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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.


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.    


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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George C. Wing, Webmaster

121  S. Tejon St., Suite 1107, P.O. Box 757
Colorado Springs, Colorado, USA 80901-0757
tel: (719) 635-4716