Our Tax Lawyers’ Guide for Colorado Small Business Tax Planning & Preparation Strategies: Don’t Just Survive, Flourish
A Tax Attorney Can Provide Tactics to Help Your Company Pay Less Taxes
Payroll, human resources, marketing, customer service… The responsibilities seem endless for a small business owner. You’re in charge of everything, including your federal, state and local taxes.
In addition to the complex and dynamic federal tax code, state and local taxes can vary widely. Unintentional errors on your taxes can be costly to your business. Missteps can lead to an IRS audit, or worse – you could potentially lose your company.
When understood and strategically used, tax laws can greatly benefit a business.
Robinson & Henry’s tax law team are experts in the field. We take a big picture approach to our small business tax services.
Our tax lawyers are here for you and your business every step of the way, from selecting the right entity to ensuring your taxes are filed on time, every time.
Let our tax attorneys help your business thrive.
From Acceptable to Exceptional: Choose the Right Business Structure
Your business has a greater chance of succeeding if you take a strategic approach to how you structure it.
As a business owner, minimizing your tax liability is one of your top priorities. It’s one of ours, too. Our tax lawyers will lay out your options and guide you to the one that best suits your business needs.
To devise the right plan for your company, your attorney will need more details about your business:
- How risky is the venture?
- Who will own the business?
- What kind of personal assets need protected?
- What are the long-term goals for the company?
In addition to affecting your tax bill, the structure of your business also determines what level of personal liability you will have for the company.
For instance, being the sole owner of a small business can be a risky endeavor. You will want to structure the company so that your personal assets are protected, as well as your investment in the business.
You’ll also want to take advantage of as many tax deductions and credits as possible. You will be able to do that with the right business structure in place.
Common business structures:
Sole Proprietorships
A sole proprietorship is one of the easiest business structures to form. The company is owned by one person, and there is no separate entity like a corporation or a partnership.
| Pros | Cons |
|---|---|
| Simpler Taxes – Income is reported on your personal tax return. Depending on circumstances, this can result in lower taxes. | Lots of Liability – Creditors can go after owner’s personal assets. |
| Easy to Create – There’s no formal paperwork to complete. Less government control. | Easily Dissolved – Death or physical/mental impairment can close the business. |
If you’re currently a sole proprietor with a burgeoning business, you may consider meeting with a tax attorney to discuss a new structure that could enhance the current growth.
Limited Liability Companies (LLCs)
A limited liability company can be a great choice for a business. This flexible structure can have numerous owners called “members.” Businesses can also be members of an LLC. The LLC is a popular option for its tax-saving advantages.
| Pros | Cons |
|---|---|
| Choice in Taxation – Owners can choose “pass-through” taxation. That means profits go to “members” without being taxed by the government. Income is reported on personal tax returns. Multiple owners can also choose to be taxed as a corporation. | Self-Employment Tax – The government considers LLC owners to be both an owner and an employee, like an individual who is “self-employed.” LLC members are responsible for paying Social Security and Medicare taxes (FICA). |
| Limited Liability – Owners’ personal assets are protected from creditors. | Liability under Veil-Piercing Principles – Colorado law permits the owner of an LLC to be liable if the corporate veil can be pierced. |
| Formed under State Law – Usually cheaper than creating a corporation. Less government oversight than a corporation. Filed with the Colorado Secretary of State. | Investor Difficulty – Tax consequences, limited corporate governance requirements, and stockholder limitations deter outside investors. |
If you own an LLC and you need outside capital, you may consider restructuring the business. Switching to a C corporation may be an option. A tax attorney can help you weigh the options.
Partnerships
A partnership involves two or more people who have invested in the business and run it. While this structure may appear idyllic at the onset for some startups, this easy-to-form structure carries quite a bit of risk.
There are three different types of partnerships. Let’s take a look at general partnerships, limited partnerships, and limited liability partnerships.
General Partnerships
In a general partnership, the business’ owners assume equal responsibility in day-to-day operations, as well as the company’s profits and liabilities.
| Pros | Cons |
|---|---|
| Pass-Through Entity – Filing is easy. Owners report income, deductions, and credits on individual tax returns. | Lots of Liability – Partners are responsible for the business’ debts created by all partners. |
| Easy to Create – No official requirements for a general partnership. Less expensive to form. | Investor Disadvantage – The equal liability among partners can discourage outside investment. |
Even though general partnerships are easy to form, seek the advice of a tax attorney about whether it makes financial sense for your business.
Limited Partnerships
Limited partnerships have multiple owners who participate in either management or capital investment. In a limited partnership, a general partner (GP) carries all of the liability for their partnership responsibilities. The limited partner (LP) does not participate beyond their financial investment.
| Pros | Cons |
|---|---|
| Pass-Through Entity – Owners report income, deduction, and credits on individual tax returns. | Formed under State Law – Formal paperwork is required with the Colorado Secretary of State. |
| Limited Liability – LPs have limited liability and still benefit from profits. | Lots of Liability – GPs have unlimited liability of debts and other business issues. |
| Investor Advantage – Ability to raise outside capital with silent or passive partners without giving away management control. | More Oversight – Acquiring investors requires annual meetings. LPs’ shares are considered “securities” and face federal and state regulations. |
| Limited Control – LPs have no control over managerial decisions. | |
If you need to raise capital, forming a limited partnership may be to your advantage.
Limited Liability Partnerships
Limited liability partnerships (LLP) benefit from the same tax advantages as the LLC. LLPs are fairly new to the business scene having become a popular structural option in the ‘90s.
Unlike the LLC, the LLP cannot have other businesses as owners. LLPs are most often used by professional industries exposed to considerable liability, such as doctors, lawyers, and accountants, but any partnership can register as an LLP in Colorado.
| Pros | Cons |
|---|---|
| Choice in Taxation – Partners can choose to file individual returns, or the business can pay taxes as a corporation. | Formed under State Law – Formal paperwork is required with the Colorado Secretary of State. |
| Limited Liability – Partners are safeguarded from each other’s negligence. | Liability under Veil-Piercing Principles – State law permits a partnership to be liable if the corporate veil can be pierced. |
| More Oversight – Required to file annual report to the Secretary of State. | |
S Corporation
Despite its name, an S corporation (S corp) is not a type of business entity like an LLC or a C corporation. The S corp is actually a federal tax designation that a business selects.
To better understand how an S corp works, let’s review some of the businesses we have already examined.
For taxing purposes, the IRS categorizes businesses as sole proprietorships, partnerships, C corporations, and S corps.
There’s no tax classification for an LLC. It’s taxed according to how many owners it has. It’s pretty simple, actually. An LLC with one owner is taxed like it’s a sole proprietor. An LLC with multiple ownersis taxed like a partnership.
Here’s where it can get confusing: LLCs and LLPs can also choose to be taxed as an S corp or a C corp.
One of the biggest reasons for electing to be an S corp is reducing tax liability.
The S corp Tax Savings
An S corp has a “pass-through” taxing process. That means, the business’ profits “pass through” the corporation and to the owners who report them on their individual tax returns. This avoids so-called “double taxation.”
S corps also avoid paying self-employment taxes on profits.
Here’s an example:
You’re one of two owners of Acme Small Business, LLC. The company has an S corp designation. Your salary is $60,000 a year. You’re also entitled to half of the business’ profits.
This year, the company net profit is $40,000. When you file your individual taxes, you claim your $60,000 salary and the $20,000 in profits.
Your $60,000 salary is subject to federal incomes taxes and FICA taxes (Medicare and Social Security). You only pay income taxes on the $20,000.
The approximate FICA tax savings: $2,800.
If you plan to designate your company as an S corp, it’s important to assign yourself a “reasonable” salary. If you give yourself an artificially low salary, you will probably hear from the IRS.
Here’s an example of what not to do:
Let’s say you become an S corp, and you’re interested in saving as much money as you can. You make your salary $20,000 and cut yourself a check for $80,000 in net profits, knowing you’ll save quite a bit on FICA taxes.
The IRS closely monitors S corp owners for this type of potential abuse. As alluring as saving as money is, it’s not worth facing the IRS.
| Pros | Cons |
|---|---|
| Pass-Through Entity – Profits pass through the corporation to its shareholders who report them on individual tax returns. This eliminates “double taxation.” | Limits on Business Size – S corps may not have more than 100 shareholders.
Stock Restrictions – S corps are may only have one class of stock. |
| Liability Protection – Owners’ assets are protected from the company’s liabilities. | Investor Disadvantage – Most venture capitalists cannot legally invest in S corps due to regulations. |
| Income Flexibility – S corps owners can receive both a salary and dividends. Doing so reduces the self-employment tax liability. | More Oversight – Required shareholders’ meeting. Meeting minutes must be documented. |
Does My Business Qualify?
Not all businesses qualify to be taxed as an S corp. The IRS prohibits:
- Foreign LLCs
- Non-resident alien owners
- Owners that are corporations or partnerships
- Multi-member LLCs with more than 100 members
S corp elections last for five years. An S corp may be the right choice for your business if you intend to remain a small business. However, if you have plans to go public anytime soon, you may want to reconsider the S corp.
One of Robinson & Henry’s tax lawyers can discuss with you whether an S corp is the best way to go.
C corporations
The C corporation (C corp) is the most common type of corporation in America. Some of the most successful conglomerates, think Starbucks, are C corps.
The C corp and the S corp share some commonalities. For instance, creditors can’t go after your personal assets to satisfy a business’ debt if your business is an S corp or a C corp.
The major difference between the two: taxes.
The C corp faces “double taxation” unlike the S corp.
So why would you choose to get double taxed, you ask? Two words: unlimited investors.
C corp investors can be other entities, individuals, an investment group. If you’re done with going the small business loan route, a C corp may be the way to go.
And the tax situation isn’t all bad news. Business expenses and employee benefits can be deducted. There are also options to split profits and losses.
| Pros | Cons |
|---|---|
| Major Growth Potential – Unlimited stock sales. C corps can have as many as 500 shareholders. *If the company gets big enough it will have to be registered with the SEC. | “Double Taxation” – C corps are taxes on its profits. Owners and shareholders are then taxed on their salaries or dividends. |
| Tax Advantages – C corps can deduct business expenses and employee benefits. C corps can also split profits and losses between the owners and business to enjoy a lower tax rate. | More Complexity and Oversight – – C corps are required to hold annual meetings and record minutes. There’s annual paperwork with the Colorado Secretary of State, as well as federal requirements. |
| Limited Liability – Owners’ and shareholders’ personal assets are protected from debts incurred by the corporation and lawsuits filed against it. | Maintenance Cost – Because of the C corp’s complex nature, you will mostly likely need a tax attorney and other professionals to manage the company’s taxes and other formalities. |
| Perpetual Existence – Unlike sole proprietorships and partnerships, a C corp “lives on” even after the owner leaves. | |
| Investor Advantage – Preferred stock is enticing to venture capitalists. It is usually paid out before common stock after a sale or liquidation. Only a C corp can have preferred stock and other classes of stock. | |
There are instances in which a C corp could benefit your business, especially if the company has grown in recent years. Talking with one of our tax attorneys can help you decide what is most beneficial for your company.
More on Piercing the Corporate Veil
Originally applying to corporations, corporate veil-piercing principles are being extended to other entities, such as LLCs and LLPs. While LLPs and LLCs continue to have a strong shield from liability in Colorado, state law allows the partners and owners of these entities to be held culpable in certain circumstances.
The protections some entities enjoy are often branded as a “corporate veil.” And laws have been created to discourage corporations from hiding behind the veil to circumvent the law.
Most courts favor the limited liability features that some businesses hold. Therefore, most of the time a court will not pierce the corporate veil unless it’s a case in which the entity is accused of some egregious conduct.
Develop a Relationship with a Year-Round Advocate
Having a tax lawyer at your fingertips is an invaluable resource for a small business owner.
Robinson & Henry’s tax lawyers want to ensure every aspect of your business is successful, from implementing the right tax strategy to offering assertive representation if you ever need it.
Receive Up-to-Date Tax Info
Local and federal taxes change fairly frequently. As a business owner, you need to know how tax code changes could affect your company and employees.
Save yourself valuable time trying to research and decipher the tax code. Let our tax attorneys take that burden off of you so you can do what’s most important, run an efficient and profitable business.
Preparation Services for Timely, Accurate Taxes
Business taxes are generally complex. There’s the payroll tax, FICA, unemployment taxes, workers compensation taxes, property taxes, and state taxes like Colorado’s corporate income tax and alternative tax on gross receipts. Need we say more?
Some businesses pay quarterly taxes. Others pay annually. You’ll want to ensure you don’t miss a deadline.
Make sure your business taxes don’t devolve into a convoluted mess. We can prepare and file your taxes on time to avoid costly penalties and interest.
Audit Defense and IRS Liaison
When you use Robinson & Henry’s tax preparation services, you can rest easy knowing that you have audit protection. If we file your taxes and you’re audited, our attorneys, who are trained to negotiate with the IRS, will handle the IRS investigators – not you.
Our attorneys are trained to negotiate with IRS investigators.
If you’re ready to take your business to the next level, schedule a consultation with our tax attorneys at (303) 688-0944.
Our tax lawyers know the intricacies of each structure and its tax implications. Let us devise a plan to maximize your business’ finances.