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Legal Structure & Registration

When starting your own business, you must carefully choose the appropriate legal structure for your business. You should examine the characteristics of each structure along with the needs and desires you have for your business. All Legal structures are set up at the Secretary of State online at the Secretary of State website: www.sos.state.co.us. For more information and registration visit https://mybiz.colorado.gov/.

There are several issues that you should consider when determining the legal structure of your business. First, to what extent will you be personally at financial and legal risk? Second, who will have the controlling interest in the business? Third, how will the business be financed? There are advantages and disadvantages to each legal structure. As a new business entrepreneur, you should examine all the characteristics and deter- mine which is best suited to your needs.

As you decide upon your legal structure, you should carefully evaluate both your present and future needs for operating your business. To avoid duplication of legal expenses, licensing and paperwork, analyze your various options and choose the business structure that will meet your long-term needs, rather than choosing a business structure solely for its short-term convenience. While it is not a requirement, it may be valuable to consult an attorney. See the chapter on Choosing Advisors for suggestions on how to select an attorney and other professional advisors.

Sole Proprietor

This is a single individual who owns and operates the business. There is no legal separation between the individual and the business. She/he benefits from 100 percent of the profits and is personally responsible for 100 percent of all the debts and liabilities of the business. If you and your spouse run your business together you have the option of registering your business as a sole proprietor or a general partnership. Colorado law allows a husband and wife to register as a sole proprietor when they register their ownership under one legal name only with the Colorado Secretary of State. The law allows the second spouse full responsibility for the business.

Married Couples

Couples are encouraged to consult a competent tax professional to determine the exact tax implications for themselves and their business. You and your spouse may run your business together and share in the profits. Be aware, though, that your business may be considered a partnership. The Department of Revenue registers the business as a general partnership if both are listed as owners of the business.

General Partnership

This is very similar to a sole proprietorship except that there are two or more individuals or entities who own the business. A general partnership offers the means for pooling all resources and sharing control of a business. There is relatively little formality required to establish and run the business, and control remains with the partners. However, all partners remain 100 percent responsible for all the debts and liabilities of the business, regardless of any partnership agreement outlining work responsibilities and shares of profit.

Limited Partnership

This provides the ability to acquire additional capital while avoiding the need to borrow as the general partner(s) maintain(s) control of the day-to-day operations of your business. The general partner(s) is/are 100 percent responsible for all the debts and liabilities of the business. The limited partner’s liability does not exceed his/ her investment in the business. However, the limited partner may not be involved in the operations or management of the business.

Corporation

This is a legal entity separate from the owners of the business. There are significant formalities that must be observed to properly operate a corporation. The corporation provides a wall of liability protection between the business and the owners. It has the ability to raise capital by issuing stock. While the limited liability enjoyed by share- holders may appear attractive, most creditors will probably require a personal guarantee as collateral. The corporation must pay its own taxes in addition to the owners, and owners who work in the business are considered employees. A corporation may become an “S” Corporation through application to the IRS. This will eliminate the double taxation of a corporation, but may result in the loss of some tax deductions and reduce flexibility on the handling of business losses. It does NOT eliminate employer responsibilities for corporate officers.

“S” Corporation

This is not a separate form of legal structure, but rather a special tax status granted by the IRS to a corporation to tax the business’ income like a partnership or a sole proprietorship. A corporation elects “S” Corporation status by filing with the IRS on Form 2553, “Election by a Small Business Corporation.”

Limited Liability Company

This combines the benefits of liability protection in a corporation with a more simplified tax structure like a partnership. It is similar to an S Corporation without the IRS restrictions. However, limited liability companies are a relatively new form of business structure.

Limited Liability Partnerships and Limited Liability Limited Partnerships

These are new forms of legal structure in Colorado since July 1, 1995. They are similar to limited liability companies with principal benefits to all owners who are members of a single licensed profession. Anyone considering the formation of a limited liability partnership or a limited liability limited partnership is strongly encouraged to use an attorney.

Limited Partnership Association

This is a new form of legal structure in Colorado effective July 1, 1995. This structure is different from a partnership or limited liability partnership in that the association has an indefinite life. Its existence does not terminate upon the disassociation, death or bankruptcy of any of its partners. For more information about this structure it is strongly recommended that you contact an attorney for specific liability protection.

Nonprofit

This is a term that refers to an organization that uses all profits to further organizational goals instead of distributing the profits to shareholders, organizers or owners. In Colorado, an organization may choose to be an unincorporated nonprofit association or a nonprofit corporation. Establishing tax-exempt status is a second process that is completed by filing either Package#1024, “Application for Recognition of Exemption Under Section 501(a)” or #1023, “Application for Recognition of Exemption,” with the IRS.

Cooperative

This is a legal organization that is formed by a group of individuals and/or businesses that desire to work together for their “cooperative” benefit. It allows a group of separate individual businesses to join together for a common purpose such as the bulk purchase of materials, for sharing office space or to sell common products. As you decide upon your legal structure, you should carefully evaluate both your present and future needs for operating your business. To avoid duplication of legal expenses, licensing and paperwork, analyze your various options and choose the business structure that will meet your long term needs rather than choosing a business structure solely for its short-term convenience. While it is not a requirement, it may be valuable to consult an attorney. See the chapter on Choosing Advisors for suggestions on how to select an accountant, attorney and other professional advisors.

A Sole Proprietorship is a business owned and operated by a single individual.

A General Partnership is a business owned by two or more individuals or other business entities.

A Limited Partnership is a business owned by two or more individuals or other business entities in which at least one of the partners has limited liability protection.

A Corporation is a legal entity that exists separately from the people who create it.

An S Corporation is not a separate form of legal structure, but rather a special tax status granted by federal tax law to a corporation to tax the business’ income like a partnership or a sole proprietorship.

An LLC combines the concepts of partnerships for tax purposes and corporations for liability purposes.

Registered Limited Liability Partnerships (LLP) and Registered Limited Liability Limited Partnerships (LLLP) limit a partner’s personal liability in the business to their personal investment in the business, except in areas related to their personal professional conduct.

Limited Partnership Associations are created by filing “Articles of Association” with the Colorado Secretary of State.

Nonprofit is a term that refers to an organization which uses all profits to further organizational goals instead of distributing the profits to shareholders, organizers or owners.

A cooperative is a legal organization that is formed by a group of individuals and/or businesses that desire to work together for their “cooperative” benefit.

Any out of state business that will have ongoing business in the State of Colorado must register with the Colorado Secretary of State.

If you are a sole proprietor or general partnership and will be doing business under a name other than your own legal name(s), you must register your trade name(s) with the Colorado Secretary of State online.

An attorney is not required to file Articles of Incorporation. However, if you decide not to use an attorney, you should educate yourself thoroughly regarding all aspects of a corporation.

A corporation may raise capital to begin the business by two different means: equity financing and borrowing money.