Company Act. The problem is those defaults were written for a generic business, not yours, and they can produce results nobody wanted.
Profits split equally regardless of who put in how much money? Default. Every major decision requiring unanimous consent from all members? Also default. No automatic mechanism for buying out a member who dies, divorces, or just stops showing up? You guessed it.
Equal splits sound fair in the abstract. They sound a lot less fair when you contributed 80 percent of the startup capital and your partner contributed 20 percent, and the state says you each get half. Unanimous consent sounds reasonable until you and your co-owner genuinely disagree and the business can't move because nobody can break the tie.
An operating agreement lets you replace those defaults with decisions you've actually made together, in writing, before any of this becomes a problem.
Who Bats Where, and Who's Pitching
The first thing a lineup card settles is roles. Same with an operating agreement.
Is your LLC member-managed, where everyone has equal authority to act? Or manager-managed, where one person runs day-to-day operations and everyone else is more like a limited partner? Those aren't just organizational preferences. They determine who can legally bind the company, who signs contracts, and who's on the hook if something goes sideways. You want that sorted before someone writes a check the other members didn't know about.
What decisions need a vote, and what's the threshold? Signing a lease, taking on significant debt, bringing in a new member, selling the whole operation: your operating agreement specifies which of these need sign-off from more than one person and how many votes that requires. Without it, you're improvising in real time, which is a fine strategy for jazz and a terrible one for business disputes.
How do profits come out, and when? This one sounds simple until someone needs cash and someone else wants to reinvest everything. Put it in writing.
What Happens When Someone Blows Out Their Arm
Every team carries a bullpen. If your starter can't finish the game, somebody else takes the mound. You don't forfeit.
An operating agreement thinks through what happens when a member can't or won't continue: death, disability, divorce (which can land a non-participating ex-spouse as your new business partner, which is as fun as it sounds), bankruptcy, or just wanting to sell their interest and move somewhere warmer. A buy-sell provision sets the terms in advance: what triggers a buyout, how the interest gets valued, and who has the money to make it happen.
Without it, you're negotiating those terms under pressure, with someone whose interests are no longer aligned with yours, while trying to keep the business running. I've seen this. It's not good baseball.
"We Had an Understanding" Is Not a Legal Document
It does come up. A lot. Two people start a business on a handshake, everything goes fine for a few years, and then something changes. The business grows, a third partner comes in, the money gets real, and suddenly everyone remembers the original understanding differently.
Operating agreements can be amended when circumstances change. What they can't do is retroactively document an agreement that nobody wrote down. At that point you're in a dispute about what was said in someone's kitchen in 2019, and nobody wins that argument cleanly.
Colorado doesn't require an LLC to have an operating agreement. The state is genuinely fine with letting you find out the hard way why you needed one. Don't take them up on that offer.
If you're forming an LLC or you've been running one without an operating agreement and want to fix that, here's more on what goes into one, or just reach out and we'll talk through it.