Colorado has many forms of business to choose from, including sole proprietorships, several types of partnerships, limited liability companies and corporations. Your decision on which structure to choose could be based on tax considerations, the size of your business, liability concerns and the number of owners involved. You may be able to change to a different business structure if your current structure is no longer ideal for your business, but there will be expenses involved in switching.
A sole proprietorship is a simple business entity that does not require any formal organization to operate, other than filing a trade name registration with the Colorado Secretary of State. There is no legal distinction between a business that is operated as a sole proprietorship and the individual operating it, which also means there is no liability protection for the owner. A sole proprietorship does not require any special accounting procedures, but the owner is taxed directly on his revenues by filing a Schedule C along with his individual income tax return. Additionally, the owner will have to pay self-employment tax.
Partnerships are agreements between two or more people to operate together in a business, typically managed by the partnership’s general partners. The founding document, called a partnership agreement, is similar to a contract and can be very flexible to fit the partners’ needs. Colorado law allows four types of partnerships: general, limited, limited liability and limited liability limited partnerships. While these types offer varying degrees of liability protection, all types except for general partnerships provide some liability protection for the partners. Likewise, all types except general partnerships are required to file their partnership with the Colorado Secretary of State. The Internal Revenue Service taxes all partnership income by requiring the partnership to issue a K-1 statement to each partner; the partner then pays individual income tax based on the profit or loss shown on the K-1 statement.
Limited Liability Company
A limited liability company mixes elements of partnerships and corporations by providing liability protection for the owners, simple organizational structure and taxation to the owners individually. In Colorado, LLCs can have just one owner or an unlimited number of owners. LLCs are organized by creating articles of organization, which is like a governing contract, and filing them with the Colorado Secretary of State. This format allows the LLC to customize its organizational structure to operate under simple or complex management and accounting methods.
A corporation is a legal entity run by a board of directors that is elected by the corporation’s shareholders, though these can be the same people in a small corporation. To create a corporation in Colorado, you must file articles of incorporation with the Colorado Secretary of State and adopt bylaws that will govern your corporation’s operations. Corporations provide strong liability protection for the shareholders, as well as easy transfer of interest in the corporation by allowing a shareholder to simply sell his shares.
For tax purposes, there are two types of corporations: C corporations and S corporations. A C corporation pays taxes on its own income, which can mean that the taxes are paid twice – once when the corporation pays and again when the shareholder pays taxes on any dividends he receives from the corporation. With an S corporation, the shareholders pay the taxes but the corporation itself does not. To become an S corporation, a corporation must meet certain IRS restrictions such as having no more than 75 shareholders.