Business Entity Formation
Colorado Attorney R. Brian Daniel
One of the most important and confusing decisions new business owners face is determining which form of business entity to use. Many issues must be taken into account, including the nature and the size of the business, as well as various tax and liability concerns. Each type of business entity has its own benefits and drawbacks. There is no substitute for expert legal advice on business entity formation. If you currently own a business or are in the process of starting one, you should contact a skilled Parker, Colorado Business Entity Formation Attorney who can determine which business entity form is most appropriate for your business and/or who can provide legal advice regarding your current business entity.
There are many different types of business entities available. The most commonly used forms are:
Sole Proprietorships – Sole proprietorships are the simplest business entity form. Sole responsibility for the operations and the profits/losses of the business are assumed by the business owner. The owner has personal liability with a sole proprietorship; because the owner’s personal assets are tied to the business.
General Partnerships – A general partnership is a business agreement between two or more individuals or entities. General partners operate and manage a business together and share in the business profits and losses. Each general partner has personal liability for business debts and lawsuits. A partnership does not pay taxes; instead, the general partners report their share of the profits and losses on their personal income tax returns.
Limited Partnerships – Limited partnerships have both general and limited partners. The general partners are responsible for organizing and managing the company and therefore, have personal liability. Limited partners, on the other hand, invest capital into the business, but because they do not play an active role in running the business, their liability with regard to business debts and lawsuits is limited to the amount they have invested into the business.
C Corporations – A C corporation is a standard corporation. Corporations provide the owners, known as shareholders, with the greatest degree of protection from personal liability; however, there is a price for this protection. Corporations are subject to double taxation, meaning that the corporation pays taxes on profits as they are earned and then the shareholders pay taxes, again, on their share of the already taxed corporate profits (shareholder dividends).
S Corporations – S corporations are similar to C corporations in terms of structure, liability protection, and other issues; however, S corporations are not subject to double taxation. The shareholders, not the corporation, pay taxes on profits and gains from an S corporation. This is referred to as “pass-through” income because it passes through the corporation directly to the shareholders’ individual tax returns.
Limited Liability Companies (LLCs) – A Limited Liability Company is formed by one or more people, called members. LLCs are usually taxed like a sole proprietorship or a partnership, depending upon the number of members. The income is passed through the LLC and taxed at the individual level. However, LLCs can choose to be taxed like a corporation. LLCs also have the liability protection of a corporation.
Business entities can be very complex and determining which one best suits the needs of your unique business situation can be challenging. If you select a business entity that is not suited for your business or not properly structured, that selection could cause serious liability and tax consequences to you. Therefore, you should consult an experienced Parker, Colorado Business Entity Formation Attorney before you set up a new business entity.
Tax Advice Disclaimer
The legal matters which may become the subject of the engagement of The Daniel Law Firm (whether they involve litigation or are transactional in nature) may directly or indirectly have federal, state or local income tax implications or consequences to you (including, but not limited to, the tax deductibility of legal fees) even though the legal services requested may not expressly involve a request for tax advice.
Due to the inherently complex nature of tax issues and how such issues may be related to individual circumstances, The Daniel Law Firm does not undertake to provide or render tax advice on any matter and The Daniel Law Firm has no implied obligation to do so unless it is the explicit purpose of the representation or unless you expressly ask The Daniel Law Firm to provide such advice and The Daniel Law Firm expressly agrees to its provision. Otherwise, The Daniel Law Firm will assume that the client’s own tax advisor(s) will provide all tax advice necessary.
If you are facing a complicated legal issue, reach out to The Daniel Law Firm. We take great pride in serving clients all over Colorado. Let us discuss with you the best strategy for moving your case forward in both a positive direction and timely manner. Call us today at (303) 951-0233.
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