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An LLC stands for Limited Liability Company. It’s a business entity formed by state law.
An LLC combines the characteristics of a Corporation and a Sole Proprietorship/Partnership. It harnesses the best of both worlds.
As a legal entity separate and distinct from you as a person, your LLC can do the following:
- Earn money
- Own personal property and real property (land, buildings, houses, vehicles, etc.)
- Form and enter into contracts
- Open and hold bank accounts
- Sue and be sued
- File and pay taxes
Benefits of a Colorado LLC
There are two main benefits to forming an LLC in Colorado:
- personal liability protection
- pass-through taxation
We’ll discuss the most important one first.
Personal liability protection is a benefit found both in Corporations and LLCs. It builds a “wall of protection” between your personal assets and the assets of the business.
If your business gets sued, your personal assets cannot be used to pay off any debts or liabilities.
The second benefit, pass-through taxation, applies to LLCs, Sole Proprietorships, and Partnerships.
Under this principle, your business is not taxed on its own. Instead, any profits/losses from your business are reflected on your personal tax return.
This way, you avoid the disadvantage Corporations face: double taxation.
Double taxation is paying taxes at the corporate level, and then again at the personal level.
Colorado LLC vs Corporation/Sole Proprietorship/Partnership
In this section you’ll learn why we recommend setting up an LLC over the others…
So, what is a Corporation, Sole Proprietorship, and Partnership?
A Corporation – (just like an LLC) – is a separate legal entity authorized to perform acts on behalf of its owners.
Like an LLC, a Corporation can do business, earn money, hold personal and real property, etc.
In a Corporation, the owners are called “Shareholders” or “Stakeholders”.
A Sole Proprietorship is an unincorporated business run by the owner him/herself. Unlike a Corporation, there is no separate legal entity formed. In the eyes of the law, the owner IS the business itself.
A Partnership is also an unincorporated business run by 2 or more. Like a Sole Proprietorship, a Partnership does not create a separate legal entity.
Now that you understand the different entity types, let’s compare them.
Colorado LLC vs Corporation
LLCs and Corporations both provide personal liability protection, but an LLC has several advantages:
An LLC is Cheaper to Create and Maintain
Unlike a Corporation, creating and maintaining an LLC does not take a lot of money. Forming an LLC with the Colorado Secretary of State is a one-time filing fee of $50. And the Periodic Report, which is due every year, is only $10.
Maintaining your LLC is also less expensive than maintaining a Corporation.
An LLC has Less “Red Tape”
Compared to a Corporation, an LLC is not weighed down by rigid corporate rules. It doesn’t need to elect a board of directors, hire corporate officers, or hold corporate meetings. A Corporation does.
An LLC is Not Subject to Double Taxation
As we’ve pointed out before, the profits/losses of an LLC “flow through” to your personal federal tax return.
That’s not the case with a Corporation, since its profits are subject to double taxation. This means company profits are taxed at the corporate level, and then shareholders are taxed again on their dividends.
An LLC is a “pass-through” entity. This means its profits are taxed at the same rate as your personal income. The LLC does not pay taxes at the corporate level with the IRS.
This doesn’t mean a Corporation totally lacks any upside. That’s not the case. They are just complex to maintain and are better suited for companies that need to raise money from outside investors. Think of tech and startup companies.
For business owners – (especially those just starting out) – who want to avoid the headache of running a complex corporate structure (but still want personal asset protection), then setting up an LLC might be a better option.
Colorado LLC vs a Sole Proprietorship/Partnership
While no double taxation is also a feature found in a Sole Proprietorship (and Partnership), the LLC has a huge advantage over the two.
An LLC Member Enjoys Personal Liability Protection
An LLC creates a “wall of protection” between your personal assets and the business assets. If your company gets sued, only the assets of the business can be used to pay off the LLC’s debts.
In short, your personal assets (bank account, house, car, etc.) are protected and safe in case your business gets sued.
With a Sole Proprietorship, there is no such protection. Since the law views you and your business as the same thing, then your personal assets can be used in the event your business gets sued.
This same thing applies to a Partnership. There is no separate entity created here. You and your partner’s personal assets are subject to being used to pay off your company’s debts if it gets sued.
LLC: The Best of Both Worlds
If you want a business that’s simple, inexpensive, and protects your personal assets in the event of a lawsuit, then setting up an LLC is probably the most practical option for you.
An LLC is the best option for you if you want a business that is:
- protects your personal assets
In Colorado, creating an LLC takes 5 simple steps:
- Choose Your LLC Name
- Select your LLC’s Registered Agent
- File your LLC’s Articles of Organization
- Draft and sign your LLC’s Operating Agreement
- Obtain your LLC’s EIN (Employer Identification Number)
If you want to form your Colorado LLC, follow these simple step-by-step tutorials.