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Colorado s corporation

Note: Colorado has temporarily lowered the filing fees for LLCs to $1. The cost of filing Articles of Organization for a Colorado LLC had been $50. A press release from the Colorado Secretary of State’s Office says the new rates will remain in place during Fiscal Year 2022-2023, or “until the amount of the general fund is exhausted.” The Department estimates this relief will last until June 30, 2023. Note that this would apply to LLCs being formed with S corporation status, but not corporations.

When starting your own business, you might hear about the benefits of an S Corporation (S Corp). In general, the S Corporation isn’t a business structure but rather a method of business taxation approved by the Internal Revenue Service (IRS). If you’re curious about forming an S Corp in the Centennial State, you’re in the right place.

Start an S Corp in Colorado

How to Set Up an S Corporation in Colorado

Colorado doesn’t register S Corps. Instead, Colorado taxes a business based on its IRS election. To form an S Corp in Colorado, you’ll need to elect S Corp taxation by filing Form 2553, Election by a Small Business Corporation, with the IRS. Therefore, setting up an S Corp in Colorado begins with forming a corporation or LLC.

1. Choose a Business Name 

Your business name must be unique from all other Colorado-registered business entities. A corporation’s name should contain the term or abbreviation “corporation,” “incorporated,” “company,” “limited,” “corp.,” “inc.,” “co.,” or “ltd.”

LLCs should include the term or abbreviation “limited liability partnership,” “registered limited liability partnership,” “limited,” “llp,” “l.l.p.,” “rllp,” “r.l.l.p.,” or “ltd.” Once you’ve chosen a name, you can file with the Colorado Secretary of State to reserve it for a (renewable) 120 day period.

We offer a Name Reservation Service that will complete a search for any similar names and file the paperwork with your proposed business name on your behalf.

2. Appoint a Registered Agent in Colorado

The next step of forming an S Corporation is to appoint a registered agent. Your registered agent is the person who will receive service of process and other legal documents on behalf of the company. The company may be its own registered agent, or you may choose another individual or business created for this purpose. Whoever you choose must have a usual place of business in Colorado.

You can use our Registered Agent Service to connect you with a registered agent in your area.

3. Choose a Director or Managers 

The next step is to decide how will your business be run by its directors or members. You must set the rules in the operating agreement, if you start as an LLC, or in the corporate bylaws, if you are starting as a corporation. Your corporate directors or LLC managers (or members, if member-managed) will make governing decisions for the business. 

4. File Articles of Incorporation/Organization with the Colorado Secretary of State

Before you can legally do business in Colorado, you must register your business with the Secretary of State. To form a Colorado corporation, you’ll file Articles of Incorporation, containing the name and address of the business, its registered agent, each incorporator, and the initial number of shares. To form a Colorado LLC, you’ll file Articles of Organization with the name and address of the business, its registered agent, individual shareholders, and each manager.

5. File Form 2553 to Turn Business into an S Corporation

Once you’ve registered with the Secretary of State, the final step to creating an S corp is to make the S Corp election with the IRS. Before you can make this election you need to obtain an Employer Identification Number, or EIN. You can do this by either going directly to the IRS website or by using our fast and convenient EIN filing services.

Next, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

OR

One caveat for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

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Pros and Cons of Filing as an S Corp

While S corp classification does come with a number of benefits for some businesses, making this election might not be right for all business types. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. Let’s look at the advantages for LLCs first.

A traditional LLC already has pass-through taxation, so the benefits of S corp election for an LLC have to do with self-employment taxes. This takes some explanation, but for certain LLCs, it could save a lot in taxes.

Self-Employment Taxes Explained

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Dividing Salary and Profits

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” While the terms aren’t completely defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning.

If the IRS determines that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

Disadvantages of S Corp Status for LLCs

Having an LLC with S corp status can have some drawbacks over a traditional LLC:

Stricter Requirements 

As we listed above, S corps have more qualifications than a standard LLC or C corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, S corp owners may want to observe some of the same formalities that C corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.

In fact, LLCs filing as an S corp may want to observe some of the same formalities that corporations do, even if they’re not legally required to. It’s not necessary to appoint initial corporate directors and corporate officers or write corporate bylaws, but keeping something similar to a corporate records book could be useful if the business is audited.

Additional Accounting and Bookkeeping

Having an LLC that files as an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:

Pass-Through Taxation

One big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. But when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation,” and it’s how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were. 

Writing Off Losses

Just as business profits pass through to the owners of an S corp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for C Corporations

S corp status also has its downsides:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.

One Class of Stock

One way corporations attract investors is to offer preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corps.

More IRS Scrutiny

Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.

We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, but they may also be able to help you find additional tax savings.

We can help

After learning how to set up an S corp in Colorado, you can review our “What Is an S Corp?” page to read more about the pros and cons of S corps in general. When you’re ready to take the leap, our S corp service can help you form a Colorado LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. With our wide range of business services, you can rest easy knowing you’ve formed your business with the experts who will keep you on track. Whether you’re in Denver or Breckenridge, we’re here to help. Reach out to us today.

Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

FAQs

  • What are the benefits of creating an S Corporation in Colorado?

    For a corporation, one of the biggest advantages is being able to avoid double taxation. Typically, a C corporation’s profits are taxed at both the business and individual shareholder level, while an S corp’s profits are taxed only on the individual level. 

    For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive. For some LLCs, this can add up to substantial tax savings.

  • Should I identify my LLC as an S corporation?

    S corp election may not be right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, be sure to consult with an experienced business law attorney or accountant in your state.

  • How should I choose a name for my Colorado S Corp?

    Because Colorado doesn’t register S Corporations, you will need to name your business according to its entity type. A corporation’s name must include “Corp,” “Co.,” or “Inc.” An LLC must include “LLC” or “Limited” in its name.

  • How should I calculate taxes for my S Corporation? 

    Calculating taxes can be confusing, but you can check out our S corp tax guide to learn more about navigating taxes for your Colorado S corporation. A certified tax professional can give you more definitive information for your circumstances.

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