Forming an LLC or a corporation is generally preferable to operating as a sole-proprietorship. The question becomes what business entity should you choose, and in what state should you incorporate.
For most people reading this page the answer will be a Colorado LLC. An LLC is not always best however, and other states provide compelling opportunities when appropriate.
Doing business without corporate protection is unwise. Creditors can seize everything in your name, including but not limited to bank accounts, homes and cars.
Beyond additional risk, sole-proprietorships also receive less favorable tax treatment. This is due to the distinction between earned and unearned income.
These drawbacks mean you eventually pay more for less. Where's the sense in that?
They both enjoy the corporate veil for protection from business creditors. Small business owners, however, generally prefer LLCs due to their reduced corporate formalities. This makes it easier to stay in compliance and maintain the corporate veil.
Corporations are double taxed by default and Colorado levies a 4.63% tax. They also provide less favorable asset protection from asset protection. Due to quirks in the law it is easier to seize shares in a corporation than an interest in an LLC.
Corporations do offer the flexibility of multiple share classes and the splitting of economic from voting rights. When this flexibility is required a corporation is the best fit. However, even then, owners would do well to own their shares with an LLC for additional protection.
Colorado makes it easy to form and maintain a company. They allow online filings and have low fees, including an annual periodic report of only $10. For many this will do. Others will be drawn to Wyoming for its asset protection, or New Mexico for its simplicity.
Personal creditors cannot seize a Wyoming LLC, force distributions or liquidate its assets. Wyoming is commonly used to hold valuable assets, e.g. cash, trademarks and domains. This company then leases and loans assets to your Colorado company. This separates valuable assets from operating company liabilities.
While Colorado makes it easy, New Mexico has them beat. New Mexico only requires the initial filing... there are no additional filings ever. No annual reports, no nothing. This means a New Mexico LLC cannot be administratively dissolved and there is no paperwork to keep up with.
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