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Legal Structure Guide

There are advantages and disadvantages to each type of legal structure, most have to do with your personal income and taxes.    It is advisable to consult an attorney or your accountant before finalizing a business legal structure.  There are provisions to allow a business to change its legal structure over the course of the business' life.  

 
The main differences between an LLC and S-Corp are:
  • LLC has more operating flexibility and less corporate formalities than a S-corporation
  • S-corporation cannot have more than 100 stockholders, must hold periodic director's meetings and must hold an annual meeting of stockholders
  • Owners of an S-corporation may be subject to less taxes than owners of an LLC, e.g. SE taxes

 

Sole Proprietorship

Management: Owned and operated by single individual: Sole Proprietor

Risk:  Unlimited personal liability

Documents:   If operating business under a name other than own full first and last legal names, then must register as a trade name with Sec of State

Taxes:

  • Income taxed to Sole Proprietor. 
  • Owner must pay self-employment taxes.
  • Option for Unemployment Taxes and Workers Compensation Insurance for owner
  • Can deduct portion of medical insurance.
  • Can deduct retirement plan.

 

General Partnership

Management: Owned and operated by two or more individuals or business entities: General Partners;

Risk: Unlimited liability for partners, no matter what partnership agreement specifies as split.

Documents: 

  • If operating business under a name other than their own legal names, then must register as a trade name with Register Business with Sec of State.
  • If partnership owns property, Partnership Agreement should be filed in the county where property is located (real estate records office)
  • General Partnerships can change to LLP’s
  • Partnership Agreement

Taxes: 

  • Income taxed to Partners. 
  • Distributions to Partners generally not taxable. 
  • Partners must pay self-employment taxes..
  • Option for Unemployment Taxes and Workers Compensation Insurance for partners.
  • Can deduct portion of medical insurance.
  • Can deduct retirement plan

 

Corporation/Professional Corporation PC

Management: Director(s) and Officer(s)

Professional Corporation PC is generally a corporation which is in business for the purpose of providing some type of professional service, such as doctors, engineers, dentists, architects, lawyers, or accountants. A PC may be taxed by the Internal Revenue Service as either a traditional C-corporation, or as a S-corporation (pass-through). 

Risk: Limited risk for shareholders; officers liable for wrongful actions

Documents: 

  • Register trade name with Secretary of State 
  • Articles of Incorporation w/ SOS
  • Periodic Report filed annually w/ SOS
  • Must hold regular meetings and keep written corporate minutes
  • Must hold annual meeting of stockholders
  • Bylaws

Taxes:

  • Income taxable to the Corporation. 
  • Dividends to Shareholders taxable as ordinary income.
  • No self-employment taxes as long as shareholders earn reasonable compensation for activities as an employee.
  • Can deduct  medical insurance.
  • Can deduct retirement plan
  • Unemployment Taxes, FICA/medicare Taxes  and Workers Compensation Insurance for employees are deductibl

A PC (or its stock shares) can only be owned by licensed professionals. Separately, and unaffected by the Colorado corporate status, is the federal tax classification of “qualified personal service corporation” (QPSC).  

 

“S” Corporation

Management:  Director(s) and Officer(s)

Cannot have more than 100 stockholders, each citizen or resident of U.S.

Risk:  Limited risk for shareholders; officers liable for wrongful actions

Documents: 

  • Register Trade name with Secretary of State
  • Articles of Incorporation filed w/ SOS
  • File form 2553 with IRS for Subchapter S election.
  • Periodic report filed annually w/ SOS
  • Must hold regular meetings and keep written corporate minutes
  • Must hold annual meeting of stockholders
  • Bylaws

Taxes:

  • Must pay unemployment and worker’s compensation for employees. 
  • Portion of medical plan may be deductible. 
  • An owner/employee of an S corporation is treated both as a shareholder and an employee. In this dual-status role, the owner can receive a wage (as employee), and a share of corporate income or dividend (as shareholder).  Both the wage and the owner’s share of corporate income are subject to the income tax; however, only wages are subject to the social security and Medicare taxes. An S corporation shareholder should not attempt to evade the payroll tax through the receipt of an excessive distribution in exchange for unreasonably low wages.   Wages can be based on the amount it would cost to hire someone for the position.

 

Limited Partnership (LP)/Family Limited Partnership (FLP)

Management: Two or more persons, with at least one General Partner and one Limited Partner

Risk:  Limited partners have limited liability, General Partners have unlimited liability

Documents:

  • File Certificate of Limited Partnership with SOS
  • Partnership Agreement

Taxes:

  • Income taxed to Partners. 
  • Distributions to Partners generally not taxable. 
  • Partners must pay self-employment taxes..
  • Option for Unemployment Taxes and Workers Compensation Insurance for general partners
  • Can deduct portion of medical insurance.
  • Can deduct retirement plan

FLP Taxes:

  • Assets held in the FLP are effectively shielded from potential claims.
  • Income taxes can be shifted to lower bracket family members or entities such as corporations and trusts to take advantage of deferral and savings techniques.
  • Estate taxes on accumulated wealth and future appreciation can be minimized or eliminated by gifting discounted interests in the FLP to children or trusts established for their benefit.

 

Limited Liability Partnership (LLP)

Management:  Owned by two or more individuals or other business entities: Partners

Risk:  Limited liability in Colorado for partners,  No liability protection in states without LLP statute. 

Documents: 

  • Register Trade Name with Secretary of State
  • File Registration Statement w/ SOS
  • General Partnerships can change to LLP’s
  • Partnership Agreement

Taxes:

  • Taxed as partnership unless elect to be taxed as corporation.
  • Income taxed to Partners. 
  • Distributions to Partners generally not taxable. 
  • Partners must pay self-employment taxes.
  • Option for Unemployment Taxes and Workers Compensation Insurance for General Partners only.

 

Limited Liability Company (LLC)

Management: Operated by Managers and owned by Members.  Members may elect to be Managers.

Risk: Limited liability in Colorado for members and managers;  Managers are liable for wrongful actions.

Documents: 

  • Register Trade name with Secretary of State
  • Articles of Organization w/ SOS
  • Operating Agreement

Taxes:

  • If single Member, then treated as sole proprietorship for income tax purposes unless LLC elects to be treated as a corporation.  If multiple Members, then taxed as a partnership unless elects to be taxed as a corporation.
  • An LLC can neither “employ” its members, nor pay them “wages.”  Instead, members are taxed on their shares of LLC net income.  In addition, all of the LLC’s trade-or-business income may be subject to SE tax.   Members, however, generally can receive distributions tax-free.  A strategy is available to LLC members, however, that can reduce exposure to the SE tax. One essential element of this strategy requires that the owner be issued two classes of interest: a managing interest, and a non-managing interest. In appropriate circumstances, these interests will be respected as distinct, so that the income from each will be treated separately, and the income attributable to the non-managing interest can escape the SE tax. For this strategy to succeed, several requirements must be met. – consult tax specialist.
  • Managers must pay self-employment taxes.
  • Can deduct medical insurance.
  • Can deduct retirement plan.
  • Must pay unemployment taxes and workers compensation insurance for employees

 

 

Buying, Selling, or Closing a Business

 

Federal Requirements for Closing a Business

There are typical actions that are taken when closing a business. An annual tax return for the last year in business must be filed.  If there are employees, the final employment tax returns must be filed, in addition to making final federal tax deposits of these taxes.  The annual tax return for a partnership, corporation, S corporation, Limited Liability Company or trust includes check boxes near the top front page just below the entity information. For the tax year in which your business ceases to exist, check the box that indicates this tax return is a final return. If there are Schedule K-1s, repeat the same procedure on the Schedule K-1.  Returns to report disposing of business property, reporting the exchange of like-kind property, and/or changing the form of your business must also be filed.  See IRS business closing website.

 

 

 

Colorado Requirements for Closing a Business

Required to notify the Colorado Department of Revenue if close, sell, or change business.  If a corporation or LLP, file Articles of Dissolution with the Secretary of State.  If partnership or LLC, file Statement of Dissolution with the Colorado Secretary of State. To close a current Trade Name, use form DR 1102.

 

 

 

Buying an Existing Business

Check recorder’s office in county where business and seller are located and the Colorado Secretary of State, Uniform Commercial Code Section, for records of any security interests filed as liens.  If retail business, have current owner file Form DR0096 to get a tax (sales, wage withholding, income) status letter from the Colorado Department of Revenue.  Also check with city and county assessor, treasurer and/or recorder for local use and property tax status.  Previous owner’s sales tax licenses, state wage withholding and unemployment insurance accounts and EIN’s do not transfer to new owner except when purchasing stock of existing corporation.  Depending on the type of business, a change of ownership form must be filed with the Secretary of State and/or the Department of Revenue.

 

 

       

 

Federal Government

 

Internal Revenue Service (IRS)

Local IRS Offices in Colorado

IRS Tax Information for Businesses

An Employer Identification Number (EIN) is used to identify a business entity.  Generally, businesses need an EIN.  The best way to apply for an EIN is online at the IRS website using Form SS-4 (free).   Income, unemployment, social security, and medicare taxes are filed with the IRS.

 

  

Social Security Administration

Local Offices in Colorado

 

 

U.S. Customs and Border Protection Service

Import, export, border security, customs, international trade

U.S. Department of Commerce

Trade, economic development, commerce

U.S. Federal Trade Commission (FTC)

Competition, truth in advertising, price fixing, consumer protection

U.S. Food and Drug Administration (FDA)

Product regulation, food, drug

      

 

 

 

Colorado State Government

State of Colorado

The official source for on-line services and information for Colorado.

Colorado Attorney General

Enforcement of consumer protection and antitrust laws; prosecution of criminal appeals and some complex white-collar crimes

Colorado Department of Agriculture

 

Colorado Department of Public Health and Environment

Environment, hazardous waste, air pollution, consumer protection, water quality, public health

Colorado Department of Regulatory Agencies

Regulates banks, telephone companies, doctors, insurance companies, electricians, plumbers, accountants; state permits and licenses; Civil Rights Division – see Labor and Employment Sections

 

Colorado Department of Revenue

State sales tax, State income tax, State Unemployment Tax/Insurance

 

Colorado Office of Economic Development and International Trade

Provides assistance to new and existing companies looking to expand or relocate in Colorado. Also provides a variety of technical assistance services including assistance with site selection, research on economic conditions and comparisons, and coordination with local and regional economic development agencies and services.

 

Colorado Secretary of State, Business & Licensing

Businesses other than sole proprietors doing business under their full legal name must register with the Secretary of State.  Corporate documents and annual reports are also filed here.  Also issues Bingo/Raffle licenses, commissions notaries public, collects and disseminates information filed by charitable organizations that solicit contributions in Colorado.

 

 

 

 

 

Local Government

 

City of Denver

Official website for the city of Denver.

Denver Office of Economic Development

Offers regulatory assistance, relocation and expansion services, economic and demographic data, Enterprise Tax-Zone Credit assistance, and international trade assistance for businesses located in Denver or looking to do business in Denver.  Offers compliance assistance with city contracts, small business and disadvantaged business ownership certification, compliance assistance for businesses located at Denver International Airport and manages the Denver Business Assistance Center.

Littleton Office of Economic Development

Must by a Littleton Resident or Business

 

 

 

 

Labor and Employment

 

 

Employer Posting Requirements

See Colorado Department of Labor and Employment and U.S. Department of Labor and Employment websites for posting requirements.  Some of the postings are provided by the government and some are obtained from insurance carriers or private companies.

Steps When Hiring Employees

  1. Review federal and state employee regulations such as minimum wage, overtime pay, work hours, employee postings, etc.
  2. Apply for a federal employer identification number (FEIN) through the IRS with Form SS-4.  
  3. Apply for Colorado State wage withholding account through the Colorado Department of Revenue with form CR100.
  4. Obtain required employer postings and post so all employees can see them – see U.S. Department of Labor and Colorado Department of Labor
  5. Employees must complete form I-9 when hired.  Under Colorado law, employers must verify employee's legal work status and keep documentation
  6. Employees must complete form W-4 when hired.  Employers must submit a copy to the Colorado State Directory of New Hires within 20 days of the hire date.
  7. Employers must withhold federal and state income taxes and Social Security/Medicare taxes from employee wages.  Employers must send amount withheld to the IRS and Colorado Department of Revenue.
  8. Employers must pay federal and state unemployment insurance – see IRS and Colorado Department of Labor and Employment
  9. Check with local authorities to see if there are any tax or registration requirements.
  10. Employers must obtain Workers’ Compensation Insurance.
  11. Review OSHA requirements for the business.  Develop safety procedures.
  12. Review the Americans with Disabilities Act (ADA) requirements for the business.
  13. Employers must provide employees with a form W-2 and independent contractors with form 1099 by January 31.  Copies of these forms must be sent to the IRS and Colorado Department of Revenue by February 28.  Some forms must also be filed with the Social Security Administration by February 28.

 

Independent Contractor vs. Employee

In general, independent contractors determine how work is to be performed, have a significant investment in their work, can realize a profit or loss, are responsible for paying their own income taxes, are paid by the job, and have a business to business relationship.  Contact the IRS for final determination.  

Generally, employers have to file 1099-MISC with IRS to report payments of $600 or more to independent contractors.  

The IRS uses this 20-Point Test to determine if arrangements are independent and qualify under the IRS definitions and regulations (answer "NO" for independent contractor):

  1. Do you provide instructions to the worker about when, where, and how he or she is to perform the work?
  2.  Do you provide training to the worker?
  3. Are the services provided by the worker integrated into your business operations?
  4. Must the services be rendered personally by the worker?
  5. Do you hire, supervise, and pay assistants to the worker?
  6. Is there a continuing relationship between you and the worker?
  7. Do you set the work hours and schedule?
  8. Does the worker devote substantially full time to your business?
  9. Is the work performed on your premises?
  10. Is the worker required to perform the services in an order or sequence set by you?
  11. Is the worker required to submit oral or written reports to you?
  12. Is the worker paid by the hour, week or month?
  13. Do you have the right to discharge the worker at will?
  14. Can the worker terminate his or her relationship with you any time he or she wishes without incurring liability to you?
  15. Do you pay the business or traveling expenses of the worker?
  16. Does the worker furnish significant tools, materials and equipment?
  17. Does the worker have a significant investment in facilities?
  18. Can the worker realize a profit or loss as a result of his or her services?
  19. Does the worker provide services for more than one office at a time?
  20. Does the worker make his or her services available to the general public?

 

Colorado Department of Labor and Employment

The Colorado Department of Labor and Employment administers laws and regulations governing wages, minimum wage, working conditions, youth employment, and certain union issues and grievances.  Also oversees Workman's Compensation and Unemployment Benefits.  See website for Employer Posting Requirements.  Minimum wage rate (2012 = $7.64) and overtime provisions are applicable to retail and service, commercial support service, food and beverage, and health and medical industries.

 

Colorado State Directory of New Hires

State Directory of New Hires (SDNH) is a centralized, confidential, and secure repository responsible for receiving new hire data reported by employers in the State of Colorado. Federal law requires employers to furnish this data to the SDNH of the state in which a newly hired employee works.  This reporting must take place within 20 calendar days after the date of hire or by the first regularly scheduled payroll following the date of hire, if such payroll is after the expiration of the 20-day period.       

 

U. S. Department of Labor 

Federal minimum wage, working hours

      

U.S. Equal Employment Opportunity Commission (EEOC)

Enforces laws against job discrimination and also provides oversight and coordination of all federal equal employment opportunity regulations, practices, and policies.

 

U. S. Occupational and Safety Health Administration (OSHA)

Assures the safety and health of America's workers by setting and enforcing standards.

 

 

 

Register Your Business

 

Trade Names

Search the Colorado Secretary of State website for available trade names.  Trade names are renewed annually.

 

 

Business Registration

All businesses other than a person doing business as a sole proprietor under their full legal name must search for an available business or trade name, then register the trade name with the Colorado Secretary of State.

File Articles of Incorporation (corporation), Certificate of Limited Partnership (LLP), or Articles of Organization (LLC) with the Colorado Secretary of State – Colorado Secretary of State Fee Schedule for Document Filing.

 

 

 

 

Licenses and Permits

 

Business Permits/Licenses

Contact the Department of Regulatory Agencies for state permits and licenses.  Also research the Office of Economic Development's Occupational License Database.  Contact the city, county, and HOA where the business is located to determine legality, e.g. CC&R’s, zoning ordinances, permits, and licenses.  Local government departments to consider: Planning, Economic Development, Building Permits, and Zoning.

Denver Excise and Licenses

201 W. Colfax Ave.

Denver, CO  80202

Phone:  (720) 865-2740

Event License

Single or multiple event licenses required for sales at location other than normal place of business are filed with the Denver Office of Special Events.

 

Retail Sales Tax License

Required if selling, renting, or leasing product to end user of product.  Form CR-0100 filed with Colorado Department of Revenue.  A business with multiple branches in the state must have a separate license for each location (exception mobile businesses and vending machines).   All county and most city sales taxes are collected by the Colorado Department of Revenue.  Exceptions are home-rule cities.  Check city and county government offices to determine license and permit requirements.

 

Wholesaler License

Required for selling product to another business that will resell product or use as ingredient in another product to be resold.  Form CR-0100 filed with Colorado Department of Revenue.  Wholesaler can sell up to $1,000/year in retail sales under Wholesaler License.  If retail sales exceed $1,000/yr, wholesaler only needs a Retail Sales Tax License to use for both retail and wholesale sales.

 

 

 

Taxes

 

Small Business Tax Management

Links to IRS – answers to tax questions

 

Small Business Quick Calculator for Sec 179 Deduction

2008 Section 179 Allowance Calculator to see how much you can save on new equipment purchases in 2008.

 

City Occupational Privilege Taxes/Head Tax

Some cities tax individuals who work within the city limits. This tax is collected through employer and employee contributions.  Set up this tax account with the city clerk’s office. 

  • Denver – (303) 640-2644

  • Greenwood Village – (303) 773-0252

  • Aurora – (303) 695-7090

 

Income Tax

Federal income taxes are reported to the IRS.  If you expect to owe the IRS more than $1,000 you must make federal estimated tax payments during the year.   State income taxes are reported to the Colorado Department of Revenue.

 

Internet Sales Tax

A Colorado Internet business must collect sales tax on items sold to customers in Colorado.  Sales tax is not collected on Internet sales to customers outside of Colorado.

 

Payroll Taxes

Payroll taxes must be withheld and/or paid if there are employees in the business: 

  • Federal Unemployment Insurance (FUTA)
  • State UI
  • Social Security (FICA) and Medicare.  The employer’s portion of FICA must be paid by the self-employed.
  • Employers must withhold federal, state, and local income taxes (based on W-4 employee completes) and the employee’s portion of FICA/Medicare from their employee’s wages.  Wages and withholding are reported annually on a W-2.  Businesses must provide employees with a W-2 by January 31 of the following year.  Order W-2 forms through the IRS.

 

Property Taxes

Property taxes are paid on real and business personal property.  Contact the county assessor or treasurer in the county where the business is located.

 

Sales Tax

Sales tax must be collected if goods are sold to a consumer in Colorado.  Many cities and counties levy local sales taxes.  There are also home rule entities that collect their own tax – contact local sales tax division.  A Sales Tax I.D. Number is required.  State, county, and city sales taxes are collected by the Colorado Department of Revenue.    Businesses with a Wholesaler License do not need to pay sales tax on items purchased for use in a product that will be resold to an end user.  Sales tax rates and sales tax license verification.

 

Self-employment Taxes

Sole proprietors, partners, and members of an LLC must file estimated self-employment taxes if taxes are expected to be more than $1,000 (federal and state separately).  These are paid quarterly to the IRS (income, FICA/medicare – both employer and employee portions) and the Colorado Department of Revenue (income).

 

Unemployment Insurance Tax

Unemployment Insurance (FUI, FUTA, SUI) provides temporary and partial wage replacement to workers who have become unemployed through no fault of their own.  Employers may be required to pay this tax to both federal (IRS) and state government agency (Dept. of Labor).  A Colorado UI account is established on form CR-100. 

 

Use Tax

A business that purchases tangible personal property in another state for use in Colorado must pay a use tax in Colorado (same rate as sales tax rate).   

 

   

 

Government Contracts

 

 

U.S. Government Contracting & Procurement

Federal Business Opportunities

The System for Award Management (formerly CCR or PRONET) is the primary vendor database for the U.S. Federal Government.  Both current and potential federal government vendors are required to register in SAM in order to be awarded contracts by the federal government.  CAGE (Contractor & Government Entity) is assigned when register in SAM.  Vendors must update or renew their registration at least once per year to maintain an active status.  Registration does not guarantee business with the federal government.

 

Colorado Government Contracting & Procurement

Vendors who would like to sell goods and services to the state should register for the Bid Information and Distribution System (BIDS). Vendors can review all competitive purchases conducted by state agencies, institutions, and colleges on the state's Internet web site. Registered BIDS vendors can review and download the Invitations for Bids (IFB), Requests for Proposals (RFP), and Documented Quotes (DQ) directly from the State Purchasing Office’s website.

State Purchasing Office

633 17th Street, Suite 1520

Denver CO 80202-3609

Phone:   (303) 866-6100

FAX:       (303) 894-7445

 

City of Denver Government Contracting & Procurement

Denver Purchasing Division

201 West Colfax Avenue, Dept 304

Denver,  CO  80202

Phone:  (720) 913-8100

FAX:      (720) 913-8101  

 

 

City of Denver Mayor's Office of Contract Compliance

201 West Colfax Avenue, Dept 907

Denver,  CO  80202

Phone:   (720) 913-1999

FAX:       (720) 913-1691

 

 

Colorado PTAC

Assists Colorado companies, including those eligible for preferential consideration, in obtaining and performing under local, state and federal government contracts.

 

SBA Procurement Seminars

Topics included are 8 (A) BD Program, SDB Program, HUBZone Program.   Seminars are free of charge.