Options for Business Entities in Colorado

Some of the most important considerations when starting a business include: Who will own the business and what is their liability?  Who will manage the business?  How will the business entity be taxed?  Colorado offers many different options.  The following is a brief overview of some of the more widely used options.

C-Corporation

The owners of a corporation are called shareholders.  Shareholders are not personally liable for the obligations of the corporation.  The owners risk only the investment that they make in the business to purchase their ownership interests.  Most often management of a corporation is centralized in a board of directors who usually delegate day-to-day duties to officers. Generally, a corporation is taxed as an entity district from its owners; i.e., it must pay income taxes on any profits that it makes, and generally shareholders do not have to pay income tax on the corporation’s profits until the profits are distributed.  When the corporation makes distributions to shareholder, the distributions are treated as taxable income to the shareholders even though the corporation has already paid taxes on its profits.  This is commonly called double taxation.

S-Corporation

The tax law permit certain corporations to elect to be taxed like partnerships and yet retain the other advantages of the corporate form, such as limited liability and centralized management.  Such corporations are called “S corporations.”  Partnerships and S corporations are not subject to double taxation.  Profits and losses flow directly through to the owners.  However, there are a number of restrictions on S corporations (e.g. stock can be held by no more than 75 persons, generally shareholders must be individuals and there can be only one class of stock).

Sole Proprietorship

A sole proprietorship is a form of business in which one person owns all of the assets of the business.  The sole proprietorship generally does not exist as an entity apart from its owner and thus little formality is required to form it.  Since a sole proprietorship is not an entity distinct from its owner, its owner is personally liable for the business’s obligations.  For tax purposes, all profits and losses from the business flow through directly to the owner.

Partnership

A partnership is similar to a sole proprietorship except that there are at least two owners of a partnership.  Little formality is required to form a partnership (just an intention to run as co-owners of a business for profit).  Partners are personally liable for obligations of the partnership.  Management generally is not centralized, but rather is spread among the partners.  Finally, profits and losses of a partnership flow through directly to the partners.

Limited Partnership

A limited partnership is a partnership that provides for limited liability of some investors (called “limited partners”), but otherwise is similar to other partnerships.  A limited partnership can be formed only by compliance with the limited partnership statute. There must be at least one general partner who has full personal liability for partnership debts and has most management rights.  This form of business entity offers limited liability to most investors, centralized management, and the flow-through tax advantages of a partnership.

Limited Liability Partnership

A limited liability partnership provides for the limited liability of all its members; there is not a general partner who stands liable for the actions of the partnership.  The partners are shielded from personal liability and from the negligent or wrongful acts of the other partners.  Otherwise, a limited liability partnership is similar to other partnerships.  Management of a limited liability partnership is shared by the partners and the profits and losses flow through to the partners for purposes of taxation.

Limited Liability Limited Partnership

Colorado is one of the small handful of states that recognizes a limited liability limited partnership.  A limited liability limited partnership has both general and limited partners, both of which are shielded from personal liability.  Management of the entity is vested in the general partners and the profits and losses flow through to the partners for purposes of taxation.

Limited Liability Company

The limited liability company is designed to offer the limited liability of a corporation and the flow-through tax advantages of a partnership.  Like a corporation, it may be formed only by filling appropriate documents with the state, but otherwise it is a very flexible business form.  Owners may choose various forms of owner management or hire outside managers.  Unlike an S-Corporation, there is no limit on the number of owners and owners are not limited to individuals.