SMALL BUSINESS LEGAL STRUCTURE

Choosing a Legal Structure

When you start your business, you must decide what legal structure to use. Some of these structures include: 

(All definitions from The Colorado Business Resource Guide).

 

  • Sole Proprietorship- A Sole Proprietorship is a business owned and operated by a single individual. There are few legal requirements to meet to establish a sole proprietorship. If you're operating your business under a name other than your own legal name, you must register a trade name. Sole Proprietor is the most common form of legal structure for new small businesses.

 

  • General Partnership- A General Partnership is a business owned by two or more individuals or other business entities. Although it is not required, it is strongly recommended that a general partnership prepare a written partnership agreement that outlines the business' structure and each partner's responsibilities. If the partnership owns real property, the partnership agreement should be filed in the county where the property is located. The agreement should be filed with the county office that keeps real estate records. Otherwise, there is no requirement to file the agreement with any state or federal agency. If the partners are operating the business under a name other than their own legal names, the business name must be registered as a trade name with the Colorado Secretary of State

 

  • Limited Liability Company- An LLC combines the concepts of partnerships for tax purposes and corporations for liability purposes. LLCs are created by filing "Articles of Organization" with the Secretary of State. While similar, LLCs are NOT corporations. In an LLC, the owners are called members. The members may elect or hire a manager(s) to run the business. As in a corporation, the owner(s)/member(s) may elect themselves to be the manager(s).

 

  • Corporation- A corporation is a legal entity that exists separately from the people who create it. A corporation is owned by its shareholders and run by a board of directors elected by the shareholders. In a large corporation, the directors hire corporate officers to manage the day-to-day operations of the business. In a small corporation, the directors and the corporate officers are usually the same individual(s). Corporations are created by filing "Articles of Incorporation" with the Secretary of State and by adopting bylaws. There are certain formalities a corporation must adhere to, including:
    • Procedures for annual shareholder meetings
    • The election of the board of directors
    • Maintenance of corporate records
    • Adoption of bylaws
    • Complete separation of personal and business finances
    • Proper filings with the Secretary of State

 

  • Registered Limited Liability Partnership- Limit a partner’s personal liability in the business to their personal investment in the business, except in areas related to their personal professional conduct. LLPs and LLLPs will usually be taxed as partnerships but may elect to be taxed as corporations. Both entities are created by filing a “Registration Statement” with the Colorado Secretary of State. The partners in LLPs and LLLPs are directly considered the operators of the business. There is usually no election of officers or managers as in corporations or LLCs.

 

  • Limited Partnership Association- The main difference between a limited partnership association and a partnership or limited liability partnership is that the association has an indefinite life. Its existence terminates upon the affirmative vote of all of its members or as otherwise provided in the bylaws and by filing articles of dissolution with the Colorado Secretary of State. The association’s existence does not terminate upon the disassociation, death or bankruptcy of a partner. LLCs may convert to LPAs in the same fashion that they could convert to partnerships or limited partnerships under the Limited Liability Company Ac

 

 

The Basics

The most common forms of businesses are sole proprietorship, general partnership, corporation and limited liability companies (LLC). The other forms are limited partnerships, registered limited liability partnership, registered limited liability limited partnerships and limited partnership associations. 

  • The type of business entity you choose will depend on liability, taxation and record keeping. It is best to first analyze and research your options and choose a structure that will meet your long term needs. This will avoid duplication of legal expenses, licensing and paperwork by choosing the structure that your business can grow with. 

 

What should you consider? 

1. Does the business require any special skills? What types of training programs are available? At what cost? For how long?

2. How will you finance the business? What are your current assets? What type of loans will you be eligible for?

3. What type of assistance will you receive from the franchisor? At what cost? For how long? What types of ongoing fees or royalties are involved?

4. What are the total costs of the franchise? These may include opening costs for inventory and fixtures, franchise fees, licensing fees, working capital, on-site expenses for the lease and construction and any service charges.

5. Is it affordable? Are there any hidden costs that might not be spelled out in the franchise agreement?

6. What are the costs of purchasing the necessary equipment? Are competitive rates available? What type of warranty and maintenance services are available? If the equipment becomes outdated, what must you do to update it?

Registering Your Business

If you are a sole proprietor or general partnership and will be doing business under a name other than your own legal name(s), you must register your trade name(s) with the Colorado Secretary of State. 

  •  Registration of the trade name does not grant exclusive rights to the use of the name. Sole proprietors and general partnerships gain exclusive rights to their name through the use of the name over a period of time or by filing a trademark in addition to registering with the Secretary of State.
  • If you want to find out if a name is already being used, visit the Secretary of State’s website, click “Businesses, trademarks, trade names” then “Search business database.” By searching this database, you can find out whether or not a name is currently in use.

Colorado Regulatory Agencies

What is DORA?

  • The Department of Regulatory Agencies (DORA) is the state's umbrella regulatory agency, charged with managing licensing and registration for multiple professions and businesses, implementing balanced regulation for Colorado industries, and protecting consumers. Our ten divisions and over 600 employees are dedicated to preserving the integrity of the marketplace and promoting a fair and competitive business environment throughout Colorado. DORA is responsible for over 40 boards, commissions, and advisory committees, which are charged with administering over 50 regulatory programs governing professions, occupations, and businesses comprising over 886,000 individual licensees and approximately 65,000 businesses and institutions. Additional services include conducting business examinations and inspections, taking complaints and conducting investigations, representing consumer interests, and conducting education and outreach.

 

  • DORA comprises ten distinct divisions, plus the Executive Director's Office which houses the Colorado Office of Policy, Research and Regulatory Reform. Each division is charged with administering a number of programs, and most house one or more Boards and Commissions made up of appointed members of the public that oversee a large variety of subjects and make a wide range of decisions affecting the day-to-day lives of Coloradans. The divisions are as followed: 

 

  • Colorado Office of Policy, Research, and Regulatory Reform (COPRRR)-The Colorado Office of Policy, Research & Regulatory Reform (COPRRR) reviews proposed regulatory programs to determine if they are needed, and it also reviews existing programs and functions of government to ensure they are necessary, fair, effective and efficient. 

 

  • Colorado Civil Right Division (CCRD)-The Colorado Civil Rights Division is charged with enforcing Colorado’s anti-discrimination laws in the areas of employment, housing, and public accommodations.

 

  • Division of Banking (DOB)- The Colorado Division of Banking protects the public interest and preserves public trust in the Colorado banking industry by regulating the business of state-chartered commercial banks and trust companies, state-licensed money transmitters, and by enforcing the Public Deposit Protection Act.

 

  • Division of Financial Services (DFS)-The Division of Financial Services works to protect public interest and preserve public trust by regulating the business of state-chartered credit unions, savings and loan associations and the financial activities of life care institutions under its supervision.

 

  • Division of Insurance (DOI)-The Division of Insurance regulates the insurance industry and assists consumers and other stakeholders with insurance issues, to ensure that insurance companies, as well as their agents, are following the law.

 

 

  • Division of Real Estate (DRE)-The Division of Real Estate protects real estate consumers by licensing and enforcing laws for real estate brokers, mortgage brokers and appraisers.

 

  • Division of Securities (DOS)-The Division of Securities protects investors and maintains public confidence in the securities markets while avoiding unreasonable burdens on participants in the capital markets.

 

 

  • Public Utilities Commission (PUC)-The Public Utilities Commission serves the public interest by effectively regulating utilities and facilities so that the people of Colorado receive safe, reliable and reasonably-priced services consistent with the economic, environmental and social values of our state.

 

 

Business Insurance

What is Business Liability Insurance?

  • Business Liability Insurance protects owner and business against liability resulting from non-performance of any of the products sold. Also known as Casualty insurance, it insures against injury or damage caused by the activities of the business. 
    Both the business owner and its customers can be protected through business liability insurance. If a client suffers damages through actions or services of the owner or an employee of the business, this type of insurance will protect the owner's personal assets, the assets of the business, and pay for costs of defending against the claim. It also provides that a customer or client who has suffered damages will be adequately compensated. Liability insurance provides a business with financial protection in the case of a claim or a lawsuit.

 

Six Common types of business insurance

  • After you purchase insurance that's required by law, you can find insurance to cover any other business risk. As a general rule, you should insure against things you wouldn’t be able to pay for on your own.
    Speak to insurance agents to find out what kinds of coverage makes sense for your business, and compare terms and prices to find the best deal for you. Here are six common kinds of business insurance to look for:

 

 

Insurance Type

Who it’s for

What it does

General liability insurance

Any business

This coverage protects against financial loss as the result of bodily injury, property damage, medical expenses, libel, slander, defending lawsuits, and settlement bonds or judgments.

Product liability insurance

Businesses that manufacture, wholesale, distribute, and retail a product

This coverage protects against financial loss as a result of a defective product that causes injury or bodily harm.

Professional liability insurance

Businesses that provide services to customers

This coverage protects against financial loss as a result of malpractice, errors, and negligence.

Commercial property insurance

Businesses with a significant amount of property and physical assets

This coverage protects your business against loss and damage of company property due to a wide variety of events such as fire, smoke, wind and hail storms, civil disobedience and vandalism.

Home-based business insurance

Businesses that are run out of the owner’s personal home

Coverage that’s added to homeowner’s insurance as a rider can offer protection for a small amount of business equipment and liability coverage for third-party injuries.

Business owner’s policy

Most small business owners, but especially home-based business owners

A business owner’s policy is an insurance package that combines all of the typical coverage options into one bundle. They simplify the insurance buying process and can save you money.

 

-U.S. Small Business Administration (SBA)-Get business insurance 

 

National Association of Insurance Commissioners (NAIC)- provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. Founded in 1871, the U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories to coordinate regulation of multistate insurers.

 

DORA-Small Business Insurance Guide- While businesses count on insurance to protect the investment in time, money and other resources, consumers can also be protected when businesses are insured. Should anything go wrong with goods and services, certain insurance may compensate people who interact with a business.

There are many choices for business owners to consider when selecting insurance. A licensed insurance agent or broker may offer a package that covers many small business needs, or design a policy with coverage designed for the particular business. It is important for the business owner to know what the policy includes.