Frequently Asked Questions
What should a new business owner be thinking about?
Our initial business consultation begins with a discussion of your business / corporate structure and the goals of the owner(s). Next, our business attorneys review service contracts, disclaimers, and advertisements to make sure they do not expose the business owners to unnecessary liability. Our office also reviews dispute resolution and debt collection procedures to protect the business owner in a cost-effective and efficient way. Even the most risk averse business models do not ensure absolute protection against disgruntled clients, and we are always prepared to speak with opposing counsel and negotiate claims. Additionally, our business lawyers can help your business with succession planning so your business will run smoothly even during changing times. At the end of the consultation and follow-up, we want every client to be confident that their business is well-protected against unpredictable future events.
Should I establish my new business as an LLC or an S Corp?
We always include tax advisors in this decision because there are a number of factors that should be considered. In their most fundamental forms, LLCs and Corporations differ in the following ways:
Limited Liability Company: A limited liability company (LLC) is an entity governed by the Colorado Limited Liability Act (C.R.S. Title 7, Article 80). The LLC is required to file Articles of Organization with the Colorado Secretary of State and should have an operating agreement in place to govern the business operations. An LLC is a flow-through entity, meaning the individuals, not the LLC, pay income tax. The LLC is required to file an informational return, including K-1s, if there are two or more members. The individuals pay self-employment taxes (Social Security and Medicare) on all profits, so there is no tax savings from setting up an LLC. An LLC does, however, provide a limitation of liability to all owners and managers if certain criteria are met (this discussion is a main point of emphasis in our initial meeting). A creditor must “pierce the corporate veil” (C.R.S. Title 7, Article 80 Section 107(1)) to hold a member personally liable for a debt or improper action of the LLC.
S Corporation: An S Corp is governed by Subchapter S of the Internal Revenue Code. The S Corp must file articles of incorporation with the Colorado Secretary of State, and it should file IRS Form 2553 with the IRS. An S Corp provides similar liability protection as an LLC but has additional tax advantages. Shareholders only pay self-employment taxes on the salary they earn, not the dividends they take, above their “reasonable salary.” There are restrictive rules on the number and type of shareholders that are allowed, making this form of business structure less flexible than an LLC.
The above information should not be considered tax advice and cannot be relied on to avoid penalties from the IRS. Please consult your local tax professional for more specific information about your particular business.