Many business owners assume that if someone is an owner, they cannot also be an employee. Under Colorado law, that assumption may be wrong and costly. In closely held businesses, it is very common for one owner to run a company while another owner contributes labor or “sweat equity.” If that labor is structured poorly or documented the wrong way, Colorado wage law can treat one owner as an employee and another owner as an employer, even though both are on the ownership chart. This article explains how that happens, why tax planning can make it worse, and how owners can reduce risk with better structure and clearer documentation.

Ownership Does Not Automatically Prevent Employee Status

Under the Colorado Wage Claim Act (CWCA), an “employee” is broadly defined as anyone who performs labor or services for the benefit of a business. The law does not exclude owners, partners, LLC members, or shareholders. The basic test for assessing performance of labor for a business is determined by examining whether one party in a position of ownership is exercising control over another party. For example, if Owner 1:

• tells Owner 2 what work to do,
• sets deadlines or priorities,
• controls pay decisions,
• supervises performance, or
• has the power to stop the work,

Owner 2 can start to look less like a co-owner and more like an employee. It does not matter if Owner 2 owns equity, and ownership status does not confer a waiver of rights to compensation under wage laws.

How This Happens in Real Life

Imagine a three-owner company: Owner 1 owns 60% and runs the business; Owner 2 owns 20% and handles sales; and Owner 3 owns 20% and manages finances. Owner 2 works full-time selling the company’s services. Owner 1 sets pricing, assigns sales targets, approves deals, and decides whether Owner 2 gets paid. Even if everyone calls Owner 2 a “partner,” a court may see: Owner 1 = employer; Owner 2 = employee. If Owner 2 is not paid wages, or is promised payment “later,” the company, and possibly Owner 1 personally, can face wage claims, penalties, and attorney fees.

How is an Owner Personally Liable for Unpaid Wages

One of the most overlooked risks under Colorado wage law is personal liability for owners who hold more than twenty-five percent of a business. Under the Colorado Wage Claim Act, an “employer” includes not only the company itself, but also individual owners who own at least 25% of the business, with an exception for minority owners who have delegated authority over operational control to another owner.[1] This means that if Owner 1 owns 25% or more of the company and exercises control over day-to-day operations, such as directing work, approving compensation, or deciding when and whether wages are paid, Owner 1 can be held personally liable for unpaid wages owed to Owner 2, regardless of ownership status. Such liability can extend directly to Owner 1’s personal assets. As noted, there is a narrow exception for minority owners who fully delegate operational control, but that exception requires real, documented delegation and consistency in practice. Simply holding less than a majority interest or calling oneself a “passive owner” is not enough. If an owner over the 25% threshold knowingly allows another owner’s labor to be performed and retains some control over operations, courts may treat that owner as an employer in their individual capacity, exposing them to wage liability, statutory penalties, attorney fees, and interest.

How Tax Planning Can Make the Risk Worse

Many owners document work relationships for tax reasons, not wage-law compliance. Depending on the tax classification of a company (C-Corp, S-Corp, or Partnership), owners often: assign/describe job duties, assign expected hours, track performance, justify compensation decisions, or defer payment to reduce payroll or self-employment taxes. Those same documents can later be used as evidence that one owner controls work and assigns it to other owners who expect compensation. A judge reviewing those records may see that Owner 1 directs work and Owner 2 or Owner 3 performs it, regardless of how tax forms are prepared. Tax planning will not override wage laws. For those owners seeking to limit wage liability, capital contribution planning must be executed with careful precision to avoid the unintended creation of an employment relationship.

Equity Is Not a Substitute for Wages

Another common mistake is assuming equity replaces wages. Under Colorado law: wages must be paid in cash (or cash equivalent) once wages are earned. Wages cannot be forfeited, and calling compensation “sweat equity” does not change its character. If Owner 2 performs work that looks like employee work, equity alone usually does not satisfy wage obligations, especially if the equity cannot be easily converted to cash. To add to this challenge, Colorado wage law is aggressive. Owners themselves can be held personally liable for unpaid wages — namely owners who hold at least 25% of the business and retain rights to operational control, as well as majority owners regardless of control status. That means Owner 1 in our example may face liability not just through the company, but personally. This is why governance, delegation, and legal structure can matter. So how can a company plan to take advantage of tax structures and avoid unintended employment relationships? Through proper business planning and development with strong legal counsel, but a few tools are noted below.

Indemnity: How Indemnity Can Help (and Where It Can’t)

Indemnity provisions placed in formation documents cannot eliminate wage obligations to an employee. You cannot make an employee “pay back” their own wages through an indemnity clause. In our running example, Owner 2 cannot indemnify Owner 1 for wages due to Owner 2, but indemnity can help allocate risk among owners. For example: if Owner 2 brings a wage claim alleging employee status and the claim exists because Owner 3 directed the work of Owner 2; the business then pays the wage claim to Owner 2; then a properly drafted indemnity clause may force Owner 3 to indemnify Owner 1 for business liability created by Owner 3. However, the indemnity cannot deny or reduce Owner 2’s wages. In plain terms: Owner 2 still gets paid; Owners 1 and 3 fight out responsibility behind the scenes. The corporate structure that includes the appropriate indemnities creates a circle of accountability among company ownership and encourages compliance with legal standards. This is one of the few ways indemnities can work to mitigate liability.

Other Practical Ways to Reduce Risk

Business owners can reduce wage-claim exposure by aligning documents, tax planning, and real-world behavior as follows:

• Avoid language that describes owners as having “job duties” or required services
• Do not guarantee payment for owner labor unless wages are actually paid
• Eliminate one-owner control over another owner’s day-to-day work
• Clearly document delegation of operational authority
• Tie owner compensation to profit and risk, not hours worked or assigned
• Review ownership percentages and management authority regularly

The Bottom Line

Colorado law does not prohibit owners from working in their businesses. But the law does require that ownership labels match operational reality. If one owner controls the business and another owner performs work under that control, courts may ultimately treat the relationship as one of employment. The safest path is proactive planning, thoughtful governance, careful tax planning, and clear documentation that reflects how the business operates. If your business has owners who also perform services, this is an area where a small structural fix today can prevent a very expensive dispute later.

Business Law Group helps business owners design ownership structures, governance frameworks, and compensation arrangements that align with real-world operations while minimizing unintended personal and statutory liability. Give us a call today at 719-319-3920 to discuss your structure before risk turns into exposure.

[1] Majority owners may not take advantage of this minority owner exception.