“Choosing The Best Legal Business Entity To Suit Your Needs.”

Forming the right business entity can provide the business owners all the necessary protection for their personal assets from business creditors’ claims and lawsuits. It can also help save a business significant tax dollars. Many new start-up companies often make the crucial mistake of basing off of the recommendation of a non-lawyer third party in choosing a business entity form. There are several business entity forms to choose from, depending on the short-term and long-term goals of the business and the owners. It is strongly advisable that you contact an experienced Denver business attorney to help you choose the right business entity.

For commercial entities and for-profit companies, there are five main forms of business structure to be chosen from; they have been listed below. For more information on nonprofit entities under §501(c)(3) of the Internal Revenue Code (IRC), please visit our Nonprofit Organization section.

Sole Proprietorship Law

A Sole Proprietorship is the default form of business form created when an owner begins a business without submitting any formation paperwork to the secretary of state. It forms automatically and is usually formed by one person. For tax purposes, the owner is taxed on all business income. The legal implication of owning a sole proprietorship means that the owner’s assets are treated the same as his or her business assets, and the owner is 100% personally liable for all business liabilities. The owner owns all of the assets; the owner also has unlimited personal responsibility for business liabilities.

General Partnership Law

A General Partnership is formed when two or more business partners get together to start a business to make profit. For tax purposes, each general partner is taxed individually. On the operational side, each general partner has power to manage the business and shares all profits and losses. The legal implication of a general partnership is that each general partner is personally liable for all business liabilities, including all liabilities the other general partner(s) incurred during the course of conducting the business. This is called joint-and-several liability. Partnerships are allowed to own and transfer business property and are not double taxed as corporations are.

Limited Partnership Law

A Limited Partnership is another form of partnership. It is different from a general partner because in a limited partnership, at least one “limited partner” contributes capital investment to the business but does not have managerial power nor any substantial decision making power.

Corporation Law

A Corporation is a legal and taxable entity created under state laws that is a separate legal entity from its owners and shareholders. There are many statutory formalities to follow when setting up a corporation and maintaining it. Corporations shield the individual owners and shareholders from all corporate liabilities, except where the corporate veil has been pierced. Piercing of the corporate veil is discussed below.

Corporations are treated in two different ways under the Internal Revenue Code (IRC), namely Sub-chapter C and Sub-chapter S. Sub-chapter C corporations, known as C-Corporations, are taxed at two levels: corporate level and individual level. This is called double-taxation. The corporation gets taxed by filing its corporate tax return on business profits. When dividends are subsequently distributed to shareholders, the shareholders get taxed on their individual tax returns. Most large scale publicly held corporations in the United States, such as Google or Microsoft, are C-Corporations.

Different from the C-Corporations, Sub-chapter S corporations, also known as S-Corporations, do not impose the same double taxation restrictions on corporations. To become an S-Corporation, several requirements must be met: (1) it must have citizen or nonresident shareholders only; (2) it must be a domestic corporation; (3) it must have no more than 100 shareholders; (4) it must offer one class of stock only; (5) it must not be an affiliate of another corporation; and (6) it must not allow partnership or corporations to become its shareholders.

Limited Liability Company (LLC) Law

A Limited Liability Company (LLC) is set up when the members of an LLC submit their completed Articles of Organization with the secretary of state and pays for the relevant state filing fees. The LLC type of business entity is very flexible and allows individuals or businesses to become members. The members are not liable for any LLC liabilities or any potential personal liability of other members. Only the LLC’s business assets can be used to satisfy the business debts.

An LLC is very flexible and makes an ideal entity for various industries. It is not taxable as a separate legal entity; it is treated as a pass-through business entity. This means the business entity itself does not get taxed on the federal level. All income, deductions, gains or losses are directly passed through to the members of the LLC. LLC owners may file different entity election for tax purposes, such as a partnership, an C-Corporation, or an S-Corporation.

Additionally, an LLC is affordable to set up, as compared to an C-Corporation or an S-Corporation. Its state filing and reporting paperwork requirements are generally less complex than those required for forming and maintaining a corporation.

Trust Law

Sometimes individuals might prefer to form a trust than establishing a business entity if the intent is to provide benefits to another person or organization rather than making a profit for themselves. A trust is established by a settlor (grantor) through a written trust document to allow a person or organization (trustee) to manage property for the benefit of another (beneficiary). The trustee holds legal title of the property granted by the settlor. The beneficiary holds equitable title to the property. There are no filing requirements with the secretary of state for establishing a trust. It is essentially a private legal document creating a three-way legal relationship between the settler, the trustee, and the beneficiary.

Maintenance of Legal Requirements

Maintenance of legal formalities of a business entity is another crucial factor in running a successful business. It helps to ensure that the business’s legal status is properly maintained and remains valid. A business’s obligations include but are not limited to the following: (1) maintaining yearly registration with the secretary of state; (2) maintaining proper corporate booking and accounting practices; (3) maintaining meeting of minutes pursuant to state laws; (4) establishing and abiding by the corporate bylaws; (5) convening the required corporate director and shareholder meetings according to state laws; (6) filing annual tax returns; (7) issuing stocks according to the business formation documents filed with the secretary of state and the United States securities laws; and (8) meeting the requirements of licensing rules and regulations for certain businesses.

There could be fatal consequences for your business for any noncompliance of formalities. If you fail to maintenance the required formalities, your “corporate veil” of liability protection could be “pierced” by the court. “Piercing the corporate veil” means the court allows a party the legal remedy to hold corporate directors, shareholders, or officers personally liable for damages. The court will pierce the corporate veil if the business entity and the owner are legally inseparable due to commingling of personal and business accounts or their failure to maintain business records, books, and accounts. Under these circumstances the limited liability “veil” will be “pierced” (removed).

If you are concerned about incurring personal liability and losing your limited liability protection for your business, please contact our Denver business attorneys and Colorado business lawyers. Call (303) 781-1533 to set up a confidential, free consultation.

 

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