Start a Colorado S Corp

1. Choose a name

The first step toward forming a Colorado LLC is selecting a name. You’ll need to consider marketing by making your name something memorable that conveys what you’re selling, but you’ll also need to abide by Colorado’s business naming regulations. Otherwise, your filing could be rejected by the state.

By law, your name must be distinguishable from all other company names in Colorado. To see if your desired name is available, do a Colorado Business Entity Search on the Colorado Secretary of State (SOS) website.

If the search engine says your proposed business name is available, follow up by calling or emailing the Secretary of State to make sure, as search engines like this aren’t completely foolproof. Also, check online to make sure that no one has claimed a state or federal trademark on your name, as the state doesn’t check for those.

Other LLC Name Requirements

Here are a few other requirements for Colorado LLCs:

• When you start a Colorado LLC, the name must include one of the following phrases or abbreviations. The SOS website points out that capitalization doesn’t matter, but punctuation does:
  • Limited Liability Company 
  • Ltd. Liability Company
  • Limited Liability Co.
  • Ltd. Liability Co. 
  • Limited
  • L.L.C.
  • Ltd. 
• Your LLC Colorado name can’t contain language that implies your limited liability company is connected with the state or federal government.
• If you want to include a character in your name like a number or symbol, then you’ll need to refer to the SOS’s page of acceptable characters. 

Reserving a Business Name 

Do you have your perfect name but aren’t ready to register? The state of Colorado allows you to reserve a business name for up to 120 days.

2. Choose a registered agent

Next, you’ll need to choose a registered agent for your Colorado business. A registered agent is a person or entity that’s tasked with receiving important documents, like service of process, on behalf of your business. This agent must have a physical street address. 

As the owner of an LLC, Colorado requires you to have an agent, and failing to appoint one can have some penalties for the business and maybe even its owners. Let’s go over a few things about registered agents. 

Who can be a registered agent in Colorado?

As we mentioned above, in Colorado, this agent can be either a person or an entity, like a business. There are some requirements to consider:

• If appointing an individual, this person must be over 18 years old and have a primary residence in Colorado.
• If appointing an entity, it must have a place of business in Colorado.

The person or entity must agree to be the LLC’s agent. 

Can I be my own registered agent?

You can be your own agent if you’d like, and you may want to since it can make things easier, right? The truth is, the duties of this agent could make it difficult to run your business. Here are some things to consider:

• If the LLC is sued, then having papers served in front of your customers and clients can be a very bad look. 
• You must be at your registered address during normal business hours. This makes it harder to run errands, meet with customers, go on vacation, etc. 

Using a registered agent service can help you avoid these issues. Our registered agent service can provide you with a reliable agent for your business, whether it’s an LLC or a corporation.

3. File Colorado Articles of Organization

File Articles of Organization with the Colorado Secretary of State. Now that you’ve chosen a great name and a registered agent, it’s time to submit your Articles of Organization. If all looks good and the SOS approves your Articles, your LLC will become official.

The filing cost is $50. The filing can only be done online through the SOS website. 

If filing official government forms is something that gives you the jitters, then don’t worry. Our LLC formation service can help you out. We’ll handle filing these forms for you and make sure everything is done correctly. Let’s go over the process anyway just to give you an idea of what to expect if you decide to do things yourself. 

Information to Include in Your Colorado Articles of Organization

If you’ve never filled out a form like the Colorado Articles of Organization before, then you might be wondering what exactly you’ll need to include. Here’s a general list of what you’ll need to provide:

• The LLC’s name
• The LLC’s principal office address
• The LLC’s mailing address (can be the same as the physical address)
• The registered agent’s name along with the agent’s:
  • Physical address
  • Mailing address 
  • Consent to being your registered agent
• Confirmation if the LLC will be managed by its members or a manager
• The name and address of the individual(s) forming the LLC
• A delayed effective date (if needed)
• The name and address of the individual(s) submitting the Articles
• Payment for filing

After filing the Articles, the office of the SOS will provide you with an ID number. 

4. Create an operating agreement

Draft an operating agreement for your Colorado LLC. An operating agreement (OA) allows you to establish the rules for how your LLC will operate and other important factors. Colorado doesn’t legally require you to put an OA together, but having one is extremely important for making your LLC run smoothly. 

Benefits of a Colorado LLC Operating Agreement

If drafting more business documents while creating an LLC in Colorado sounds like a bore, then you might reconsider after finding out the benefits of having an OA.

A few common ones include:

• Setting rules for how the LLC will run 
• Spelling out the roles of the individuals involved in the LLC
• Deciding ownership percentages 
• Highlighting how voting will be conducted for business-related decisions 
• Further legitimizing the business by making it look more professional and planned out 
• Helping you get loans since some financial institutions may require an OA

What to Include in an Operating Agreement

Here are some common elements you may want to include in your OA:

• The names of the owners and their ownership percentages
• The duties of each member/manager
• How voting on business matters will be conducted
• How profits will be distributed
• Directives on how new members will join the LLC
• Reasons and procedures for removing a member/manager
• How ownership interests will be handled if a member leaves the LLC or retires, dies, etc.
• How to handle dissolving the business

If you want to create an OA but aren’t sure how to get started, then check out our customizable template. 

5. Apply for an EIN

Get an Employer Identification Number (EIN) from the IRS. Many LLCs, including those with employees or more than one owner, are legally required to obtain an EIN, also known as a Federal Tax Identification Number or Federal Employer ID Number. Most banks require an LLC to have an EIN to open a business bank account. This nine-digit number is used for tax purposes and other financial paperwork.

We can obtain this number for you with our EIN service.

Register with the Colorado Department of Revenue 

You’ll also need to register with the Department of Revenue for a state tax number. Their website allows you to access important forms, apply for a sales tax license, file sales and retailer use tax, and more. When signing up, you’ll need to include some information, like your EIN (referred to as a Federal Employer ID Number on the website) and some personal information. 

6. File the form to apply for S Corp election

Submit the form to apply for S corporation tax status. Once your LLC or C corporation formation is approved by the state, 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: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

There’s a caveat for limited liability companies wanting 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 file both Form 8832 and Form 2553 together via USPS-certified mail. 

All of the members or shareholders must sign the consent statement portion of the form. For more information on how to file Form 2553, visit the IRS website.

S Corp Colorado: Pros and Cons

While S corp classification does come with a number of benefits for some businesses, making this election might not be right for every company. Sit down with an experienced tax professional and carefully weigh the various pros and cons before deciding how you want to move forward. 

S Corporation Colorado: Advantages for LLCs

The advantages of filing as an S corporation for an LLC aren’t the same as they are for C corporations. First, let’s look at the advantages for LLCs.

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

Explaining Self-Employment Taxes

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, meaning that they’re self-employed.

Being self-employed means paying taxes for self-employment (Social Security and Medicare, which add up to about 15.3%) on all the 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 tax 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 stipulation to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. If they didn’t, you could pay yourself an annual salary of $3 and avoid contributing anything to Social Security and Medicare. 

So, how is “reasonable compensation” defined by the IRS? 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 clearly defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning.

If the IRS determines that whatever salary you’re paying yourself isn’t reasonable, it has the authority to reclassify your non-wage distributions (which aren’t subject to employment taxes) to wages (which are subject to employment taxes). Various 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 regular LLC:

Stricter Requirements 

S corps have more qualifications than a standard LLC or corporation (as we listed earlier). An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or nonresident aliens. A standard LLC doesn’t have these limitations.

More Scrutiny from the IRS

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS usually monitors 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, small business owners in an S corp may want to observe some of the same formalities that corporations do (such as extensive record keeping), even if they’re not legally required to. It’s not necessary to appoint corporate officers or write corporate bylaws, but keeping something similar to a corporate records book could be useful if the business is audited.

More Accounting and Bookkeeping

Having an LLC with an S corporation election 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, too.

With these added complications, it’s possible that you’ll have higher administrative costs. You may need ongoing professional advice from an accountant and/or bookkeeper, not to mention a payroll service or software.

Advantages of S Corp Status for C Corporations

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

Pass-Through Taxation

One major 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 shareholders as dividends, they’re taxed a second time on the shareholders’ personal tax returns.

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

However, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. Thus, 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 corporation shareholders 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 its early years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the 2017 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 corp 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 corporation election also has the following minuses:

Limited Number of Shareholders

As mentioned, an S corporation can’t have more than 100 corporation 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 become a problem if you want to expand internationally. You also can’t have partnerships or corporations as shareholders. A standard corporation doesn’t have these limitations.

Only One Class of Stock

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

More IRS Scrutiny

With the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation’s 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. They may also be able to help you find additional ways to lower your tax bill.

Colorado-Specific Considerations

In an S corp, the business itself doesn’t usually pay federal income taxes, just the individual owners. But what about state income taxes?

Colorado treats businesses that file as an S corp for federal purposes the same way when it comes to Colorado state income tax. That is, the same pass-through taxation that applies to federal income taxes applies to state income taxes. The individual business owners will pay state income taxes on their share of the profits, but those profits won’t first be taxed at the business level.

Some states require an S corporation to make a separate S corp election at the state level, but Colorado doesn’t require that. If a company has a valid federal subchapter S corporation election, it will automatically be a Colorado S corporation.

We can help

Forming an S corporation or any business can be complicated, but we’d like to make it as easy for you as possible.

When you’re ready to make your move, we can help you form a Colorado LLC with an S corporation designation and provide you with valuable support and additional resources from our team of business experts. Just click the button below to get started.