Colorado has a favorable tax climate, a supportive business environment, and a highly educated workforce, making it an ideal state in which entrepreneurs can start or expand their businesses. If you're looking to start a small business in Colorado, though, you'll want to first decide how to structure your company.
By electing to form an S corporation (S corp), you could save money on your taxes and benefit from other advantages of this business structure. Getting your business set up as an S corp in Colorado doesn't have to be complicated. This guide will walk you through the steps required to form an S corp and keep it compliant as long as you remain in business.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Colorado
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Colorado S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Colorado S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Colorado
Starting a Colorado LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Colorado.
Be sure to choose a name that complies with Colorado naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Colorado LLC:
- Your name must include one of the following terms or abbreviations: limited liability company, ltd. liability company, limited liability co., ltd. liability co., limited, l.l.c., LLC, or ltd.
- Your name must be distinguishable from any existing business in the state.
- Your name cannot contain any term that would violate any Colorado law. For example, your business name cannot include obscenities or references to illegal activities.
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Certain restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
You can also read the Colorado state statute about LLC naming guidelines for more information.
2. Is the name available in Colorado? You can use the name availability search on the Colorado Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Colorado Registered Agent
You must elect a registered agent for your Colorado LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Colorado Registered Agent Consent to Appointment
The person filing the Colorado Articles of Organization must check a box during the online filing process indicating that their registered agent has consented to their appointment.
Step 3: File the Colorado LLC Articles of Organization
The California Articles of Organization is used to officially register an LLC.
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Colorado LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Colorado S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Colorado S Corp Compliant
Formally filing the paperwork to start a business is an important step in launching your new venture. But, once you get your business up and running, you’ll want to ensure you keep it in good standing by following state and federal laws.
Colorado S corp owners must file a periodic report each year along with Form 106 to cover their quarterly estimated income taxes.
Colorado S Corp Periodic Report
Every year, your Colorado S corp must file a periodic report with the Colorado Secretary of State. This ensures your business information remains up to date with the state. Even if nothing changes since your last report, your business still needs to file this report on an annual basis.
To find the filing deadline for your periodic report, visit Colorado’s business database page and search for your business. This report has a $10 filing fee, and you can file it online via the Colorado Secretary of State website.
Read our Colorado Periodic Report guide for a step-by-step overview of the filing process.
Colorado S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Colorado S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Colorado Income Taxes
Colorado’s state income tax rate is 4.4%. Some states have no income tax while others impose income tax rates that exceed 10%. Colorado’s 4.4% income tax rate is fairly standard when compared to its neighboring states.
Most Colorado S corps must file Form 106 to pay their quarterly estimated income taxes. Your business must make estimated payments to cover its income taxes if that income exceeds certain thresholds.
Colorado Sales and Use Tax
Colorado has a statewide Sales & Use Tax System (SUTS) that allows Colorado businesses to file and pay their taxes online regardless of their location within the state. This tool not only enables business owners to easily calculate their sales tax, but also provides a geographical information system (GIS) that allows them to look up a specific tax rate and jurisdiction using an address.
The current state sales tax rate is 2.9%, but we recommend using Colorado’s SUTS to get a better sense of any local tax rates that may apply to your business in addition to the state sales tax. Whether you operate in Denver, Boulder, or Grand Junction, each Colorado area may have its own local tax laws.
Start a Colorado S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Can I switch from an LLC to an S corp?
If you already formed an LLC in Colorado, you can switch your LLC's tax status to an S corp if you meet the minimum requirements set by the IRS.
Is Colorado a good state for forming an S corp?
There’s no one-size-fits-all rule when forming your business as an S corp because each state has its own tax structure and business incentives. Structuring your business as an S corp in Colorado will give you access to an attractive tax structure and a business-friendly environment that can help boost your chances of success in a highly competitive business landscape.