How to Incorporate in Colorado vs. How to Start a Colorado LLC
A Guide to Choosing the Best Business Entity in Colorado
Think you have the perfect idea for a business in Colorado, but you’re not sure if you should form an LLC or a corporation. Let Active Filings be your guide. We’ll walk you through the advantages and disadvantages of incorporating or forming an LLC in Colorado. Throughout this Colorado-specific corporation and LLC formation guide, you’ll discover exactly how to form either an LLC or corporation in Colorado, and learn the disadvantages and advantages of each business type.
At Active Filings we offer our customers peace-of-mind by establishing their companies fast, efficiently and at an affordable price. When you work with Active Filings, we’re confident that you’ll find out in no time why we are America’s most reliable business incorporation service.
LLCs vs. Corporations
People looking to start a business often ask whether they should set up an LLC or incorporate for their new venture. Like everything else in life, the answer depends. Below you’ll find the three factors we think will help you make an informed decision.
- Ease of maintenance
LLCs are simply easier to maintain compared to corporations. Both offer solid liability protection from lawsuits, but a corporation has so many moving parts. Corporations have to hold shareholder meetings, elect directors, create bylaws, and keep notes from all the meetings. Tedius to say the least, but worth it if you are looking to grow your business big. For the rest of us, the LLC is perfect. You form it. You manage it, or higher someone to manage it for you. File your annual report. Boom. Easy.
- Desired tax structure
By default an LLC is a pass-through tax entity, meaning that the income is not taxed at the company level. The income or loss as shown on this return is ‘passed through’ the business entity to the individual members, and is reported on their individual tax returns. Less paperwork. More straightforward. A corporation is a separately taxable entity, and pays tax on the income prior to any dividend distributions to shareholders. If and when corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business expense deduction, and dividend income is taxed as regular income to the shareholders. Complicated. Paperwork. The Colorado LLC wins this one.
When it comes to investing in a company, most investors feel most comfortable investing their hard earned money into corporations. The biggest reason investors prefer corporations is their favorable taxation rules. Unlike LLCs, a corporation’s shareholders are not taxed on company profits unless profits are distributed, which means the dividends paid from the corporation can be structured to take advantage of the best tax scenario for the shareholders. If you plan to grow your small business into a larger entity and attract investors, forming a corporation is your best bet.
One final thought on LLCs and corporations. While the local plumber is a fine upstanding company, their LLC just doesn’t have the prestige of a Nike, Inc or a Walmart, Inc. When you hear the word corporation, many people think of big multi-national companies with tons of resources at their disposal. While the LLC is perfect for the small to medium-sized business, the words Limited Liability Company (LLC) don’t carry the same weight as the corporation. While LLCs first came into being in the late 1970s, the corporation is the oldest recognized business entity in the US, and thus they carry with them an aura of prestige.
CO LLCs vs. CO Corporations
Let’s dig a bit deeper and see what unique advantages and/or disadvantages Colorado offers to LLCs and corporations.
- Low Cost Annual Maintenance
Colorado requires all businesses to file a Periodic Report. Some states charge an arm and a leg for their yearly reports, but not Colorado. And you can file it online too, saving you the pain of paperwork. The state charges $10 and it’s due within a three month window starting on the first day of the month in which you filed your company’s Articles. For example, if you officially formed your business in July, then your reporting window is between July 1st and September 31st.
- Corporate Tax
Colorado taxes corporate income at a flat 4.63%. Colorado ranks among the top 20 states for best corporate tax system and business-friendly tax climate according to the Tax Foundation in part because of the state’s flat tax. One of the primary arguments for a flat taxation system is that it allows businesses to be able to save more of their money and incentives growth. A business with sales of $1,000,000 isn’t penalized with a higher rate than a business with sales of $10,000, who receives a lower tax rate. Both pay 4.63%. Colorado believes that their flat tax system increases overall revenues, provides economic stability, and even attracts business investments.
- Online Formation Only
Colorado only allows you to form your business online, which for most people is efficient and cuts down on paperwork. For others it may make things more difficult if they aren’t computer savvy. The good news is that when you hire Active Filings, we are happy to nerd out and professionally submit all of your paperwork directly to Colorado’s business formation portal. You’re almost forced to either buy a computer and learn how to file online, or hire a person or company to do it for you. So while online formation is the way of the future, if you’re not a person who is good with modern technology, business formation in Colorado could be difficult.
- Income Tax
Colorado levies a flat 4.63% personal income tax. With the state’s income tax and corporate tax being one and the same, it’s kind of nice being an LLC, because you’ll pay 4.63% on your LLCs profits, while the corporation will get hit with a top rate of 9.26%. Ouch. Makes you think twice about forming a corporation in Colorado.
- Diminished Liability Protection
Under current Colorado law, an LLC’s personal liability protection is somewhat diminished after a 2012 ruling (Martin v. Freeman) where the state’s Court of Appeals “pierced the corporate veil” by handing down the decision that business owners or corporations can be held personally responsible for business debts. The court held the view that neither fraud, wrongful intent, nor bad faith needs to be shown by an LLC’s creditor to reach the assets of the LLC’s single member.
How to Incorporate in Colorado
To officially form your Colorado corporation, you must file Articles of Incorporation with the Colorado Secretary of State. You can file the document online. The Articles of Incorporation cost $50 to file. If you choose Active Filings, we’ll make sure the process of incorporation is as painless and straightforward as possible.
Here’s a quick over view of the information you’ll need in order to properly fill out your company’s Articles of Incorporation:
Your Colorado business name must contain the words “Corporation”, “Company”, or “Incorporated,” or the far more popular and succinct abbreviated versions “Inc.,” or “Corp.” Example: Nike, Inc.
The street address you enter here will become part of the permanent public record of your Colorado corporation. When you hire Active Filings you can use our address as your principal address, thus keeping your name and information out of Colorado’s public record.
Your registered agent must be a Colorado resident (you can act as your own registered agent) or a business that offers resident agent service. Active Filings has your back. When you hire us we’ll act as your registered agent.
This is the physical Colorado address where your registered agent will be available to accept legal notifications. Hire us, and our address will go here.
You can’t just spring the job of registered agent on someone in your company. Check this box to confirm consent, and if you hire Active Filings, we’ll check the box for you.
Who is filling out your forms and filing them? This is where you’ll put their name, or, if you hire Active Filings, our info will go here instead.
List the number of shares you’re creating. You must create at least one. If you have more than one class of shares, you’ll have to upload an attachment stating how many shares of each class there are. Don’t worry, you can always amend your Articles in order to add more shares at a later date.
If you want your business to start right away, leave the “yes” selected. If you prefer to push out your start date (maybe the next tax period is right around the corner), you can enter an effective date up to 90 days in the future.
Colorado can email you important due dates and business notifications. You don’t have to submit your email address, but if you do, beware the spam bots who will pluck your email from Colorado’s public record, and pretty soon your inbox will be overrun. If you hire Active Filings, our email goes here.
Individual Causing Delivery is Colorado’s way of asking “who is the person submitting this form?” Most likely this person is you, unless you hire Active Filings, in which case our info goes here.
How to Start an LLC in Colorado
Colorado’s Articles of Organization cost $1 to file. You (or Active Filings can) fill them out online, as Colorado does not accept paper forms. Here’s a quick overview of what information you’ll need to enter in order to formally form your LLC. If you hire Active Filings, we’ll make sure the process of forming your LLC is smooth and easy.
Here’s a quick over view of the information you’ll need in order to properly fill out your company’s Articles of Organization:
You must include “Limited Liability Company” or an abbreviation like “LLC” in your name, and you can’t pick a name already in use. Example: Joe’s Plumbing, LLC.
Your principal office has to be a street address (no P.O. Boxes). Note that any address you put in your Articles of Organization becomes a permanent part of the public record. Hire us and you can use our address.
You can list either an individual or a business that provides registered agent service. It just so happens that Active Filings includes a year of registered agent service when you hire us to form your LLC, and we’re really good at being registered agents!
This is the address where legal notifications are delivered. It has to be a Colorado street address. Have we said yet that if you hire us, you can use our address?
Who is filling out this form? If you hire Active Filings, then it will be us. If you go it alone, you’ll put your name and address here.
Most small LLCs are member-managed. However, if you want to retain ownership interest but don’t actually want to run day-to-day operations, you can hire or appoint managers. Here is where you’ll list those managers.
Most LLCs in Colorado begin their life as soon as the Secretary of State receives and approves their Articles of Organization. However, you can also choose a future date for your business to start, as long as it is within 90 days of filing.
This is a roundabout way of asking who is the person clicking the button to submit the delivery of your Articles of Organization. The person clicking “submit” is most likely you. If you hire Active Filings we’ll be your delivery causing individual.
CO Annual Report Requirements
Colorado requires that all LLCs and corporations doing business within state boundaries file an annual report called the Colorado Periodic Report. The report is an annual renewal of your company’s registration with the Colorado Secretary of State and reserves your right to keep your business name and updates the state on any changes your business may have had in the last year. When you hire Active Filings, you receive guaranteed on time filing, so that you won’t have to pay late fees, or worry about your business getting in trouble with the state.
What is the Colorado Periodic Report?
The purpose of Colorado’s report is to keep your business records up to date with the state, which allows creditors and other interested parties to look up your business address in case they need to contact you. The IRS also uses this information to track the payment of your company’s taxes.
How do I file my Colorado Periodic report?
Online only. There are no paper filings in Colorado. The Secretary of State’s office will send your LLC or corporation a notification email with instructions on how to file your report. When you hire Active Filings we’ll get this email and let you know way ahead of the due date, which means you won’t have to worry about filing on time.
Where do I mail my Colorado Periodic Report?
Short answer. You can’t. Longer answer is, many states allow you to mail in a paper copy of your state annual report, but Colorado is ahead of the curve. Your Colorado Periodic Report must be filed online with the Secretary of State. There are no paper filings in Colorado.
How much does this report cost?
$10, by far one of the least expensive state reports.
When is my report due?
Your Colorado Periodic Report is due within a three month window starting on the first day of the month in which you filed your company’s Articles. For example, if you officially formed your business in July, then your reporting window is between July 1st and September 31st. Colorado gives you a two month grace period, after which you will be charged a late fee of $50. Failure to file the report could result in your business
Colorado Business Taxes
Almost no one enjoys taxes. They are, however, an integral part of successfully doing business in America. While we’re not tax professionals, we definitely will do our best to try and explain what kind of taxes your business will be expected to pay.
How will my corporation be taxed?
Corporations face “double taxation.” First they pay taxes on net profits from the business, and then get hit a second time when on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. An LLC doesn’t have this problem, which means anyone looking to form a corporation should take note of a state’s corporate income tax and personal income tax.
How will my LLC be taxed?
Single member LLCs, meaning it’s just you running your business, are treated like sole proprietorships by the IRS. This means that any profits or losses your LLC experiences, will pass-through to you as the single owner. All you have to do is file a Schedule C with your personal tax return (IRS Form 1040).
What if my LLC has more than one member?
As with a single member LLC, the IRS will view your multi-member LLC as a pass-through entity for tax purposes. It will also designate you as a partnership, which means each member will have to file Ia Return of Partnership Income form (IRS Form 1065). This document lets the IRS check and make sure each owner is reporting their income properly. Beyond that, each LLC owner will attach a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to their Form 1040. This form shows the IRS each member’s share of the LLC’s profits and losses.
Here’s a tip: if your LLC is going to have more than one member, it would be a good idea to draw up a simple operating agreement. Most states don’t require an LLC to have one, but with so many cooks in the kitchen, you’ll want clear documentation with regards to ownership percentage, voting rights, distribution of profits and losses, as well as rules for buying out a member. You won’t be require to file the agreement, but it should be signed by each member and kept with the LLC’s important documents.
What tax forms do I need to file?
Corporations: Form 112
LLCs: Form 104
Nonprofits: Form DR 0715
What is Colorado’s corporate tax rate?
Colorado has a flat corporate income tax rate of 4.6%
What is Colorado’s personal income tax rate?
Income tax in Colorado is a flat rate of 4.63%, which means that everyone in Colorado pays that same rate, regardless of their income level. This is good or bad depending on your outlook.
When are my taxes due?
Businesses must file their Colorado tax return by April 15
What if I need an extension?
Colorado offers a 6-month extension, which moves the filing deadline to October 15 (for calendar year taxpayers). Colorado’s tax extension is automatic, which means there is no application to submit unless you have tax liability.