Another option for your Colorado business formation strategy is registering as a C Corporation. With this option the corporation is considered a legal person, thus, any actions that the corporation takes, generally speaking, does not create liability for its officers, directors, or shareholders. For instance, any lawsuit that may arise against the business is solely a lawsuit against the business and not for the owners individually. This is a company that is owned by its shareholders, run by a board of directors and managed by its officers. Additionally, any liability of the corporation is solely that of the corporation. If a corporation takes a loan from a bank to finance the purchase of real estate or the development of some property, that loan will be not be the personal liability of the owners (setting aside the issue of personal guarantees).
It is important to note that this personal liability protection is subject to the officers, directors, and shareholders respecting the required corporation formalities. These corporate formalities include, but are not limited to:
- Drafting Articles of Incorporation and filing them with the Secretary of State
- Adopting Bylaws
- Holding annual shareholder meetings
- Maintaining corporate records including annual filings with the Secretary of State and board meeting minutes
- Keeping the finances of the corporation separate from any officer, director, or shareholder personal finances.
When such corporate formalities are not upheld, the liability protection afforded a corporation may be pierced, allowing for personal liability for the responsible party. Please keep in mind that no one factor is dispositive and many factors are taken as a whole in determining whether the corporate liability protection is pierced. This is called “piercing the corporate veil”.
From a tax perspective, a C Corp’s earnings are subject to double taxation, meaning that the corporation is taxed on its income and then that after tax income is taxed again when it is distributed to its shareholders, called a “dividend”. That money is taxed again at the shareholder level at the shareholder’s individual tax rate.
A Colorado business attorney who is well versed in state business law can help guide your Colorado business formation decisions.
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