Clients considering forming a new business in Colorado should be concerned with the distinctions between an S-Corporation or a Limited Liability Company (“LLC”) for several reasons. We guide clients through this maze.
One of the first considerations should be differences in the way the entities will be taxed. From a tax perspective, your personal accounting professional should answer the question of which entity is more appropriate for your tax situation. Sometimes the answer will lie in how much income the business will generate and other times the relationships between the owners is an important consideration for choosing how the entity will be taxed. Other variables play into the decision as well.
A business owner should also be concerned with questions regarding proper formation of the entity; liability protection for owners, managers, board members, and officers; fiduciary obligations for those various roles; considerations for operation of the company and what items should be addressed in an Operating Agreement or a Shareholder Agreement; and common mistakes to avoid during business formation. A very important item that is often placed on the “backburner” when parties are entering business together is a form of Buy-Sell Agreement. This agreement may be contained within other operational documents or it may be stand-alone. The ramifications if the agreement is never finalized can be devastating, as we see far too often in clients with business disputes that may be headed for litigation. Careful planning at the formation stage can create solid exit strategies down the road, instead of messy business break-ups. Whether an S-Corp or an LLC is used for the business, structure, a Buy-Sell Agreement is a must.
Proper choice of entity and proper formation of the business entity can ensure that an owner operates more smoothly. These formation decisions can also be critical in laying a foundation for liability protection for the owner. Filing the initial documents with the Colorado Secretary of State does not alone protect an owner from liability! This is only the first step toward liability protection of a business owner. When answering questions of personal liability for business owners, courts in Colorado look just as closely to the structure, the governing documents, and the daily operations of the business as the courts look to whether or not the corporation or limited liability company was formed by filing with the state.
If you are starting a new business, or need to clean-up the operation of an existing business, we can answer questions and provide you with the solid foundation that you need. Give one of our Colorado business attorneys a call at 303-688-3045.
By Katie James
Attorney at Law
