Protect yourself and your business!

 There are six major types of corporations recognized by most states in US: C-Corporation, S-Corporation, Non-Profits, Limited Liability Company (LLC), Sole proprietorship, and General Partnership.

Each of these has different benefits, limits and protections on what kind of personal assets may pay business debts.

An “S” Corporation is an entity formed under the laws of the State of Colorado. It is a standard corporation that provides liability protection to its shareholders. The shareholders are the persons that actually own the corporation. The Corporation will also have Directors and Officers. These persons will manage the corporation and run its day to day operations. To qualify as an “S” Corporation, one must make a valid election with the IRS within 75 days of incorporation by the State. A valid election allows the corporation to be taxed as a pass-through entity. This means that the corporation will file a tax return, but all of the profits and losses of the corporation will flow out to the shareholders in accordance with their ownership in the corporation. In order to have an “S” Corporation one must have less than seventy-five (75) shareholders, all shareholders must be U.S. Citizens and the corporation can only possess one class of stock. (General Voting Stock). “S” Corporations are required to file an 1120S tax return form due on March 15 of each year. You will also be required to file an annual report with the Secretary of State. The cost of that report is currently twenty-five dollars ($25.00). You should open a bank account in the name of the corporation. All corporate income should be deposited into that account and corporate expenses should be paid from that account as well. You are also required to hold yourself out as a corporation. Your letterhead, business cards, invoices and other documentation should all be identifying the corporation itself and not you as individuals.

C corporations have many tax benefits. One of the most significant is having the ability to take large deductions for start-up operating costs, acquiring personal assets and equipment, and so forth. This is an incentive to incorporate a because, after incorporation, expenses incurred are deductible up to the amount of the corporation’s taxable income.  The bad news? C corporations have no limits or restrictions on how much shareholders can be taxed for owning stock(s) in a corporation that operates as a business.

A C-corporation is managed by "directors" who decide what products or services will be offered, pricing, advertising, etc. Corporations have several meetings each year when the directors make decisions about business affairs together, while officers operate day-to-day tasks required to keep things running smoothly. 

A sole proprietorship is a business owned & operated by a single individual. The sole proprietors should be identified on the bank account and the face of checks (by name, business name or both) used to pay personal expenses.  Sole proprietorships can be formed through registration with your state’s Secretary of State office, filing for a fictitious name permit, or by operating under an assumed name. 

Non-profit corporations are formed under state laws to create a legal entity that allows for particular tax benefits and exemptions from federal income tax. Depending on the requirements of the state and your proposed non-profit organization’s purpose, any number of people may assemble to form a non-profit corporation. Each state establishes particular laws regarding what will constitute an acceptable purpose that establishes a non-profit corporation and these can vary widely. 

LLCs are another very popular entity for small business owners today. They provide the same Liability protection as a Corporation does. They also have the same requirements that you must hold yourself out as an LLC to the public via your business cards, letterhead, invoices and telephone ads. Limited Liability companies are also a flow through entity. They are required to file a tax return, generally a form 1065. Limited Liability Companies closely resemble partnerships. They can have managers who run the company on a day to day basis. They also have members. These are the persons that own the Limited Liability Company. Limited Liability Companies are generally more flexible than “S” Corporations. They can send profits and losses out to the partners in accordance with the operating agreement. Therefore, your ownership does not necessarily reflect the amount of profit or loss that you may receive from the LLC on an annual basis. These amounts/distributions can also be changed on an annual basis. 

The operating agreement is similar to a partnership agreement and sets forth all of the rules of operation for the LLC. However, all the income earned by the Limited Liability Company is subject to self-employment tax and as such the tax liability of an LLC is generally higher than that of an “S” Corporation depending on the type of income earned by the entity (eg. Ordinary vs. Passive Income). Limited Liability Companies are a great conduit for passive income so that it retains its passive income classification therefore they are commonly used as the entity for Rental Properties.

A general partnership is owned by two or more individuals that share in the profits and management of the business.  Partners, regardless of how many shares or the percentage they own, have equal rights to participate in the control and management of day-to-day business operations and receive an equal share (percentage) of profits.

All of the partners in a general partnership share the authority and responsibility for making any and all business decisions. Decisions concerning the daily operations of the partnership are often made by a majority vote of the partners whose percentage interest entitles them to that decision-making power. 

Feel free to inquire on the costs for dissolving a corporation in good standing; depending on the details of your situation will determine which rate applies to you. Dissolution or revival (restoring to good standing) of suspended corporations is generally handled on an hourly rate basis.

When you've decided to wind down your business, but you need to take care of several important steps to limit your liability for lawsuits and government fees. Several months after you send notice to your creditors that you're going out of business, and after you've settled debts with all known creditors, it's time to officially end your corporation or limited liability company (LLC). You need to dissolve your entity with the secretary of state or the corporation’s division in your state by filing a form or two. By dissolving your entity, you ensure that you are no longer liable for paying annual fees, filing annual reports, and paying business taxes. If you don't dissolve your corporation or LLC, you could be looking at thousands of dollars in accumulated fees and penalties after a few years.

Officially dissolving your business also puts creditors on notice that your business can no longer incur business debts. In fact, in some states, if you don't notify your creditors and customers by officially dissolving your business, they can sue you for a longer period of time.

In some states, before you are allowed to formally dissolve your corporation or LLC, you are required to obtain something called a tax clearance, consent to dissolution, or verification of good standing from your state tax agency. In these states, the secretary of state or corporations division will not allow your corporation or LLC to dissolve if you have not filed your last tax return (checking the "Final tax return" box and writing FINAL at the top) and paid all taxes owed.

To get the clearance or consent of the tax agency, you submit a request by phone or fax. If you are current on filing tax returns and paying state taxes, you will receive a letter or certificate declaring that you have no tax liability.

Make an appointment at our offices in Denver, Colorado, to understand the options available for your business. Our lawyer offers services for clients throughout the area.