Colorado LLC amendments

Denver, Colorado
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Colorado LLC amendments

Trevor Bogus
Rental Property Investor · Durango, CO · Member since 2019 · 17 posts · 13 votes

Looking for some advice from anyone who’s been through this before, especially any real estate attorneys or investors familiar with Colorado LLCs.

We have a property-specific LLC that currently owns one investment property. Right now it’s owned 50/50 between my LLC and my business partner’s LLC.

We’re looking at bringing on a third partner, who would own 50% of the property-specific LLC. My partner and I would each go from 50% ownership down to 25%.

Assuming everyone is on the same page, what’s the typical process for making that change?

  • Is it as simple as amending the Operating Agreement and adding the new member?
  • Do each of us assign 25% of our membership interest to the new partner?
  • Is there anything that actually gets filed with the Colorado Secretary of State, or is this mostly handled through the Operating Agreement and internal documents?
  • Anything else we should be thinking about from a legal or tax standpoint before we talk with our attorney?

Just trying to educate myself and understand the process before we engage an attorney. Appreciate any thoughts or experiences!

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  • Diana KhanPro Member
    Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 553 posts · 189 votes
    1d
    Quote from @Trevor Bogus:

    Looking for some advice from anyone who’s been through this before, especially any real estate attorneys or investors familiar with Colorado LLCs.

    We have a property-specific LLC that currently owns one investment property. Right now it's owned 50/50 between my LLC and my business partner's LLC.

    We're looking at bringing on a third partner, who would own 50% of the property-specific LLC. My partner and I would each go from 50% ownership down to 25%.

    Assuming everyone is on the same page, what’s the typical process for making that change?

    • Is it as simple as amending the Operating Agreement and adding the new member?
    • Do each of us assign 25% of our membership interest to the new partner?
    • Is there anything that actually gets filed with the Colorado Secretary of State, or is this mostly handled through the Operating Agreement and internal documents?
    • Anything else we should be thinking about from a legal or tax standpoint before we talk with our attorney?

    Just trying to educate myself and understand the process before we engage an attorney. Appreciate any thoughts or experiences!

    @Trevor Bogus, you're on the right track with updating the operating agreement, but I'd first look at how the new partner is getting that 50% interest. Are they buying part of your existing interests, or are they putting new money into the LLC in exchange for ownership? Those are two different arrangements, and the paperwork and tax implications can be different. In Colorado, ownership changes are generally handled through internal LLC documents, although any changes affecting the state's existing records may require an update.

    I'm a real estate attorney, broker, and investor based in Maryland, and I work with investors and business owners on LLCs, contracts, and ownership agreements. One thing I've learned is that ownership percentages are only part of the conversation. I'd also want everyone to agree on who makes decisions, how profits are distributed, whether additional contributions may be required, and what happens if someone wants to leave the partnership.

    I appreciate you looking into this before bringing in the third partner, @Trevor Bogus. These arrangements are much easier to discuss when everyone is on the same page. I'd have a Colorado business attorney and CPA review the proposed structure, especially since the LLC already owns property. This is closely related to my work, and I'd be happy to stay connected!

    [email protected]240-266-0291
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  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
    14h

    Trevor, Diana covered the legal side well. From the tax side, I'd slow down before deciding how to bring the third partner in because selling an interest to the new partner and having the new partner put money directly into the LLC can produce very different tax results.

    Since the LLC already owns a property, I'd want to look at the property's current value versus its tax basis, the existing mortgage, each member's basis, and any depreciation or suspended losses before making the change. If the new partner is buying 25% from each of you, there can be a taxable gain to the existing members depending on their basis. If the new partner is contributing cash directly to the LLC for a newly issued 50% interest, the analysis is different, and you'd want to make sure the existing built-in appreciation is properly accounted for as well.

    I'd also have the CPA look at the partnership's debt and ownership changes. A change in each partner's share of the LLC's liabilities can affect their tax basis, so the mortgage shouldn't be overlooked in the restructuring. And if you're doing an actual purchase of existing partnership interests, I'd ask the CPA whether a §754 election and §743(b) adjustment should be considered for the incoming partner.

    So before changing the Operating Agreement, I'd have the attorney and CPA model the two structures side by side. It may look like the same 50% ownership change on paper, but the tax consequences can be very different.

    Feel free to DM me I’d be happy to send over a few resources that might be helpful.

    [email protected]941-914-7779
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