In Colorado, the most common entities for new businesses are the sole proprietorship, general partnership, limited partnership, limited liability company; and corporation. When considering which structure is right for your new business you should consider the following factors: (i) the extent owners are protected from personal liability; (ii) your desired management structure; (iii) the ease or difficulty of formation; and (iv) relevant tax consequences. Although the nuances of each business structure require careful consideration, the summary set forth below outlines the general characteristics of each structure and can serve as a starting point in your selection process.
Sole Proprietorship
- Owned and operated by singe individual
- Unlimited personal liability
- Income and loss flows directly to the individual (income and expenses reported on Schedule C)
- Individual must pay self employment taxes
- Easy to form, no filing requirements
- May file trade name with the Colorado Secretary of State (if doing business under another name)
General Partnership
- Owned and operated by two or more individuals or entities
- Each partner can participate in management and legally bind the partnership (unless limited by agreement)
- Unlimited personal liability for partners
- May convert to limited liability partnership to the limit the liability of the partners
- Income taxed to partners
- Partners must pay self employment taxes
- Death or withdrawal of one of the partners may result in the dissolution of the partnership
Limited Partnership
- Owned and operated by two or more individuals or entities with at least one general partner
- Unlimited personal liability for the general partner
- Limited personal liability for limited partners (assuming they do not participate in the management of the business)
- Income taxed to partners
- Partners must pay self employment taxes
- Written partnership agreement
- File Certificate of Limited Partnership with the Colorado Secretary of State
Limited Liability Company
- Owned by one or more members who may be individuals or entities
- Operated by one or more managers who may or may not be members
- Limited personal liability for members and managers
- Typically taxed as a sole proprietorship (if one member) or partnership (if multiple members) as pass-through entity
- May elect to be taxed as a corporation
- Managers must pay self employment taxes
- Written operating agreement – can provide significant flexibility with respect to management and economic interest in entity
- File Articles of Organization with the Colorado Secretary of State
Corporation
- Owned by one or more shareholders
- Operated by officers and directors who may or may not be shareholders
- Limited personal liability for shareholders
- May elect for “S” status for pass-through tax treatment, however there are limitations regarding the number/nature of shareholders and classes of stock
- Traditional “C” corporation is subject to payment of its own taxes which results in double taxation as shareholders are also taxed on distributions but without the limitations regarding the number/nature of shareholders and classes of stock
- Written bylaws
- File Articles of Incorporation with the Colorado Secretary of State
- Most formal entity and required to have formal meetings
As is plain from the summary above, there are many factors to consider when selecting the right structure for your business. Before making a final decision it is advisable to consult with legal counsel and your tax advisor to more fully discuss the particulars of your situation. If you would like more information regarding the right business structure for you, please contact our Business Law Group partner, David A. Closson at [email protected].