Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Colorado, the choice of entity for operating a business is an important decision that affects liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The options include corporations, general partnerships, limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection to shareholders and are conducive to raising capital, but they may be subject to double taxation unless they elect S corporation status. General partnerships involve shared management and liability, while limited partnerships offer limited partners protection from liability but not active involvement in management. LLCs provide limited liability and are taxed as pass-through entities, avoiding double taxation. Sole proprietorships are the simplest form with no separate legal entity from the owner, meaning personal assets are not protected from business liabilities. Each entity type has different implications for taxes, personal asset protection, attractiveness to investors and lenders, employee equity incentives, and costs of formation and maintenance. Colorado law requires compliance with specific formation procedures and ongoing reporting for each type of entity. Business owners should consult with an attorney and a tax advisor to determine the most suitable entity type for their specific circumstances.