What is a business entity?
To put it in simple terms, a business entity refers to how your business will be structured or formed. The entity that is chosen for a new business will greatly determine everything that is involved with business ownership, including tax filings, risk exposure, and financial and legal effects. Electing a business entity when starting a new venture in Colorado is, perhaps, the first and most important step of the process.
What are the types of business entities?
In the State of Colorado, there are two business groups; Corporations and Unincorporated Associations. Corporations are quite common and are more recognizable than the Unincorporated Associations. Corporations offer two categories; the C-Corporation and the S-Corporation.
Under a C-Corp., the owners are otherwise known as shareholders. Those shareholders elect a Board of Directors on an annual basis, who in turn, appoint officers that will oversee the daily operations of the company. A C-Corp. can transition to an S-Corp. once it has filed an S-Corporation election with the IRS. The only distinguishing factors between the two corporations are the way in which taxes are imposed, restrictions on the number and types of shareholders, and the issuing of the number of classes of stocks.
Another corporation combining certain features of corporations with those of partnerships is called a Limited Liability Company, or LLC. Limited Liability Companies have become quite popular and are a common form of business today. The profits and losses of an LLC are listed on the member/s personal tax forms; therefore, the LLC doesn’t pay taxes. One of the greatest benefits to forming a Limited Liability Company is to limit financial and legal liability of the member/s. Since ownership is not restricted in a majority of states, anyone can be a member of the LLC, with the exclusion of insurance companies and banks.
When forming an LLC, the first line of action is to choose a business name and file an Article of Organization with the state, which establishes legal recognition of the LLC. Negotiating and implementing an Operating Agreement, which tailors the terms of the Limited Liability Company by outlining the duties, powers, liabilities, and rights of the Limited Liability Company is highly recommended, especially if there is more than one member; however, it is not a filing requirement in the State of Colorado.
Unincorporated Associations and the entities that fall within this category may be less familiar to the general population, but they can offer better entity choices, dependent upon the needs of the business, especially when forming a partnership. These entities defined under Unincorporated Associations include:
Sole Proprietorships – Sole Proprietorships are the simplest way to structure a business and aren’t technically recognized as a business entity. The sole proprietor is responsible for self-employment tax rates and is solely liable for any legal or financial repercussions. A Sole Proprietorship requires very little to set up, but the individual will need to file a Trade Name if he/she intends on using a business name other than their own.
Partnerships – When two or more individuals in the State of Colorado decide to co-own a business, or form a partnership, there are a number of entities that can be chosen to legally structure the business. Like a Sole Proprietorship, a General Partnership is the easiest to form and does not require state filings, unless the partnership is going to conduct business under a different name. Under a General Partnership, all partners will equally be responsible for their taxes and will divide the profits and losses of the business. Each partner will also be personally responsible for any legal or financial implications.
Partnership entities that do require state filing include:
- Limited Partnership
- Limited Liability Partnership
- Limited Liability Limited Partnership
When starting a business, it’s important to understand how the new venture should be structured and which business entity will offer the greatest benefits and protections for you and your company. Hiring a business attorney can be your greatest investment and be most advantageous when making decisions that pertain to any business startup. Ted Bendelow of Bendelow and Wolfson is a seasoned business attorney who has provided his expertise for over 40 years. Mr. Bendelow will take the time to understand your business ideas and goals and provide sound legal advice and recommendations for the business entity best suited for your needs. Once your business’s structure has been determined, Ted Bendelow of Bendelow and Wolfson will prepare and file the necessary documents with the state.
If you live in Boulder, Denver, Longmont or any of the surrounding areas and need the services of an experienced business attorney, call the trusted team at Bendelow and Wolfson today.
