When you start a business in Colorado, you can choose from different business structures. Each structure offers different advantages. Partnerships are popular choices for businesses with more than one owner because they offer simple tax options and a lot of control over the business operations.
Liability & tax considerations
Partnerships are almost always taxed as pass-through entities, meaning the income from the business is accounted for on the partners’ personal income taxes. The partnership itself doesn’t file any corporate taxes. This keeps the paperwork to a minimum and allows for greater focus on growing the business. The IRS has good information on some of the federal requirements for partnerships.
In Colorado, any partnership that’s required to file a federal partnership income return must also file a Colorado partnership income tax return if any of the partnership’s income comes from Colorado. This can be done online at the Colorado Department of Revenue’s website.
Personal liability is the other important topic to consider when forming a business. Personal liability is a legal term that explains how closely your personal debts and assets are tied up with your business. If you have no personal liability, then none of your business’s debts are counted against your personal assets, in effect the business is totally separate from you. This means if you have to settle a business debt, such as a loan or lawsuit, then the creditors can’t seize your home, cash, or other personal assets to settle the debt. While no legal structure gives you complete liability protection, some grant more options than others.
The types of partnerships offered in Colorado are compared below, with information highlighting the differences in liability and tax considerations.
General partnership (GP)
Liability of partners: A general partnership is the most basic type of partnership and allows partners to share revenue in the easiest way possible, by passing the business profits and losses directly to the partners.The downside is that the GP structure offers no liability protection for the personal assets of the general partners.
Tax overview: The general partners are responsible for including the GPs profits and losses on their individual yearly income taxes.
Limited partnership (LP)
Liability of partners: LPs have two types of partners. The first type is general partners, the second is limited partners. While general partners are liable for the business debts, limited partners are only liable for as much as they’ve invested in the partnership. This partnership is common when investors are needed to help get a business up and running.
Tax Overview: While the liability of general and limited partners may be different, they still account for profits and losses in the same way by filing individual income tax returns each year.
Limited liability partnership (LLP)
Liability of partners: Most often used for businesses that expose partners to significant liability by virtue of the profession in which they participate (doctors, lawyers, etc.), LLPs shield partners from liability created by their partners. A partner won’t be held accountable for another partner’s debts, obligations, or mistakes.
Tax overview: In Colorado, LLPs can choose to be taxed as a partnership with the partners accounting for the profits and losses individually, or as a corporation where the business pays its own taxes.
Limited liability limited partnership (LLLP)
Liability of partners: LLLPs are almost completely the same as LLPs except they allow for limited partners whose liability is limited by their investment in the business. This means that outside investors can be brought in to contribute to the business without being liable for other partners’ debts or obligations.
Tax overview: LLLPs are treated exactly like LLPs for tax purposes, including having the option to be taxed as a corporation.
Limited partnership association (LPA)
Liability of partners: LPAs are a very uncommon form of partnership. The primary difference between LPAs and LLPs is the ability of LPAs to continue even after a partner is no longer a part of the business (death, bankruptcy, etc.).
Tax overview: The LPA structure is also relatively new. The Colorado Department of Revenue appears to tax them in same way it taxes LLPs, but consulting a Colorado business tax attorney may be wise.
Limited liability company
If you need additional taxation choices or greater protection from personal liability you may want to consider forming a limited liability company (LLC). The LLC business structure combines many of the advantages of partnerships while offering greater flexibility in tax structures. On the downside, they often require more effort to maintain than a partnership but even then, they are known for their simplicity.
How to form a partnership in Colorado
If you decide to form a partnership in Colorado, there are a few mandatory steps to through in order to create the partnership properly.
Step 1: Select a business name
While you may name your business nearly any name that hasn’t already been taken, it’s also important to bear in mind that your business name must contain information on the type of entity it is.An example being a limited liability partnership named ABC Goodie Creation could be called ABC Goodie Creation, LLP.
Step 2: Register the business name
Before you can register your business name, you’ve got to make sure the name you want isn’t already taken by another business. Check the Secretary of State’s Business Database to see which names are available. When you are ready, you can protect your business name in Colorado by filing it with the Secretary of State.
Step 3: Complete required paperwork
In Colorado, all partnerships except for GPs require the appropriate paperwork be filed along with the current filing fee.
General partnerships (GP): While GPs aren’t required to file paperwork with the state, it’s encouraged that they do so. If the GP owns property, it’s required to file its partnership agreement in the county in which the property is owned.
Limited partnerships (LP): In Colorado, a LP must file a Certificate of Limited Partnership with the Secretary of State.
Limited liability partnerships (LLP): Colorado law requires partners to file a Registration Statement with the Secretary of State in order to form an LLP.
Limited liability limited partnerships (LLLP): To form an LLLP in Colorado, business owners must file a Registration Statement with the Secretary of State.
Limited partnership associations (LPA): LPAs are created by filing Articles of Association with the Colorado Secretary of State.
Step 4: Determine if you need an EIN, additional licenses, or tax IDs
Partnerships with employees should obtain an Employer Identification Number (EIN) from the IRS. Even if your partnership isn’t planning on hiring employees, an EIN is helpful when you open a bank account for your business, hire contractors, and more.
Some businesses require additional licenses from the state in order to operate, such as permits and licenses to sell alcoholic beverages. Additional taxes may be required as well, depending on your business.
Step 5: Get your day-to-day business affairs in order
Once you have your appropriate paperwork back from the Secretary of State, you can start doing business in Colorado. Consider the following to get your business up and running:
- A bank account for your business
- A permanent address for the business
- A web address for your business
- Insurance for your company, having insurance may help establish even stronger liability protection
Ready to start a partnership? LegalZoom will help you choose which one may be right for you. We can also file the paperwork to form your business, help you find a registered agent, and get you in touch with an attorney or tax professional.
