Should I incorporate if I want to start my own business?

It is usually preferable to own a business in the corporate form as limitation of personal liability is the primary reason for incorporation. In other words, an owner or shareholder will typically not incur personal liability for contracts that the business itself enters into and for its employees’ negligent acts. One exception to this rule may occur if a court “pierces the corporate veil” for not observing corporate formalities such as holding annual meetings of directors and shareholders, adopting bylaws, and issuing shares of stock. Limited liability protects the personal assets of the shareholders of the corporation against potential claims of creditors. Failure to properly maintain the corporation's legal status creates the risk that you and not your corporation will be held solely responsible against the potential claims of creditors.

Further, depending on the particular type of business, operation as a corporation may yield income tax advantages.

What form of incorporation should I use?

Colorado recognizes two primary forms of corporate existence. The first is a traditional corporation. Under the Internal Revenue Code, a corporation may be a traditional C Corporation or an S Corporation. An S-Corporation, which offer many tax advantages, is a “flow-through” entity meaning it pays no taxes at the corporate level.

Put another way, any taxable income (or deductions) normally attributable to the corporation "flows through" to each S-Corporation shareholder. Only individuals, and not other corporations, trusts or other entities, can own S-Corporations.

A limited liability company (or LLC), which is also entitled to flow-through treatment, is the other type of entity used by many small businesses. Like an S-Corporation, the limited liability company pays no taxes on its income at the corporate level (with some exceptions) and passes taxable income (or deductions) directly to its owners. Unlike S corporations, however, limited liability companies are not limited to individual shareholders and can be owned by one or more other corporations or trusts. Limited liability companies are often used by shareholders to directly own or trade real estate.

You should consult with both your attorney and accountant before deciding to form a C Corporation, S Corporation or limited liability company. They can provide assistance in determining your exact needs.

Should I try to incorporate my own business?

We usually do not recommend doing this yourself because the eventual financial consequences of an incorrect or failed incorporation significantly outweigh the legal costs (including attorney fees) of incorporating your business. Your corporation may be invalid against a creditor if all corporate formalities are not properly observed. In other words, a court may “pierce the corporate veil” and not acknowledge the protection of limited liability if all corporate formalities are not followed. Also, in situations where there is more than one owner, a "Shareholders Agreement" will determine the parties' rights and responsibilities in the event one shareholder dies or wishes to leave the business. It is preferable to make this type of arrangement in advance before potential problems arise. Ultimately, the up-front money spent for an attorney's assistance in an initial incorporation is money well spent.

What factors should I consider when buying or selling a small business?

Acquiring a business entails a morass of valuation, tax and legal issues. Since shares in a small business are not publicly traded, it may be difficult to agree on a fair price for the business. It is also essential to structure an acquisition by discovering unforeseen risks and liabilities as well as properly negotiate the terms of the transaction. It is further necessary to obtain valuable intellectual property, secure key personnel and deal with the assignment of the acquired business’s contracts. Your attorney can also assist you in compliance with all regulatory requirements necessary to close the deal.

Selling a business similarly entails a morass of valuation, tax and legal issues. A business owner needs to be aware of duties to the business’s customers, employees and shareholders. Tax consequences, restrictions on stock transfers, employee contracts and non-compete agreements also play a critical role to obtaining terms most favorable to you.

Particularly with the sale of a family business, emotional events such as death, disability, illness, divorce, retirement or death may precipitate a sale and complicate any business transaction, which further necessitates the need to hire an attorney and financial professional.

What is a Non-Profit Corporation and how does it work?

A non-profit corporation is created to obtain state and federal (“501(c)”) income tax-exempt status and can be either a charitable, political, religious, financial, or social organization. To qualify for non-profit status, the corporation must have been formed with beneficiaries in mind, such as specific groups, the public, or members from the organization. Directors, shareholders and employees of a non-profit corporation enjoy the same type of limited liability as enjoyed by those of other corporations and LLCs. Non-profit corporations are entitled to sell a variety of goods and services to raise money to operate. They use these funds to pay officers and employees, but are forbidden to distribute money to individual members and directors or officers for personal profit. Individuals typically donate money and other property to non-profits because they can deduct the payments from their own income and estate taxes.

It likely will take the IRS several months to process your application. You are not required to wait for exemption status to create a non-profit corporation. While in the process of submitting the necessary documentation, your attorney will continually work to to create a successful non-profit corporation.