So, you’ve been mulling over business ideas and finally have your sights set on creating an LLC. Great! When forming an LLC in Colorado, you’ll need to get down to brass tacks from the off to ensure you meet every legal requirement.
You’ll want to follow the proper LLC formation process for legal compliance with state laws and regulations. Following the appropriate LLC formation process will also ensure you enjoy the benefits of this entity, such as management and tax flexibility.
Forming your LLC in Colorado correctly helps you establish limited liability protection, ensuring your and other members' assets are protected from business debts and liabilities.
The Centennial State’s rapid economic ascension has created more economic opportunities for entrepreneurs. Still, every rose has a thorn. Entrepreneurs in Colorado are grappling with increased costs of business operations, including human capital and rent costs for commercial space.
These and other unintended consequences of state legislative policies, such as family and medical leave insurance, wage transparency, and retail delivery fees, have pushed some businesses to expand operations beyond the state borders and others to consider moving all their operations out of the state entirely.
Why Choose Colorado for Your LLC?
Colorado has become fertile ground for entrepreneurs to start and expand their businesses. The healthy economic climate, resulting from the state’s supportive and collaborative communities and manageable regulations and taxes, attracts entrepreneurs looking to start or expand their businesses.
Further, Colorado’s diverse industry base gives entrepreneurs the confidence to venture into various sectors, be it tech, hospitality, retail, or agriculture. Also, a dedicated workforce and an unmatched quality of life contribute to shaping Colorado as the ultimate destination for entrepreneurs.
Understanding the Basics of LLC Formation
LLC is short for limited liability company—a business structure that protects its owners from personal responsibility for its liabilities and debts. It is an ideal choice for small business owners and entrepreneurs who wish to limit their liability while maintaining flexibility in their business management.
How does an LLC compare to a sole proprietorship?
Liability, ownership, and taxation are the differences between these structures. An LLC is formed by one or more people – often called members, while a sole proprietorship is owned by one person.
The primary difference between an LLC and a sole proprietorship is the degree of personal liability protection provided to the business owner – LLCs provide limited liability protection, while sole proprietorships don’t. That’s because an LLC is a separate legal entity that can enter into contracts, sue or be sued in its name, or even own property.
A sole proprietorship is simply an extension of the owner’s identity.
For tax purposes, a sole proprietorship isn’t taxed as a separate legal entity, and the owner reports the business’s profits and losses on their tax return by filing the IRS Form 1040. Besides the personal tax, the owner of a sole proprietorship pays self-employment tax on their net income from the business.
Sole proprietors in Colorado are also subject to state and local taxes, such as sales taxes, use taxes, and others, depending on the nature and location of their business.
LLCs provide tax flexibility as they can be taxed either as corporations or pass-through entities. In the case of a single-member LLC, it is considered a 'disregarded entity,' requiring the owner to report income and expenses on their personal tax return using IRS Schedule C (Form 1040).
Unless members elect otherwise, a multi-member LLC is treated as a partnership or pass-through structure for tax purposes. That means the company makes a tax return for partnership income by filing Form 1065. However, the respective incomes and expenses are passed through to the individual members, who report them on their tax returns using IRS Schedule K-1.
Is it appropriate to tax my LLC as a S corp?
“That’s typically not a good idea," says Ryan Clement, a Colorado attorney. He says he’s seen a troubling number of social media posts claiming that the S-corp choice is a great choice. However, there are significant disclaimers.
S-corp owners are required to pay themselves a regular, reasonable salary—that is, what they would make doing the same work somewhere else—to themselves. An S-corp that pays all profits in salaries may not save taxes. Additionally, accounting, tax preparation, and payroll services typically cost more.
Be wary of DIY solutions. Tax professionals can estimate your tax liability and recommend a reasonable salary based on IRS guidelines.
Step-by-Step Guide to Forming an LLC in Colorado
The Secretary of State must receive Articles of Organization to create an LLC. Before filing, however, you’ll need to get a name for your LLC and appoint a registered agent. Afterward, you may need to consider drafting an operating agreement.
Most importantly, you’ll need to obtain licenses and permits that pertain to your specific business and ensure you comply with Colorado tax regulations.
Below is the step-by-step process of forming an LLC.
Choose and Reserve a Unique Name
You’ll likely have a name for your business in mind, but it needs to be unique to distinguish your LLC from other businesses already registered with the Colorado Secretary of State. You can search the Colorado Secretary of State business name database to establish the availability of your preferred name.
If the name is available, you can reserve it for 120 days by filing a Statement of Reservation of Name with the Colorado Secretary of State. Most importantly, your name must include the following terms or abbreviations:
limited liability company
- liability company
- limited liability co.
- liability co.
- Limited l.l.c.,
Appoint a Registered Agent
Your Colorado LLC must have a registered agent residing in the state. The agent can be an individual (18 years or older) or an entity, such as an organization, estate, trust, etc. The LLC can also serve as its registered agent.
File Articles of Organization
You create your LLC by filing Articles of Organization. You can obtain a sample form from the Colorado Secretary of State’s website. This form must include:
- LLC name
- The main address (street address) and mailing address of the business
- Registered agent name, street address, and mailing address
- Registered agent consent
- Whether the member or a manager will be in charge of managing the LLC
- A line stating that the LLC has at least one member
- Name and address of the person(s) forming the LLC
- Name of the person filing the articles of organization
Filing the articles of organization must be done online, but you’ll need to pay before doing so.
Prepare an Operating Agreement
An operating agreement isn’t a requirement for creating an LLC, but it is highly recommended. It’s an internal document that explains how the LLC will be run by highlighting the members’ and managers’ rights and responsibilities. That way, it helps show that the LLC is a separate business entity, which may help preserve the limited liability of the owner(s).
Obtain Necessary Licenses
Depending on its type of business and location, an LLC may need to obtain other state and local business licenses. For state licenses, verify with the Colorado Department of Regulatory Agencies. For local licenses, verify with the city where the business is located.
Comply with Colorado Tax Regulations
If an LLC has employees, it will be required to pay employer taxes to the Colorado Department of Revenue (DOR). Also, if you plan to sell taxable goods and services, you’ll need to collect and pay sales tax.
For this, you’ll have to file Form CR 0100 to set up a tax account with the DOR. After filing, the DOR will assign you an ID that will act as your sales tax license. From then on, you’ll need to submit sales tax returns to the DOR periodically.
Obtain an EIN
Even if it has no employees, a multi-member LLC must obtain its own IRS Employer Identification Number (EIN). For a single-member LLC, you should obtain an EIN only if it will have employees or if you elect to have it taxed as a corporation instead of a disregarded entity.
Common Pitfalls to Avoid in LLC Formation
Forming an LLC shouldn’t be complicated, but it’s important to pay attention to every detail to avoid making mistakes during this process.
Here are some things to look out for:
Failing to Elect the Proper Tax Status
A common mistake in the LLC formation process that business owners make is failing to elect the proper tax status for their LLC. By default, single-member and multi-member LLCs are treated as “pass-through” entities, meaning that the LLC’s profits and losses are passed through to the members, who then report these on their tax returns.
You can elect to have your LLC taxed as a corporation, where the IRS treats it as a separate legal entity that files its tax returns. So, being clear about how you want your LLC to be taxed will help you understand your IRS and Colorado filing requirements and your company’s tax burden.
Failing to Obtain Required Licenses
Depending on your LLC’s operations in Colorado, you may need to obtain more than one license. It is, therefore, crucial to check with local authorities and the Colorado Department of Regulatory Agencies whether you’ll need a business license for your LLC’s operations.
Overlooking an Operating Agreement
Forming an LLC without a properly drafted Operating Agreement essentially means leaving it to be governed by the state’s LLC law. Since this law might be vague in different areas, your LLC may encounter legal issues later. Having a proper operating agreement from the get-go helps address potential legal issues whenever they arise.
While following the stipulated LLC formation process can help you avoid glaring mistakes, you can hardly get everything right. That’s why it is advisable to have legal guidance during this process for efficiency and speed – a Colorado business attorney can help you avoid these common mistakes and streamline the entire process.
Expert Insights: Why Consult a Business Lawyer
Having a business lawyer when creating your LLC isn’t a requirement, but there’s more than one reason why it is advisable. Since legal professionals stay current with state laws, your lawyer will ensure you dot the i’s and cross the t’s.
Your lawyer will also handle the time-consuming steps, such as name searches, filing the Articles of Organization, drafting a proper Operating Agreement, obtaining the necessary licenses and permits, and ensuring your LLC is tax-compliant.
Ultimately, consulting a business lawyer takes the burden off your shoulders and helps you focus on other issues pertaining to your LLC. Most importantly, it helps you wrap up the process sooner and avoid common mistakes that may result in legal issues.
Forming an LLC can be overwhelming, but the importance of doing it right can’t be overstated. Following the right steps ensures your LLC is created in accordance with the state’s LLC laws, obtains the required licenses for operation, and is clear on its tax obligations. Also, the proper formation of your LLC eliminates ambiguity when it comes to personal liability for business lawsuits and debts.
What exactly is a “disregarded entity?”
In the event that an LLC has just one member, it is regarded as a disregarded entity. This typically entails the owner disclosing the LLC's income, deductions, gains, losses, and credits on their income tax return.
In the scenario where an individual owns the LLC, the income and expenses of the LLC would be disclosed on one of the subsequent schedules that are submitted along with the owner's Form 1040 or 1040NR:
- Schedule C, Business Profits and Loss (Sole Proprietorship)
- Schedule E, Additional Income and Loss
- Schedule F, Agriculture-Related Profit or Loss
How much does the Colorado LLC formation cost?
Colorado charges $50 to set up an LLC in the state and $100 to register an LLC from another country.
Should I hire someone to help me set up my LLC, or can I do it myself?
If you only have one member, you might be able to set up an LLC by yourself. Find out exactly what paperwork you need by going to the website for starting a business in your state. It’s not a bad idea to speak with a professional before starting any kind of business, though, to make sure you are making the right choice for your situation.
I live in Colorado. Can I be my own registered agent?
You can, as long as you live in Colorado, are at least 18 years old, and have a physical address in Colorado. Another member of the LLC could also act as the agent.
What should I do if I want to end my LLC?
To dissolve your Colorado LLC, you must file a Statement of Dissolution with the Secretary of State and pay a fee of $10.
Can you run any kind of business with an LLC?
In most cases, yes. Some businesses, like banks and insurance companies, usually can not be LLCs, though. You can find out more by looking at the federal tax rules and the specific rules for your state.
At what point can I classify my LLC as a Corporation?
Any LLC with one or more members can choose to become a corporation at any time.
- You need to file Form 8832 in order to turn your business into a C corporation. After that, you must file Form 1120, your income tax return, every year.
- You need to file Form 2553 in order to become an S corporation. Then you must file Form 1120-S, your income tax return, every year.
Note: People or businesses from other countries can own or become shareholders in an LLC classified as a C corporation. However, foreign people or businesses cannot own or become shareholders in an S corporation.
Is it possible for my LLC to buy a house?
Can a limited liability company buy a house? Yes, but it can be hard. Let’s briefly gloss over the benefits and drawbacks of buying a house with an LLC and the problems that could arise.
Why would you want to buy a house through an LLC?
Buying a house with an LLC can give you a lot of great benefits. Among these advantages are increased privacy, decreased liability, tax breaks, and the opportunity to form partnerships. For added privacy, buying a house with an LLC lets you keep your business life separate from your personal life.
What Are the Drawbacks of Buying a House Through An LLC?
It is important to keep in mind that there are substantial drawbacks associated with purchasing a property via an LLC prior to pursuing this course of action. Consider the costs upfront and over time, the trouble getting a mortgage, and the fact that capital gains are not taxed more favorably, just to name a few.
In what situations should someone use an LLC to buy a house?
If you are new to investing in real estate, buying a house with an LLC has many more cons than pros. Real estate investors with more experience who want to make this their job could use this strategy to help their business grow. For investors with a lot of experience, owning a lot of real estate can protect them from being sued personally.
Ryan Clement, Esq., is a seasoned Colorado licensed attorney with nearly 20 years of experience. As the Founder/CEO & Managing Attorney of Business and Technology Legal Group, he specializes in software and technology law, intellectual property, data privacy, security, and business startups. Ryan's career includes a judicial clerkship at the Second Judicial District Court of Nevada and tenure at prestigious law firms before establishing his successful practice in 2012. Holding an MBA from the University of Colorado, Denver, and with over a decade of experience in the software industry at Fortune 500 and publicly traded companies, he brings a unique blend of legal and business acumen to his role, making him an expert at the intersection of law, technology, and business.