Entrepreneur’s Mini-Guide to Creating a Colorado Business Entity

November 1, 2011 by Tom

The Entrepreneur’s Mini-Guide to Creating a Colorado Business Entity

By: Anna E. Lineberger
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Contemplating the idea of starting your own business can be a daunting yet exhilarating process. There will certainly be a myriad of information to sort through, decisions to be made, and groundwork plans to be implemented. However, the goal of this post is to facilitate your understanding of the legal component of establishing your own business entity and provide you with additional resources that may be of service to you in such an exciting time.

In addition to acquiring the appropriate funding, skills, discipline, experience, insurance, all of which will be required for any successful business entity, the following items will need to be addressed:

Business and Financial Plan
A business plan defines your business goals and serves as a guide to track the organization’s growth and progress. It spells out items such as your budget, cash flow projections, and financial needs. Most banks will not speak with you about lending start-up funds until you have a sound business plan in place. Below are a few of the local resources available to help with this important step:

SCORE: www.scoredenver.org – SCORE is a nonprofit association dedicated to entrepreneur education and the formation, growth, and success of small business nationwide. Local chapters provide free counseling and low-cost workshops in their communities. Both working and retired executives and business owners donate their time and expertise as business counselors. Check here for training locations in the Denver area.
Denver Chamber of Commerce – Small Business Development Centers – www.DenverSBDC.org. Small businesses represent 97% of all employing businesses in Colorado and is a dominant source of new job creation in the state. The Denver Chamber is committed to strengthening small businesses through its affiliate Denver Metro Small Business Development Center (SBDC), which provides free one-on-one business consulting services and affordable business seminars.
U.S. Small Business Administration – Colorado office.

Choice of Entity
The choice of entity is also a critical step in creating a business. Among the options include a sole proprietorship, partnership, or corporation, and the numerous variations under each form. The information below sets out a brief glimpse at the distinguishing factors between the more common entity choices found in Colorado. Different structures allow for different benefits and limitations, and it is strongly advised to speak with a business planning attorney and CPA to discuss this step of formation.

o Sole Proprietorship –A sole proprietorship is an unincorporated business owned and established by one individual. No formal actions are required in order to organize a sole proprietorship, but a trade name may be registered by filing a Statement of Trade Name with the Secretary of State’s office. Likewise, the individual tax return may reflect the DBA (“doing business as”) designation. The individual is personally liable for all risks and obligations of the sole proprietorship. All income and loss is reported on the individual’s tax return.

o Partnerships: GP, LP and LLP

♦ A general partnership (GP) is an association of two or more persons to carry on, as co-owners, a business for a profit, but excluding an association formed under any other statute. There are no formal actions to be taken in order to organize a GP, and there are no restrictions concerning the naming of the partnership. Partners are jointly and severally liable for the obligations of the GP, but with a few exceptions – the creditor must exhaust all remedies against the GP before executing against a partner. Income from a GP is passed through to the individual partners.

♦ A limited partnership (LP) is formed by two or more persons under the laws of Colorado and having one or more General Partners and one or more Limited Partners. An LP is formed by filing a certificate of limited partnership, and can become an LLLP (registered limited liability partnership) by registering with the Secretary of State of Colorado. Both forms of limited partnerships must include the LP, LLLP, Ltd., or the elongated form of the acronym in the entity’s name, as well as be distinguishable from any other entity name on the record. A general partner is jointly and severally liable for the obligations of the limited partner. A limited partner is not personally liable for the obligations of the LP unless the limited partner participates in the control of the business and causes a third party to reasonably believe that he or she is a general partner. Income from the LP is passed through to the individual partners.

♦ A registered limited liability partnership (LLP) is a general partnership in which the partners are not personally liable for the debts and obligations of the general partnership. An LLP must register as such with the Secretary of State of Colorado and must contain LLP or the elongated form of the acronym in its name. Like an LP, the name of an LLP must also be distinguishable from any other entity name on the record. Unless the partnership agreement states otherwise, a partner is not liable directly or indirectly, including by way of indemnification, contribution, or otherwise for a debt, obligation, or liability of or chargeable to the LLP, except for the partner’s own negligence, wrongful acts, or misconduct. Income from the LLP is passed through to the individual partners.

o Corporations: C-Corp, LLC and S-Corp

♦ A C-Corporation is a domestic, for-profit entity which is organized under the CBCA (CRS § 7-101-401(11)). A Corp is incorporated by filing Articles of Incorporation with the Colorado Secretary of State, and the name must include Corporation, Incorporated, Company, Limited, or the corresponding abbreviation, as well as be distinguishable from any other entity name on the record. Shareholders have no personal liability for the debts of the corporation, except as may arise through piercing the corporate veil as well as the shareholder’s own acts. Corporations are taxed at the entity level as well as at the individual level upon receiving shareholder distributions. Corporations are subject to SEC regulations as well as additional filing and reporting requirements.

♦ A limited liability company (LLC) is organized and existing under the CLLCA (CRS §7-80-102(7)). An LLC is formed by filing Articles of Organization with the Colorado Secretary of State, and the name must include LLC, Ltd., or the appropriate long form version, as well as be distinguishable from any other entity name on the record. Members and managers of an LLC are not liable for any debt, obligation, or liability of the LLC. Income from the LLC is passed through to the individual members, who report the income on their individual tax returns. Note that LLCs may elect to be taxed as a C or S corporation.

♦ An S-Corporation is similar to a C-Corp, except it has successfully elected to be treated as an S-Corp for pass-through tax purposes by meeting certain qualifications -– see IRS Form 2553. Income from an S-Corp is passed through to the individual members and filed on a Form 1120S. Profit distributions are recorded on Schedule K1.

Business Name and Registration
Once you have established your business plan and chosen organizational structure, you will need to reserve and register the name of the entity with the Colorado Secretary of State.

o Sole Proprietorships and General Partnerships: Owners of these business structures may file a Statement of Trade Name to register their business interest with the Colorado Secretary of State.
o Corporations and variations: These and other entities must first search the Secretary of State’s records database to see if the desired name is available. If so, they may then proceed with filing the requisite articles or agreements.

Intellectual Property
Could your business model involve the use patents, trade secrets, products or other ideas for which you would like to protect your rights? Even items such as symbols, logos and names may and often should be protected against competitors. Do you know if rights to your website and photos belong to you, or your web developer? These and other intellectual property questions should be addressed at the onset.

The three main types of protection afforded are copyrights, patents, and trademarks. A copyright protects original works of authorship, while a patent protects inventions or discoveries. Ideas and discoveries are not protected by the copyright law, although the way in which they are expressed may be. A trademark protects words, phrases, symbols, or designs identifying the source of the goods or services of one party and distinguishing them from those of others. (source: U.S. Copyright website)

There are many questions which needed to be sorted out concerning the best way to protect your business assets, especially the intangibles. A one hour discussion with an experienced attorney can save you much time and money in the long run.

Employee Tax Matters
As rewarding as providing a means of employment for a fellow citizen is, it also comes with a myriad of tax regulations which require your attention.

If you operate a sole proprietorship, you will still be responsible for self-employment tax. This tax covers your Social Security and Medicare taxes. If your business will likely involve other employees you will need to ensure compliance with federal, state, and local wage withholding and payroll accounts. You will also be responsible for filing and paying Social Security and Medicare taxes as well as the federal unemployment tax. An overview of small business taxes may be found here on the IRS website.

You will also need to be prepared to file a W-2 for each employee of the business by January 31^st after the end of the tax year. This form can be prepared online through the IRS website. All of these items require you to obtain an Employer Identification Number (EIN) from the IRS. This is a free, immediate service able to be done online with the IRS.

Licensing
You will need to ensure compliance with any licensing requirement for both the federal, state, county and city governments. For additional information than the links provided below, the SBDC small business development centers have comprehensive information on licensing. You may also contact the (303-620-8076).

Denver County Business Licensing Center – check here for your individual business area to ensure compliance with all Denver County licensing requirements.
Arapahoe County – Arapahoe County does not require a business license, however, they recommend contacting the Colorado State Dept of Revenue and local cities for business license requirements.
Dept of Revenue – The Colorado Department of Revenue’s website lists the types of licenses required and granted by the state of Colorado. These include licenses for sales tax, wholesale, small home businesses, and licenses for special events, as well as exempt certificates for non-profit, charitable, school, religious, or government organizations. Most licenses are good for a two-year period.

City/County Business Regulations and Zoning
Finally, check with your local city government for the zoning restrictions concerning the location and operation of your business. Most cities require a permit to run a business in an otherwise residential area. The Denver Zoning department houses all of the appropriate links and information to determine your particular requirements.

If you own your own home and plan to begin in a home office, you should also check with neighborhood covenants and restrictions related to advertising, parking and signs. If you will begin in an apartment, review the lease to determine whether or not there is a prohibition against a home office.

In Conclusion

Though this post only covers the legal basics of starting a business, it should highlight the importance of good planning and sound advice. The first step is the thought of owning your own business – then next, the reality of doing so. Surrounding yourself with a team of individuals dedicated to your success is a great place to start. Our attorneys at DRC have over 20 years of experience doing just that, and we would love to be a part of your journey.

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Anna Lineberger is an associate attorney with Dymond Reagor Colville, LLP.