Lawyers Helping Businesses
Business startup, smart formation and proper management are crucial to any small business or new company. It starts with choosing the right entity, but it doesn’t end there. In addition to business start-up and formation advice, our office handles all types of business contracts, agreements and documents, including operating agreements, shareholder or buy/sell agreements, employment/contractor agreements, commercial and residential leases, sales agreements, pledge and security agreements and promissory notes. We are also able to advise on general business issues as well as provide tax planning and exit strategy advice regarding your business. Business entity types are governed by state law and registrations are processed by the Colorado Secretary of State. Business taxation is governed by federal tax law which is carried out by the IRS. Descriptions of only the most common Colorado entities are listed below.
This is the default entity for a business that is owned and operated by a single individual who has not otherwise registered the entity. There are very few legal requirements to formation of this type of entity. Financially, the business and the owner are considered one in the same, and everything is reported on the individual’s personal income tax return Schedule C. If the business operates under a different name than that of the owner, it must register a trade name.
This type of business is operated by two or more individuals or entities for profit. A partnership should have a written partnership agreement outlining the management of the business and each partner’s obligations and rights. The partnership agreement generally does not have to be filed, though there may be situations where it is advisable to do so.
Each partner in a general partnership pays their own taxes on their share of the profits/losses of the partnership. One of the major disadvantages of the general partnership is that each partner is jointly and severally liable for all of the debts and obligations of the partnership. This arrangement exposes the personal assets of all partners to liability with creditors if the partnership encounters financial problems.
This type of business is operated by two or more individuals or entities for profit, with the added element that at least one of the partners has general liability and at least one of the partners has limited liability. This means the general partner(s) is/are exposed to liabilities of the partnership, but they also manage and control operations of the partnership. The limited partner’s liability is limited to their financial investment in the partnership only. Often, investors may be interested in the limited liability and may not be interested in or have time for management of the partnership.
In Colorado, a Certificate of Limited Partnership must be filed with the Secretary of State to create a limited partnership.
Limited Liability Company (LLC)
This type of business entity is created by filing Articles of Organization with the Colorado Secretary of State, along with paying the filing fee. The LLC is a hybrid entity that mixes the tax principles of a partnership with the limited liability principles found in a corporation. In an LLC, the owners are called members. Management of the LLC can be vested in all the Members or in Manager(s).
An LLC should have an Operating Agreement, which defines the LLC, its members, and the relationship, management and obligations of all parties. The Operating Agreement can address compensation, allocation and taxation issues, what happens if a member dies, how LLC Interests can be transferred, Voting and Meetings, and other specifics.
By default, an LLC is taxed as a partnership if there are two or more owners, unless it elects to be taxed as an “S” corporation. LLCs are still relatively new legal entities, so they may not necessarily receive uniform treatment across state lines, and operate without a lot of defined law.
This entity exists totally separate from the people who create it and/or own it. A corporation is owned by shareholders. Generally the shareholders elect a Board of Directors to oversee the Company. The Board in turn elects officers, if necessary, to handle the day-to-day operations of the company. Often in smaller corporations, the same person may be a shareholder, Board member and officer all at the same time.
A corporation is formed by filing Articles of Incorporation with the Colorado Secretary of State. A corporation must obtain a Tax ID Number (EIN) from the IRS.
Corporations have more formalities to operation than any of the entities discussed so far. A corporation must have annual shareholder meetings, elect a Board of Directors, maintain corporate records, adopt bylaws, keep completely separate business finances, and make proper filings from time to time with the Colorado Secretary of State, among other things. These actions help the corporation to maintain its status, and the shareholders, officers, and directors to maintain their limited liability. If you are not sure if your corporation is following corporate formalities, our office is happy to help with maintenance of your corporate formalities and assist with any filing requirements.
A corporation faces double taxation. It is taxed once at the corporation level on its profits, and again on its distributions/dividends to the individual shareholders receiving them.
An S Corporation can begin either as a corporation or as an LLC. The “S-Election” simply refers to the tax status of the entity. By making the S-election, a business is telling the IRS that it wants to be taxed and treated as a small business corporation (rather than as a partnership or a C corporation). A corporation can elect “S” status by filing IRS Form 2553, Election by a Small Business Corporation. The timing of an S-Election is important; please contact our office to further discuss whether or not your business should make an S-Election and when the best time to do so would be.
In exchange for generous tax treatment, there are certain restrictions placed on an S corporation. To be eligible, the entity must meet the following criteria, in addition to other criteria:
- Domestic entity (formed in US)
- Only one class of stock
- Maximum number of shareholders is 100
- Shareholders must be either US citizens, resident aliens or certain qualifying trusts, estates or exempt organizations
- All shareholders must consent to the S-Election
To ensure that you form your new company properly, for advice concerning your current company, and/or to ensure your company continues to serve its purpose and maintain it’s liability protection, call Bordeaux & Boyes LLC. We are here to serve your Fort Collins and Northern Colorado business needs.