Many Colorado small business owners start out as sole proprietors, then expand their businesses as their revenue grows. The next logical step is usually hiring an employee or employees.
This is a big step and one that entails a great deal of risk if your business is still unincorporated. Incorporating provides you with additional asset and liability protections that you just don’t have as a sole proprietor. It also provides you with numerous other benefits, including legitimacy and possible tax benefits.
If you’re ready to incorporate your Colorado small business, here’s what you need to know.
The main benefit of incorporating a business is the ability to shield your personal assets from liability. When you incorporate, you create a separate, taxable entity in the eyes of the law. This entity – your business – has its own financial books and is liable for its own obligations, including paying off debts and answering to lawsuits.
As an unincorporated sole proprietor, your personal finances and your business finances and one and the same. If your business gets sued or if you run afoul of your debt obligations, actions taken against your business are also taken against you, personally. If the worst comes to pass, you would have to file for personal bankruptcy rather than file for bankruptcy protection on behalf of your business, potentially putting your income, your home and other personal assets at risk.
Many sole proprietors and self-employed individuals may not need to incorporate, but it all depends on the level of risk you are willing to tolerate. If you have employees, operate in a regulated industry or engage in work that could be dangerous, it is almost always a good idea to incorporate.
You may qualify for additional tax write-offs if you incorporate. Being incorporated also looks much better to potential customers, and lenders are typically more willing to help finance incorporated companies.
There are three types of corporations you should be aware of. These include:
C corporations can have an unlimited number of shareholders and are taxed separately from their owners. That means any distributions from the corporation’s earnings are treated as a dividend for tax purposes.
In other words, business profits are taxed at the corporate level, then taxed again at the personal income level. This is sometimes referred to as “double taxation.” Most major and multinational companies, including those that are publicly traded on the stock market, are C corporations.
An S corporation is like a C corporation aside from two key differences. For one, corporate income, as well as corporate losses and credit are “passed through” to shareholders, which helps them avoid the “double taxation” standard associated with C corporations. Second, an S corporation cannot have more than 100 shareholders.
Finally, a limited liability company (LLC) is an organized business that protects business owners from liability. While technically not a corporation, an LLC is still a legally formed company. Similar to an S corporation, income is passed through to shareholders before being taxed.
LLCs and S corporations are the two most popular options for small business owners; however, you could potentially organize as a non-profit corporation, a partnership or another entity depending on the nature of your organization.
It is relatively easy to incorporate in Colorado. Just follow these steps:
You must choose a unique business name so as not to run afoul of trademark laws. The Colorado state website has a business database search tool to help you learn which names are already taken. If you’d like, you can organize under your own name. This will help you avoid trademark infringement even if a business with the same name exists.
Once you’ve decided a name, you’ll need to choose which type of corporation to form. Again, most small businesses are either sole proprietorships, partnerships, LLCs or S Corporations. Each type has its own benefits and restrictions, so take your time with this decision.
You can register almost any type of business easily by filing online through the Colorado state website. Simply choose the type of business you’d like to form and follow the steps provided.
In order to form and maintain certain types of corporations, you may need to meet specified requirements. For example, S corporations and C corporations must hold regular meetings of directors, shareholders or managers. They must also establish bylaws and an official business structure. You may need to elect directors and determine who is authorized to sign checks on behalf of your company.
The state government website of Colorado has a handy checklist to help you through this process.
Once you’ve formed an official business, you’ll also need to comply with Colorado’s small business insurance laws. Many of these laws apply specifically to the benefits you must provide your employees. For example, Colorado requires all businesses with employees to have workers’ compensation insurance. You may also need to provide full-time employees with benefits like health insurance to avoid penalties.