When starting a business, you must decide what legal structure is best for the needs of your business. There are several choices of business formats in Colorado. To help you decide, ask yourself the following questions:

  1. To what extent will you be personally at financial and legal risk?
  2. Who will have the controlling interest in the business?
  3. How will the business be financed?

There are advantages and disadvantages to each legal structure.

Advantages and Disadvantages

Sole Proprietorship 

Definition: Business owned/ operated by a single individual

Advantages: 

  • Simple
  • Ease of decision making
  • Owner keeps profits

Disadvantages

  • Owner assumes all liability of business
  • Owner must guarantee all debt personally
  • More financing limitations 

Business Registration: Secretary of State

General Partnership

Definition: Business owned by two or more individuals or business entities

Advantages: 

  • Simple formation
  • Ability to pool resources of partners (financial, professional, managerial, etc.)
  • Flexibility in dividing profits and losses 

Disadvantages

  • Partners assume personal liability if partnership structure changes
  • Partnerships must be dissolved and reformed

Business Registration: Secretary of State and Internal Revenue Service

Limited Partnership

Definition: Business owned by two or more individuals or other business entities where at least one partner has limited liability protection

Advantages: 

  • Partners’ risk is limited to their investment in the business
  • Can raise capital by selling additional limited partnership interests 

Disadvantages

  • General partner remains personally liable
  • Limited partner may not work in business/ management without risking loss of limited liability status 

Business Registration: Secretary of State and Internal Revenue Service

Corporation 

Definition: Legal entity that exists separately from the people who created it 

Advantages: 

  • Protection from personal liability
  • Stability even with ownership change
  • Ability to attract multiple investors 

Disadvantages

  • Corporate profits may be subject to double taxation
  • Substantial legal and tax paperwork 

Business Registration: Secretary of State and Internal Revenue Service

S Corporation 

Definition: Corporation that is taxed more like a partnership or sole proprietorship

Advantages: 

  • Same as corporation with possible tax advantages 

Disadvantages

  • Limitations of number of potential investors
  • Numerous restrictions and substantial legal and tax paperwork 

Business Registration: Secretary of State and Internal Revenue Service

Limited Liability Company (LLC)

Definition: Combines concepts of partnership for tax purposes and corporation for liability purposes

Advantages: 

  • Protection from personal liability
  • For income tax purposes can be treated as a partnership or a corporation 

Disadvantages

  • Tax and liability treatment is not uniform from state to state
  • May be limitations on transfer of ownership 

Business Registration: Secretary of State and Internal Revenue Service