Financial guide to starting a small business - start smart series part 2 : Choosing a Business Structure
Selecting the right business structure is one of the first—and most important—financial decisions you’ll make. Your choice affects how you pay taxes, how profits are distributed, what happens if you’re sued, and how easily you can grow or add partners later.
Let’s break down the common structures, what they mean for your taxes, and how to plan early for both capital contributions and startup costs so your foundation is financially sound from day one.
1. Sole Proprietorship – Simple, but All on You
What it is: You and the business are legally the same.
Taxes: All income and expenses flow to your individual Form 1040 Schedule C. You pay income tax + self-employment tax on net profit.
Pros:
Easy and inexpensive to start
Full control and flexibility
Cons:
No legal separation between you and the business
Higher self-employment tax burden
Colorado note: If you use a trade name (“DBA”), you must still register it with the Colorado Secretary of State.
2. Limited Liability Company (LLC) – Flexibility with Protection
What it is: A separate legal entity protecting your personal assets from business debts.
Taxes:
Single-member LLC: taxed like a sole proprietor.
Multi-member LLC: taxed like a partnership.
Can elect S-Corporation status for tax savings once profits are steady.
Pros: Liability protection, flexible taxation, simple upkeep
Cons: Self-employment tax on profits unless S-Corp elected
Colorado note: File Articles of Organization ($50) + $10 annual report.
3. S-Corporation (Elected Status) – Strategic Tax Savings
What it is: A tax election for qualifying LLCs or corporations.
Taxes:
Owner-employees take a reasonable salary (subject to payroll taxes).
Remaining profit is distributed as dividends—not subject to self-employment tax.
Pros: Payroll-tax savings, stronger professional image
Cons: Payroll compliance and reporting costs
When it makes sense: Once annual net profit regularly exceeds ≈ $50 K after expenses.
4. Partnership – Shared Ownership, Shared Responsibility
What it is: Two or more people doing business together without incorporating.
Taxes: Files Form 1065 partnership return; income flows through via Schedule K-1.
Pros: Combines skills and capital; pass-through taxation
Cons: Each partner personally liable for debts; profit-split complexity
Colorado note: A written partnership agreement isn’t required—but it’s vital for defining contributions and ownership percentages.
5. Corporation (C-Corp) – Built for Growth
What it is: A separate legal entity owned by shareholders.
Taxes: Pays its own corporate tax (21% federal); dividends taxed again at owner level.
Pros: Strong liability protection; easier investor access
Cons: Double taxation unless S-Corp elected; formal recordkeeping
Colorado note: File Articles of Incorporation ($50) and maintain annual reports.
6. Plan Your Capital Contributions – Cash and Property
Starting a business isn’t just about paperwork—it’s about funding your entity correctly. Whether you contribute cash or non-cash property, the way you record those contributions affects your taxes, ownership basis, and future deductions.
a. Cash Contributions
Deposit funds directly into the business account.
Record them as owner contribution, not income.
Increases your basis for future withdrawals or loss deductions.
b. Property Contributions
Record each asset’s fair market value on contribution date.
The business’s depreciation basis is the lower of your cost or FMV.
Keep documentation—especially if property has debt attached or if it’s shared use (business and personal)
c. Why It Matters
Misclassifying contributions can create taxable gains or ownership conflicts later.
In multi-owner entities, accurate contribution tracking protects each member’s equity position.
Colorado note: Colorado doesn’t tax capital contributions, but accurate federal reporting and entity records are essential.
7. Plan for Startup Costs Before You Spend
Startup costs are the expenses you incur before your business officially opens—and how you treat them determines whether they’re deductible, amortized, or lost.
Examples of startup costs:
Market research and business planning
Website design, advertising, and branding
Legal and accounting fees
Employee training before opening day
Rent, utilities, or insurance paid before operations begin
Tax treatment:
You can deduct up to $5,000 of qualifying startup costs and $5,000 of organizational costs in your first year (reduced once total exceeds $50,000).
The remainder is amortized over 15 years.
Expenses paid after you’re actively operating become ordinary deductions.
Planning tip:
Open a dedicated account for pre-launch spending and tag each transaction as startup cost in your bookkeeping system. This makes your first-year tax return far cleaner and ensures no deductions are missed.
Colorado note: Colorado generally conforms to federal treatment, so correct federal categorization is key for both returns.
8. How Your Choices Affect the Future
Taxes: Determines whether income is taxed once or twice.
Self-Employment Tax: S-Corp status can reduce exposure.
Funding & Growth: C-Corps attract investors; LLCs stay flexible.
Exit & Succession: Structure influences how ownership transfers and gains are taxed.
Startup Records: Properly documented contributions + startup costs prove basis and protect deductions.
Decision & Startup Planning Checklist
Before filing, confirm you’ve:
Evaluated expected profits and liability risk.
Decided how you’ll pay yourself (draw vs payroll).
Planned and documented all capital contributions.
Tracked anticipated startup costs and categorized them correctly.
Reviewed tax implications with a professional before opening.
Next in the Series
Part 3 – Business Banking: Separating Personal and Business Finances
We’ll cover how proper banking setup protects your liability shield and keeps your records audit-ready.
Final Thoughts
Starting strong isn’t about guessing—it’s about planning.
Most small business owners are experts in their craft, not in tax law or accounting. They know their trade, their clients, and their product — but the financial side often feels like foreign territory. Unfortunately, making the wrong structural or financial decisions early on can lead to problems that are difficult and expensive to unwind later.
The truth is, the choices you make before your first sale can determine the difference between success and struggle. The right entity, proper capital setup and documentation, and accurate treatment of startup costs can directly influence your profitability, your cash flow, and even your personal peace of mind.
At Hiatt Accounting Group, we’ve helped countless small business owners across Colorado and the U.S. set up their businesses the right way — from formation through first-year filings. Our process ensures you start with solid financial systems, clear recordkeeping, and a structure that supports your goals long term.
When you work with us, you’re not just getting help with paperwork — you’re building a foundation for sustainable, profitable growth.
Schedule your Startup Planning Consultation today, and let’s make sure your business is set up for success from day one.
Call or text us: (720) 595-9473
Email: ahiatt@hiattaccountinggroup.com
Visit: www.hiattaccountinggroup.com
