Colorado
Business Entities
Businesses can have various legal forms in Colorado. Each
form has different legal and tax treatment. This article explores the basics
of business entities in Colorado.
Sole Proprietorship
A sole proprietorship is the simplest business form. An individual
engaged in business activity is a sole proprietory.
No charter or permission is required from the state in order to start
business as a sole proprietor. Income and expenses are reported on
schedule C of the proprietor's federal income tax return. Net income is
subject to federal income tax and self employment and medicare
taxes.
Trade names are registered with the Colorado Department of Revenue.
There is no liability protection. The sole proprietor is personally
liable for the obligations of the business a all kinds.
No particular formality is required to close a sole proprietorship.
The proprietor closes the doors, pays the bills, and keeps the remaining
assets.
Partnership
A partnership is a business carried on by two more persons or
entities. A partner does not have to be a natural person.
Corporations or combinations of corporations and natural persons may be
partners. In a general partnership, all the partners are liable for
all the liabilities of the corporation. Each partner has the power to
bind the partnership to actions within the scope of the partnership.
Partnerships are formed by agreement. Agreements may be informal and
unwritten, or they may be complex, written documents spelling out the tax
structure and management of the partnership.
Although a written agreement may provide otherwise, under Colorado law, a
partnership is dissolved by a partner's withdrawal, death, or
bankruptcy. On dissolution the partners first pay the debts.
After the debts are paid, the partners receive back their capital
contribution. Then they share out the remaining assets in proportion to
their interest in the partnership.
A written partnership agreement can determine management, allocate tax
attributes, and determine the way partners are paid on dissolution.
Written agreements may be highly complex, covering many different aspects of
the partnership and its structure.
Corporations
A corporation is an entity which has a separate legal existence from its
owners, who are called stockholders. The affairs of the corporation are
directed by a board of natural persons called directors. The board of
directors elects the officers, who hire the employees and who manage the
business.
Colorado requires a minimum of three directors,
however, if there are fewer than three stockholders, the number of directors
may be the same as the number of stockholders. Thus if there is one
stockholder, only one director is required. Two stockholders require a
minimum of two directors.
The president is the principal officer of the corporation. The other
officers are the treasurer and secretary. Each of these officers may
have deputies, such as the vice-president, assistant treasurer, and assistant-secretary.
In Colorado a single natural person may hold all the offices. In the
smallest corporation, a single person may be the sole stockholder, director
and officer.
A corporation provides liability protection for the owners. The
stockholders, directors, officers, and employees are not personally liable
for the obligations of the corporation. Almost all businesses of any
significant size are either incorporated or set up as a limited liability company
because of the liability issue.
Although the corporate form provides liability protection, individual
liability may exist based on individual actions such as personally
guaranteeing a corporate obligation or personally committing an act for which
the corporation is sued. In addition under the federal and state tax
laws, the principal officers and directors may be held responsible for paying
amounts withheld from employee wages, considered "trust funds," sales
taxes, and other taxes not remitted to a governmental entity. A
few other areas of legal exposure also exist under various state and federal
laws.
Profits are paid to stockholders as dividends under Subchapter C of the
Internal Revenue Code. The corporation is a separate taxpayer, which
pays tax on its net profits. When the corporation pays dividends to the
stockholders, they in turn report the dividends as income on their tax
returns, but hte corporation receives no deduction
for the payment.
As an alternative way of being taxed, the stockholders of a small
corporation may elect to be taxed under Subchapter S of the Internal Revenue
Code, in which case profits and losses flow through the corporation to the
stockholders, who report them on their individual income tax
returns. In a small corporation, where the officers are
also the stockholders, they may receive wages as part of their total
compensation and share the net profits as the other part. The
portion received as wages is subject to income tax withholding, federal
employment tax, fica and medicare
tax, but the net profits are not.
Limited Liability Company
A limited liability company is taxed as a partnership, but it receives the
legal liability protection of a corporation. Management can be quite
informal, or it may be quite complex. A written agreement will cover
the management, ownership, dissolution, taxation, and many other aspects of
the organization and operation of the company. Limited liability
companies are particularly suitable for passive investments, such as managing
real estate.
Limited Partnership
A limited partnership has one or more general partners,
who actively manage the business, and who are liable for its obligations.
It may also have multiple limited partners, who have no liability for
the obligations of the business, and who may not have an active role in
managing the business. Real estate investments are often structured as
limited partnerships because of the tax treatment and the liability
protection afforded the limited partners.
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