Colorado Corporations
Filing, Amendment & Advisement
Corporations come in various sizes and may be either publicly or privately held. When we think of corporations, we often think of large multi-national corporations, but a corporation may be formed by even a single individual. In Colorado, a for profit corporation has the option of being formed as a public benefit corporation (PBC), which pursues one or more particular public benefits and is committed to operating in a responsible and sustainable way. (More information in PBCs in the section on benefit corporations below.)
For-Profit Corporations
A corporation is a distinct legal entity separate from its ownership (“shareholders”). As distinct legal entities, corporations are stable and continue in existence unaffected by transfers or sales by ownership. This makes corporations a preferred option for raising money from outside investment as stock can be easily sold or traded without affecting business operations.
The same person or business may be both a manager [and a shareholder-owner]... it is common in closely-held corporations for the shareholders to have various management roles within the corporation.
Corporations are also familiar entities to investors, and the liability protection afforded by their distinct existence protects their personal assets from business debts and obligations. Because of the organizational separation between ownership and management, these investors as shareholders are entitled to personal liability protection for the debts, obligations, and acts of the corporation so long as corporate formalities are observed (For more about these corporate formalities, see below).
This liability protection means that investors can purchase equity in the entity without placing their personal assets on the line for business debts or obligations. Instead, a corporation's shareholders are potentially liable only to the extent of their financial investment in the corporation.
A corporation is owned by its shareholders who share in profits and vote on certain major decisions reserved to ownership, but the shareholders, as such, do not manage the day-to-day activities of the business. Except for smaller corporations, even the organizing shareholders generally retain little decision-making power for the corporation after it has been formed.
The sorts of major decisions often reserved to shareholders include decisions related to, for example, dissolution, merger, or the sale of substantially all corporate assets.
So long as the corporation is not too large, a board member, director and officer may be the same person. But any officers of the corporation are typically employees of the business and must be paid a "reasonable salary."
Instead, management roles are separate from ownership in corporations. However, the same person or business may be both a manager ("director" or "officer") in a corporation as well as a shareholder. In fact, it is common in closely-held corporations for the shareholders to have various management roles within the corporation.
The managers in a corporation are generally bound to pursue only what is ultimately in the interest of the shareholders of the corporation as well as the entity or business itself. This does not mean that a conventional for profit corporation cannot consider the interests of, for example, its customers or employees. But it might mean that its managers may need to be able to explain how those actions will benefit the shareholders or company in the end.
By forming a PBC, the scope of management's focus is expanded to include various other stakeholders, from employees and customers to the environment and community. As a result, managers cannot be found to have violated any duty to the corporation or its shareholders if they deliberately take corporation actions that produce environmental or community benefits, even at some loss of value to shareholders. Despite their broader focus, forming a PBC can often be a profitable decision even from the perspective of shareholder value.
To preserve the liability protection of its shareholders, a corporation is expected to follow certain formalities, including:
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Adoption of bylaws;
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Establishing procedures for annual shareholder meetings and recordation of minutes;
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Electing a board of directors;
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Maintenance of corporate records;
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Complete separation of personal and business finances; and
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Proper annual filings with the appropriate Secretary of State’s office.
Observing these "corporate formalities" is important for protecting the personal assets of owners. Where a corporation does not properly follow these formalities, a court may decide to "pierce the veil" of the entity. That is, the court may disregard the separate existence of the corporation and hold its shareholders liable for the debts or obligations of the business. Two articles on this site discuss "veil piercing" more fully: The Current State of Veil-Piercing Law (Colorado) and LLC Talk: Single-Member LLCs - Asset Protection.
As a result, a corporation will need to adopt bylaws to establish various procedures related to the operations and decision making of the business, including those for shareholder meetings and electing a board of directors. Without bylaws and other governing documents in place, the corporation will be unable to observe to the required formalities and may expose shareholders to personal liability. For more information, see the page covering Bylaws and Shareholders' Agreements.
Corporate bylaws give corporations some flexibility to create operating procedures related to their particular needs and circumstances. Bylaws also give corporations the ability to issue a variety of types or "classes" of stock with different rights and returns, entitling the holder to different shares of profits or different voting rights. This came be helpful when seeking outside investment but attempting to maintain voting control in a select few hands.
With the emergence of LLCs across the United States and their flexible ownership and management structures, conventional for profit corporations are not as commonly used by entrepreneurs as they used to be. However, they can still be utilized effectively when seeking venture capital. Furthermore, PBCs are a modern development of corporate law that combines corporate social responsibility and the need to attract outside investment (from "impact investors" who seek returns on capital from enterprises that operate in a responsible and publicly beneficial way).
Public Benefit Corporations (PBCs) & B Corp Certification
PBCs are for profit entities - they are not nonprofit corporations. They allow social and other entrepreneurs who wish to operate a business as a force for good to choose to form a PBCs instead of a conventional corporate structure. By doing so, they require management to consider other stakeholders than simply the corporation's shareholders and to act to achieve a public benefit. Nevertheless, some PBCs may actually be more profitable than their more conventional competitors.
In Colorado, when formed, a PBC must select at least one public benefit that it will pursue. Once selected, management is obligated to consider the effects of corporate acts on the achievement of this benefit. In this way, the corporation's purpose or mission is "locked" or "baked" into the fabric of the corporate structure. Traditionally, corporations were formed in order to bring about a particular public benefit; PBCs return corporations to their traditional function.
A "public benefit" includes both producing a positive effect or reducing a negative one, and there are a wide variety of types of benefits that a PBC may pursue. The Colorado PBC law includes specifically any effect "of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature." It's an extensive list that permits founders to pursue a wide variety of public benefits and corporate purposes.
Additionally, and regardless of its particular purpose, every PBC has to be managed in a way that considers the interests of all stakeholders - not simply shareholders - and operates in a responsible and sustainable way. The potential advantages of forming and operating a PBC are discussed more fully in the article title: Colorado Corporations: To PBC or Not To PBC?
The same person or business may be both a manager [and a shareholder-owner]... it is common in closely-held corporations for the shareholders to have various management roles within the corporation.
PBCs are required to be governed in a more socially responsible manner and, as a result, are more suited to B Corp certification than other entities. B Corp certification is not a type of business entity, but a trademarked certification maintained by the nonprofit organization B Lab that is open to various kinds of entities depending on their verified assessment along various factors related to sustainable, responsible, and ethical business operations and practices.
PBCs and certified B Corps are distinct. PBCs do not have to be certified B Corps, and certified B Corps do not have to be PBCs. Other entities are eligible for B Corp certification. But if you wish to certify a corporation, that corporation will have to convert to a PBC in order to maintain its B Corp certification.
By statute, the approval of at least 2/3rds of voting interests is required in order to take any action or adopt any new governing document that would modify or abandon a PBC's purpose or mission. For this reason, PBCs are a popular choice for founders and other social entrepreneurs who wish to ensure that their corporation will continue their mission even after changes of ownership or control.
If you need assistance with forming a PBC, refining a corporate mission or purpose, or drafting or reviewing bylaws or shareholders' agreements, Reach out, Today!
Small Corporation ("S-corp") Tax Treatment
Many entrepreneurs want to form "S-corps" - which is to say that they want their entity taxed as an S-corp. Being taxed as an S-corp can be an effective way to increase the income of the owners of small corporations and other entities eligible to be taxed as corporations.
All for-profit corporations, including PBCs, are originally formed as C-corporations ("C-corps") for tax purposes. C-corps are taxed as entities at the flat corporate rate of 21% and then the shareholders are taxed personally on their share of corporate income. This is sometimes referred to as "double taxation" - taxation at both corporate and personal levels on the same business income.
Smaller, eligible corporations or other entities that can elect to be taxed as corporations (like LLCs), may elect S-corporation tax treatment in order to be taxed as a "pass-through" corporation. To make this election, a business files Form 2553, "Election by a Small Business Corporation," with the IRS. By electing S-corp tax treatment, a corporation thereby avoids "double taxation" as the entity itself will no longer be taxed and taxes are only paid based on the personal income of individual shareholders.
In order to properly make such an election, the corporation must be a domestic entity with only a single class of stock and fewer than seventy five (75) shareholders. It must also satisfy additional requirements, including restrictions on non-resident owners as well as the sorts of legal entities that can hold stock.
Non-corporate business entities may also be eligible to be taxed as S-corps. Such entities are normally untaxed at the entity level, but electing S-corp status allows business income to be divided between salaries and dividends, thereby potentially achieving tax savings depending on the net income of the business.
The savings to owners is achieved principally by reducing the amount of income subject to Federal Insurance Contributions Act ("FICA") taxes, which can be particularly important where self-employed individuals are responsible for both the employer and employee contributions. In this situation, only the salary is subject to FICA taxes and any income related to the dividend avoids being taxed in this way. However, it is important to consult your tax advisor before making any such determination since by avoiding FICA taxes, you will also affect the Social Security that you will have available down the road.
However, for some businesses it will make sense to be taxed as an S-corp in order to reduce self-employment taxes. Where business income is significant enough, the shareholder-employees of a corporation can take both a salary and a remainder of their share of income as a dividend. However, it is important to be sure that any salaries paid are in fact "reasonable salaries," given the nature, size, and circumstances of the business and the type, quality and sophistication of work performed.
Non-corporate business entities may also be eligible to be taxed as S-corps... allow[ing] business income to be divided between salaries and dividends, thereby potentially achieving tax savings.
S-corps generally have all of the same benefits as C-corps while avoiding taxation at the corporate level. However, S-corps may have important differences in allowable deductions and the carrying of losses. It is important to carefully consider the decision to be taxed as an S-corp and to talk to your tax advisor or attorney about the needs and circumstances of your particular business.
Initially, the election to be taxed as an S-corp must be filed within 75 days of formation. Subsequently, any such election must be filed for the current tax year no later than March 15th. However, once elected, S-corp status will continue until formally revoked - or until eligibility is lost.
Articles of Incorporation & Bylaws
A PBC or conventional for profit corporation is formed by filing Articles of Incorporation with the Secretary of State and adopting bylaws. The Articles require the provision of several names and addresses, including those of the incorporators, the registered agent, the individual filing the Articles as well as the address of the corporation's principal office. The Articles also require information related to classes of stock and their number. It is important to consider carefully the answers to these questions.
A corporation's Articles of Incorporation are a public record that can be found by searching the Secretary of State's website. As a result, you should not include any information in the Articles that you would like to remain private. An experienced attorney can help you protect the privacy of your own personal information when forming a new entity, and if you have any questions or concerns about your what information will be public, Reach out, Today!
The Articles of Incorporation will also establish the initial board of directors. This board must hold an initial meeting shortly after formation where bylaws are adopted and officers are elected. The elected officers subsequently control the daily operations of the corporation and report back to the board of directors.
A corporation's bylaws govern the roles and responsibilities of management and owners and can specify various procedures and practices related to the board of directors and their oversight of corporate officers. For more information on corporate bylaws as well as shareholders' agreements, see the page discussing Bylaws and Shareholders' Agreements.
The Pote Law Firm works with small business owners to help them properly register their business. If you need assistance with forming a corporation, electing S-corporation taxation, or drafting or reviewing bylaws or shareholders' agreements, Reach out, Today!