The Colorado Supreme Court handed down a landmark ruling this month which establishes that owners and managers of limited liability companies, commonly called LLCs, have limited exposure to personal liability for the company’s debts. The Court also ruled that LLC managers do not owe creditors of the company a fiduciary duty when the company is insolvent.
With this ruling (Supreme Court Case No. 10SC143) Weinstein v. Colborne Foodbotics, LLC), owners and managers of an LLC no longer need to fear personal attacks from creditors. This is an important win for Colorado and the companies that choose to incorporate in the state. In fact, many say it makes Colorado a more attractive jurisdiction in which to form an LLC and serves as precedent for other states.
According to Chief Justice Michael Bender, who delivered the clarifying opinion: “The plaintiff asserted a statutory claim for receiving an unlawful distribution in violation of section 7-80-606, C.R.S. (2012) against the LLC’s members and a common law claim for breach of fiduciary duty against its managers. The defendants moved to dismiss both claims, arguing that the creditor had neither a right to sue for unlawful distribution under section7-80-606 nor a right to assert a claim for violation of fiduciary duty against the defendant managers. The trial court granted the defendants’ motion. On appeal, the court of appeals reversed the trial court.”
With this decision, the Supreme Court agreed with the trial court.
An LLC is a form of business entity that allows for pass-through taxation and offers flexibility in terms of ownership and management structure. In many ways, LLCs are a hybrid between traditional corporations, partnerships and sole proprietorships; they are primarily governed by the state’s LLC Act and the LLC’s operating agreement.
LLCs have become an increasingly popular business entity. Contemporary court rulings continue to form the basis for how an LLC is viewed and treated by the law – as a corporation, a partnership or a separate entity altogether. The Weinstein ruling establishes that in Colorado, LLCs will be viewed as separate, subject only to the LLC Act and not the laws that govern corporations or partnerships.
Legal observers expressed concern prior to the ruling that the court might expand the Colorado Court of Appeals’ previous Weinstein ruling to cover solvent LLCs as well, which would have rendered Colorado an inhospitable jurisdiction for incorporating LLCs. The court’s ruling instead makes the state an increasingly attractive place to organize an LLC, and could serve as a precedent for other states to similarly protect LLC owners and managers from personal liability for company debts.