CO Bar CO Bar Business Organizations 1 — Questions and Answers
Question 1: Under Colorado law, a limited liability company (LLC) provides its members with:
- Unlimited personal liability for all company debts
- Limited liability for company debts, similar to corporate shareholders (Correct answer)
- Personal liability only for torts, not contracts
- No liability protection unless the operating agreement provides one
Correct answer: Limited liability for company debts, similar to corporate shareholders
Colorado LLCs shield members from personal liability for the company's debts and obligations, similar to the protection afforded to corporate shareholders.
Question 2: A Colorado corporation is formed upon:
- Adoption of bylaws by the board of directors
- The Secretary of State's filing of the articles of incorporation (Correct answer)
- The shareholders' first meeting
- Issuance of stock to initial shareholders
Correct answer: The Secretary of State's filing of the articles of incorporation
Under the Colorado Business Corporation Act, a corporation is formed when the Secretary of State files the articles of incorporation.
Question 3: Under the Colorado Uniform Partnership Act, absent a partnership agreement, partners share profits and losses:
- In proportion to their capital contributions
- Equally regardless of capital contributions (Correct answer)
- Based on time devoted to the business
- According to majority vote
Correct answer: Equally regardless of capital contributions
The default rule under the Colorado Uniform Partnership Act is that partners share profits and losses equally, regardless of their relative capital contributions.
Question 4: In a Colorado corporation, the business judgment rule protects directors from liability when they:
- Make decisions that result in a profit
- Act in good faith, on an informed basis, and in a manner they reasonably believe is in the corporation's best interest (Correct answer)
- Obtain shareholder approval for all major decisions
- Rely solely on outside legal counsel for every decision
Correct answer: Act in good faith, on an informed basis, and in a manner they reasonably believe is in the corporation's best interest
The business judgment rule protects directors who act in good faith, on an informed basis, and in a manner reasonably believed to be in the best interests of the corporation from liability for poor outcomes.
Question 5: Piercing the corporate veil in Colorado allows courts to hold shareholders personally liable when:
- The corporation declares bankruptcy
- The corporation is used as an alter ego or to perpetrate fraud or injustice (Correct answer)
- The corporation fails to generate profits
- Shareholders take dividends in any year
Correct answer: The corporation is used as an alter ego or to perpetrate fraud or injustice
Colorado courts may pierce the corporate veil to impose personal liability on shareholders when the corporate form is used as an alter ego to perpetrate fraud or injustice.
Question 6: A Colorado LLC's operating agreement governs the company's internal affairs; if silent on an issue, the matter is governed by:
- The Colorado Business Corporation Act
- The Colorado Limited Liability Company Act default rules (Correct answer)
- Common law partnership principles exclusively
- A majority vote of members on an ad hoc basis
Correct answer: The Colorado Limited Liability Company Act default rules
When an LLC's operating agreement does not address a particular issue, the Colorado Limited Liability Company Act's default statutory rules fill the gap.
CO Bar CO Bar Business Organizations 1
Under Colorado law, a limited liability company (LLC) provides its members with: