Entity Types: What are you?
Each type of company has specific guidelines, IRS and Colorado requirements, advantages and disadvantages. Of all the business decisions to be made, this is probably the most important. Following are brief descriptions of the various entity types. If you have not yet formed your business entity, we highly recommend an in depth discussion prior to your making a final decision. Depending on your selection, we may refer you to legal counsel for appropriate entity formation.
Sole Proprietorship
For single owner businesses, this is the most simplified entity form. The income and expenses are reported on a Schedule C as part of your personal individual tax return. Taxes are paid on the profit of your business regardless of what monies the owner has withdrawn. The owner is not considered an employee and therefore, payroll is only required if the business has other employees. There are no requirements of meetings or minutes. The sole proprietorship has considerable tax planning attributes, which are useful in the family owned and operated business environment.
Partnership
A partnership is used for multiple owner businesses. This entity form allows the owners flexibility although it limits the types of benefits allowed. Owners may share the profit, loss and cash as they agree. A separate tax return is filed for the partnership with forms K-1 "passing" the taxable income and deductions through to the owners, to be included in their personal individual tax returns. Like a sole proprietorship the owners are not employees and pay tax based on the K-1 information regardless of the money they have withdrawn. Payroll is only necessary if the business has other employees. Although no meetings or minutes are required, proper documentation of decisions and agreements is highly recommended to avoid complications.
Corporation
For single or multiple owner businesses. This entity provides limited liability to the owners as long as they meet specific requirements. These include (but are not limited to) meetings, minutes, separation of finances between the owner(s) and the company, and payroll. Because of theses requirements a corporation is considered one of the more complicated entity forms. A fully elected corporation or "C" corporation files and pays its own taxes and has the widest range of fringe benefits allowed any entity. Owners are considered employees and therefore payroll is required. Any money taken out other than in the form of payroll, may be considered a dividend, taxable to the owner but not deductible by the corporation (double taxation).
There is an available election to have the corporation designated as an "S" corporation. S corporations are a hybrid of the sole proprietorship, partnership and the "C" corporation. They require the same handling as a "C" corporation but pass the income or loss through to the owner(s) on a K-1 form.
Limited Liability Company
This is a legal designation only; you will be taxed as one of the entities listed above. A simplified explanation is that the LLC limits the owner(s) exposure to liability.
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