BusinessÕ structure requires thought

To incorporate or not to incorporate is no longer the question. Experts — lawyers and accountants — recommend that all businesses of any size choose a legal form for doing business.
Instead, the question new business owners should be asking is which legal structure is best for their business? The choices are many: sole proprietor, general partnership, limited partnership, corporation, limited liability company, limited liability partnerships, limited liability limited partnerships and limited partnership association.
"The main thing to consider is liability," said Brad Laue, an attorney with Brega & Winters PC in Greeley. "It doesn˜t matter what type of business. If you incorporate or form a limited liability corporation, it gives you a shield from personal liability as long as you act in a reasonable manner and not in a willful or wanton manner."
Philip Neville, a certified public accountant with Anderson & Whitney in Greeley, said that most businesses now choose either the LLC or LLP structure. "You can˜t tell much of a difference (between the two structures)," he said.
From an accounting standpoint, there are some things a business should take into consideration when investigating the different business structures. LLCs and LLPs, for example, tend to be easier to work with because they are treated as partnerships, and the tax returns are partnership returns.
The ability to take certain deductions, such as for the owners˜ health-insurance premiums, can also be an important factor in the selection. If this is the case, Neville said, a business may want to investigate the S Corporation designation, which allows such deductions.
With that in mind, let˜s take a quick look at advantages and disadvantages of the different legal structures. The following information comes from the Colorado Office of Business Development˜s Small Business Start-Up Kit.
Sole Proprietorship is a business owned and operated by a single individual. It is the most common form of legal structure for new small businesses, even though there is no legal requirement to do so. The business name, if different from your own, must be registered as a trade name.
Simplicity is the primary advantage and disadvantage of a sole proprietorship. All profits and losses are reported on the owner˜s personal income-tax return. All decisions are handled by the single owner. Therefore, the owner is personally accountable for all liabilities and debts. If the business fails, creditors may pursue the owner˜s personal assets.
"I don˜t recommend it unless the business owner is in a real low-risk situation and has insurance to cover any type of thing they may get into," said Greeley attorney Laue.
A General Partnership is a business owned by two or more individuals and has few legal requirements. Advantages include the opportunity for partners to pool their resources. Profits and losses are reported annually on federal and state partnership returns; there are no partnership taxes. Partners are individually responsible for taxes on their personal returns.
The primary disadvantage to such a general partnership is that all partners are equally liable for all business debts. Personal assets of any one or all partners may be attached to cover the partnership˜s liabilities, regardless of how the liability or debt was incurred.
A Limited Partnership, on the other hand, is a business owned by two or more individuals or other business entities in which at least one of the partners has limited liability protection. At least one general partner must remain personally responsible for all of the partnership˜s liabilities.
The advantage to a limited partner is that he or she is liable only for the amount of cash or property invested in the business; the general partner retains personal control of the business while increasing financial resources without incurring long-term debt. A limited partnership can raise capital by selling additional limited partnership interests.
The disadvantage to such an arrangement is that the general partner is responsible for all liabilities and debts of the business. Limited partners cannot work in the business or participate in management without losing limited liability status.
A Corporation, which fewer businesses are choosing these days, is a legal entity that exists separately from the people who create it. It is owned by shareholders who elect a board of directors. A corporation must follow certain formalities, including annual shareholder meetings, election of the board of directors, adoption of by-laws and maintaining separate personal and business finances.
The advantage of a corporation is that it is separate from the owners and liability is limited to the amount of investment in the corporation. The disadvantage is that owners and officers can still be held liable by the personal actions or guarantee of an owner. Also, corporate profits may be subject to double taxation, and the corporation must pay tax on income as a separate legal entity. If profits are distributed to shareholders, they are subject to taxation as part of the individual shareholder˜s income. And if dividends are paid in lieu of wages, the entire dividend is subject to payroll taxes.
An S Corporation, on the other hand, is not a separate form of legal structure, but rather a special tax status granted by the Internal Revenue Service to a corporation to tax the business˜ income like that of a partnership or sole proprietorship. An S Corporation has, in general, all of the advantages of a corporation except that it does not file corporate income taxes. Expenses and income are divided among shareholders who in turn report profits and losses on their personal income-tax returns. The primary disadvantage is that several restrictions are placed on S Corporations, ranging from the type of stock it may issue to the number of shareholders allowed.
More businesses, Laue said, are choosing to become a Limited Liability Company, a structure that became legal in Colorado in 1990. An LLC combines the concepts of partnerships for tax purposes and corporations for liability purposes. They are not, however, corporations.
The advantage of an LLC is that the IRS treats them like partnerships. Liability for all members of the company is limited to personal investments. The primary disadvantages are that LLCs are not recognized in all states and some states treat them differently in regard to taxes and liability. Also, transferring ownership may be limited in some circumstances.
Limited Liability Partnerships and Limited Liability Limited Partnerships have been in effect since July 1, 1995. LLPs and LLLPs limit a partner˜s personal liability in the business to their personal investment in the business, except in areas related to personal professional conduct. Both are taxed as partnerships. The partners are considered the operators of the business.
New businesses and existing general partnerships may register as LLPs. Existing limited partnerships may register as LLLPs and gain liability protection for all partners without a complete reorganization of the business. The liability protection is similar to that provided a corporation.
According to the Colorado Office of Business Development, the intent of the new law "appears to gain the benefits of an S corporation without the S corporation restrictions and seems to resolve many of the unanswered tax questions surrounding LLCs."
That it is a new, somewhat untested legal structure is its greatest disadvantage. Many are still waiting to see how it will be accepted by both the IRS and the courts. Also, not all states recognize LLPs and LLLPs.
A Limited Partnership Association, also in existence since July 1, 1995, provides the partnership or corporation with an indefinite life. Its existence does not terminate upon the disassociation, death or bankruptcy of any one of its partners. The disadvantage to such an arrangement is that LPAs must have two or more persons as members of the business.
Sole proprietors and general partnerships should register their business name with the Colorado Department of Revenue. Call (800) 333-7798, for forms and additional information.
LPs, LLCs, Corporations and LLPs need to file with the Colorado Secretary of State. Call (303) 894-2251 for more information.