Colorado Business Entities
Colorado Sole Proprietorship
If you are planning to operate a business in Colorado, one of the first considerations for your new business is which type of business entity you will form. The simplest form of business entity is a sole proprietorship, and it does not require that you take any formal legal steps. If you operate a business yourself, it is a sole proprietorship unless you choose to create another business entity. While a sole proprietorship is easy to start up, it leaves you open to complete liability for debts of the business or injuries caused by the business. Alternatives to a Colorado sole proprietorship include a corporation, a partnership or a limited liability company.
A Colorado corporation is the most formal and complex of the possible business entities. A corporation may be privately or publicly held. A publicly held corporation in one in which shares have been sold to the public. A corporation is a completely separate entity for tax and legal purposes from its owners or shareholders. A corporation can be a C-corp or an S-corp. A corporation must elect to be taxed as an S-corp; however, some businesses, such as insurance companies cannot elect S-corp status. The principle difference between the two is that S-corps are not taxed at the corporate level but do have restrictions regarding who may be a shareholder and what type of stock the corporation may issue. All corporations must file articles of incorporation with the Secretary of State as well as a number of other legal documents in order to incorporate. Corporations must also follow strict management and operational rules.
A Colorado business can elect to form a partnership. At its most basic, a partnership is formed when two or more people choose to operate a business for profit. While a partnership does not require a formal agreement, many partnerships do operate under a written partnership agreement. In Colorado, some of the typical characteristics of a partnership are not required. For example, you can form a partnership where all partners do not have equal rights to manage the business or enter into binding contracts. A limited partnership gives one partner the authority to manage the business but also the liability associated with the business. All other limited partners are shielded from liability but are also prevented from making management decisions. A limited liability partnership is another alternative which requires registration with the Secretary of State and allows the partners to evade liability unless it is a result of their own negligence or wrongful conduct. In addition, a Colorado partnership can be structured to be able to continue even after the death or withdrawal of a partner.
Colorado Limited Liability Company
Limited liability companies, or LLCs, are not officially recognized by the Internal Revenue Service, but are a creation of state law. In Colorado, an LLC can be created by filing articles of incorporation with the Secretary of State and creating an operating agreement. An LLC combines features from both partnerships and corporations. While managed much like a partnership, it affords liability protection similar to a corporation. In addition, an LLC allows pass-through taxation so that the business is not taxed at the corporate level. Colorado also allows single-member LLCs, which essentially operate much like a sole proprietorship except without the liability of a sole proprietor.
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