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Choosing An Entity

For most people looking to start a business, one of the first decisions they will have to make is what kind of entity their business should operate under. In Colorado, there are several choices, but primarily what most business owners desire when forming an entity is limited liability. Without the limited liability protection that various entities provide, the owner(s) of a business could be personally liable if things go wrong in the business. When you choose an entity that has limited liability protection, it means that an owner’s liability is limited to what he or she promised to contribute to the capital of the entity. In the simplest example, if your contribution to the capital of an entity is $1,000, that is the extent of your potential liability. Your personal assets generally cannot be touched unless your corporate veil has been pierced, but that is outside the scope of this article. Moreover, limited liability generally doesn’t protect people against professional malpractice. This means that doctors, for example, have full liability for professional malpractice.

The following options are available to Colorado business owners:

  • The sole proprietorship: the simplest entity to form. It doesn’t require the filing of any kind of paperwork, and it’s essentially formed when one person decides to go into business for themselves and doesn’t choose another type of entity. This doesn’t provide any limited liability and, thus, is not an advisable option.
  • General partnership: also very easy to form – basically, it’s two or more people working together without choosing another entity form. Highly advisable not to go with a general partnership, since every partner has full liability for their own acts and the acts of their partners.
  • Limited liability company (LLC): generally the best choice for most small-business owners. Relatively easy to form and manage compared to an S Corp and especially a C Corp.
  • Limited partnership (LP), limited liability partnership (LLP), limited liability limited partnership (LLLP), limited partnership association (LP): all are forms of partnership that are hugely preferable over the general partnership, since all forms of the limited partnership provide limited liability.
  • S Corp: a good option if a business owner elects not to go with the LLC. Like the LLC, the S Corp is a pass-through entity. This means that its owners don’t pay corporate tax, but rather are taxed at their personal levels.
  • C Corp: best avoided by small-business owners due to complexity in formation, operation and tax issues. This often is a good choice for more-complicated business arrangements, however.

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