Business Entity Differences

The following is provided for informational purposes only. The information below may not apply to your specific situation so always consult an attorney. Use of this information does not create an attorney-client relationship between you and the Law Office of E.C. Lewis, P.C., home of your Denver small business lawyer.

What is the difference between all the different business entities?

Business entities typically used by small businesses include:

  • Sole proprietorships
  • Partnerships (general or limited liability)
  • Corporations
  • S-corporations
  • Limited Liability Companies

Sole Proprietorships

Starting a sole proprietorship is the easiest way for a single individual to start a business.  An individual does not have to file any incorporation paperwork to form a sole proprietorship with Colorado; however, the individual may be required to get specific permits from the city, county, or state.  The individual may need an Employee Identification Number (EIN) if he is going to have employees or independent contractors.  In addition, in some cases, the individual may also want to apply for intellectual property rights such as trademarks, trade names, and copyrights.

Sole proprietors are required to keep records for all business expenses.  Sole proprietors need to keep personal and business expenses separate.  In most cases, this means keeping separate checking accounts, credit cards, and making sure that when purchasing business and personal items at the same time, requesting separate transactions (and receipts).  In addition, if a sole proprietor has employees, he will need to keep documentation on each employee as required by the United States Department of Labor, the IRS, Colorado Department of Labor and Employment, and other governmental agencies.

The advantages to forming a sole proprietorship are:

  • They are easy to form.
  • They are inexpensive to form.
  • There is less paperwork involved than other entities in most cases.
  • The tax preparation is easier as, in most cases, the sole proprietor files a schedule C for the business as opposed separate individual and business returns.
  • There is no double taxation (i.e. the business and the owner are not taxed separately because the two are the same).
  • The business losses can offset all of the owner’s income from all sources and the spouse’s income.

The disadvantages to forming a sole proprietorship are:

  • There is personal liability for the sole proprietor.
  • A sole proprietor’s tax rate may increase.
  • A sole proprietorship can only have one owner.

For the full article on the different business entities, and information about the Law Office of E.C. Lewis, P.C.’s services, please contact your Denver business lawyer Elizabeth Lewis today.