The attorneys at Fellows & Quenzer LLC have experience in creating various types of business entities for numerous clients over the last two decades. Whether you have a Start-Up for a new business or your existing business has outgrown its initial entity type, we can help guide you through your choices. We offer our clients the pros and cons for each type of entity relevant to their unique situation. If you have questions on the type of business entity compatible to your business or equity issues, please call us at 303-376-6366 for a complimentary consultation to explore your unique situation.
In Colorado, for business entity type, one has 5 main choices: sole proprietorship, partnership, limited liability company (LLC), limited liability partnership (LLP) and corporation. There are variations of each type creating a wide range of hybrids. For most businesses, the initial choice is between LLC and corporation.
A sole proprietorship means one owner, and is the "default" form of business entity if the owner does nothing else other than opens the doors to operate a business. The key issue of a sole proprietorship is that it is the same as you for all purposes, liability, debt, profit and tax. There is no protection of other personal assets and any debt of the business can be attached to all personal assets. 99 times out of 100, Fellows & Quenzer LLC recommends against operating a business as a sole proprietorship. The risks are too great and the advantages are minimal.
A traditional partnership is not a form of business entity often chosen in the 21st century. Each partner is liable for all actions of all other partners. There is no personal asset protection. In Colorado, the LLP or LLC is a preferable choice of entity rather than a traditional partnership.
The LLP and LLC are somewhat similar. They each combine many of the aspects of a partnership with the aspects of a corporation. Each allows the partners or members to report income from the business on their personal tax returns. There is not a separate tax to the business. Each type of entity offers protection of other personal assets from business creditors. The business is considered a separate person from the founders. Each has very limited state reporting requirements and allows flexibility to the business in how it operates. One person can own an entire LLC. For IRS purposes, an LLC can be treated as a partnership or as an S type corporation. This is a desirable flexibility depending upon the nature of the business. Many real estate centered businesses form as an LLC and opt to be treated as a partnership for tax reporting purposes. There are numerous tax considerations for a business in deciding between a LLP, LLC or corporation.
There are two basic types of corporation, the subchapter C and subchapter S. The "C" and the "S" refer to parts of the federal tax code. The C Corporation is the preferred form of a larger corporation with many shareholders. There is no limit to the number of shareholders. All companies on the publicly traded stock exchanges are C corporations. The disadvantage is the double taxation that is paid on corporate profits. The C corporation pays taxes on its earnings and then shareholders also pay taxes on any dividend they receive from the C corporation as well.
The S Corporation's net earnings pass through to the shareholders on their personal tax returns without the double taxation of the C corporation. The disadvantage is there are limits to who can be a shareholder and how many shareholders are allowed. Also, for some issues such as various types of employee benefits that are allowed as a pretax business expense for C corporations and forbidden to S corporations.
Every business is different and each business owner should consult with experienced legal counsel for decisions related to type of business entity formation.