Chapter 2 - § 2.1 BUSINESS LAW AND COLORADO CANNABIS LEGISLATION

• Jurisdiction: Colorado

§ 2.1 BUSINESS LAW AND COLORADO CANNABIS LEGISLATION

§ 2.1.1—Introduction

One of the most important decisions every business owner must make is determining the appropriate governing structure for its entity. The State of Colorado recognizes a number of governing structures, including corporations, limited liability companies, partnerships, and more.¹ Each form of entity may further be designated as a domestic entity, meaning that the company was formed under the laws of this state, or as a foreign entity, meaning that the company was formed under the laws of a different state, but is operating within this state. A business owner may choose to form its company under the laws of a different state if the laws are more favorable for tax or other purposes even if it operates solely within the State of Colorado.

A business owner may also operate its company as a sole proprietorship, meaning that the company is doing business within the state but has not formally organized by filing the requisite documents as a specific form of entity in the State of Colorado or any other state. Operating as a sole proprietorship may be attractive to some owners because there are no meeting or record-keeping requirements like with other forms of entities, and there are no additional tax filings to make, because the Internal Revenue Service (IRS) "passes through" the profits and losses of the sole proprietorship to the owner.² Additionally, since there are no documents to file to commemorate the formation of a sole proprietorship, the owner is able to cut out certain expenses, such as attorney fees or filing fees, making the formation much less expensive than with other forms of entities. However, operating as a sole proprietorship also means that the owner will be personally and unlimitedly responsible for the debts and liabilities of the company. In addition, the owner may run into difficulty raising capital or incurring debt on behalf of the company, as the owner must rely on its own credit and personal loans, rather than borrowing money on behalf of the entity, and may also miss out on tax deductions or other benefits that are only available to certain entities.³ While a sole proprietorship may be the preferred choice of entity for some business owners, this chapter will focus only on those formal types of governing structures that involve a formal organization process and the various requirements imposed on such organizations by the State of Colorado.

As mentioned above...