If you are in Colorado and looking to start a company, you may want to go for a Limited Liability Corporation, aka LLC. It is one of the most convenient ways of starting a business and saving some money in your journey. Wondering how? Worry not! In this article, we will tell you all you need to know about LLCs in Colorado.
This article covers the following:
- What is LLC?
- What are the advantages of LLC?
- What are the disadvantages of LLC?
- Steps to Start an LLC in Colorado
- What must you do after you have formed an LLC?
- LLC Colorado laws
- FAQs on LLC
- How can Deskera assist you?
- Key takeaways
What is LLC?
An LLC is an excellent choice for business owners who want the liability protection of a corporation but without double taxation. The LLC is a type of organization with all the advantages of a corporation and the ability to pass business profits and losses along to you personally.
All the owners or the founders of an LLC are called members, and they share in the benefits of an LLC structure. Individuals, businesses, or several partners can be members of an LLC.
What are the Advantages of LLC?
Here are a few advantages of LLC that you must not miss out on:
It is Flexible
In LLC, you can choose from the multitude of options on tax treatments. You can choose to adopt the tax regime of sole proprietorships, partnerships, S corporations, or C corporations. This provides the company with the option of being treated as a flow-through entity, so long as it does not choose to be treated as a C corporation.
The income of a flow-through entity is treated as the income of its owners. That means that owners of an LLC can avoid double taxation. With double taxation, income gets taxed both at the corporate level and distributed as dividends to owners. With an LLC, income is only taxed at an individual member level rather than the company level.
If the company chooses to be taxed as a partnership, its income can be allocated across members in forms other than ownership percentage. Members agree upon this in the operating agreement.
The document governs the company’s finances, organization, structure, and operations. Unlike corporations required to appoint officers or a board of directors, an LLC is more flexible with its management structures. This, too, is decided on and stated in the operating agreement.
It Provides Protection
Limited liability companies additionally benefit from the advantages of corporations. The largest benefit is the company’s limited liability status. The company exists as its legal entity. This protects members and owners from being held personally liable for the operations and debts of the business.
Ciao- Adios to Paperwork
Corporations also offer limited liability, but they have to observe certain requirements that may not be well suited to a small, informally run business. For instance, corporations typically must hold annual shareholder meetings, make annual reports, and pay annual fees to the state.
They also tend to have substantial recordkeeping requirements. In contrast, LLCs don't have to hold annual meetings and usually are not required to keep extensive records. In many states, LLCs do not need to file annual reports.
LCs don't have their own federal tax classification but can adopt the tax status of sole proprietorships, partnerships, S corporations, or C corporations. The Internal Revenue Service automatically classifies LLCs as either partnerships or sole proprietorships, depending on whether they have one owner or more than one owner.
This means that LLCs can always take advantage of "pass-through" taxation in which the LLC does not pay any LLC taxes or corporate taxes. Instead, the LLC's income and expenses pass through to the owners' personal tax returns, and the owners pay personal income tax on any profits.
Easy to Manage
Corporations have a fixed management structure that consists of a board of directors that oversees company policies and officers who run the day-to-day business. Owners, also known as shareholders, must meet every year to elect directors and conduct other company business.
Easy Profit Distribution
LLCs have flexibility in distributing profits to their owners, and they aren't required to distribute them equally or according to ownership percentages. On the other hand, corporations must distribute profits to shareholders according to the number and types of shares they hold.
What are the Disadvantages of an LLC?
Here are a few disadvantages of LLC that you must keep in mind along with its advantages:
Profits Subject to Social Security and Medicare Taxes
Owners of an LLC may end up paying more taxes than owners of a corporation. Salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. Only salaries (and not profits) are subject to such taxes with a corporation. This disadvantage is most significant for owners who take a salary of less than $97,500 for the tax year 2007.
Owners Must Immediately Recognize Profits
A C-corporation does not have to distribute its profits to its shareholders as a dividend immediately. This means that shareholders in a C-corporation are not always taxed on the corporation's profits. Because an LLC is not subject to double-taxation, the profits of the LLC are automatically included in a member's income.
Fewer fringe benefits
Employees of an LLC who receive fringe benefits, such as group insurance, medical reimbursement plans, and parking, must treat these benefits as taxable income.
The same is true for employees who own more than 2% of an S-corporation. However, employees of a C-corporation who receive fringe benefits do not have to report these benefits as taxable income.
Steps To Start an LLC in Colorado
Here is a stepwise process to start an LLC in Colorado:
Step 1: Name It
Your identity stands as the most important in any business and any market in any business and any market. Choosing a company name is the first and most important step in forming your Colorado LLC. Be sure to choose a name that complies with Colorado naming laws and requirements and is easily searchable by potential business clients.
Here is what you must keep in mind while naming your business in Colorado:
- Your name must include the phrase “limited liability company” or one of the following abbreviations or words: “LLC, L.L.C., ltd., limited liability co., ltd. Liability company, ltd. liability co., or limited.”
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- Restricted words (e.g., Bank, Attorney, University) may require additional legal paperwork and a licensed individual, such as a doctor or lawyer, to be part of your LLC.
2. Is the name available in Colorado? Make sure the business name you want isn't already taken by doing a name search online through the Colorado Secretary of State Business Database Search.
3. Is the URL available? We recommend checking online to see if your business name is available as a web domain. Even if you don't plan to make a business website today, you may want to buy the URL to prevent others from acquiring it.
Step 2: Select a Registered Agent
A registered agent is an individual or business entity responsible for receiving necessary tax forms, legal documents, a notice of lawsuits, and official government correspondence on behalf of your business. Think of your registered agent as your business's point of contact with the state.
A registered agent must be a full-time resident of Colorado or a corporation, such as a registered agent service, authorized to conduct business in Colorado. You may elect an individual within the company, including yourself.
Step 3: File Your Colorado LLC Articles of Organization
To register your Colorado LLC, you will need to file the Articles of Organization with the Colorado Secretary of State. You can only apply online. Now is a good time to determine whether your LLC will be member-managed vs. manager-managed.
Step 4: STEP 4: Create Your Colorado LLC Operating Agreement
An operating agreement is not required for an LLC in Colorado, but it's good to have one. What is an operating agreement? An operating agreement is a legal document outlining the ownership and operating procedures.
Why are operating agreements important? A comprehensive operating agreement ensures that all business owners are on the same page and reduces the risk of future conflict.
Step 5: Get your EIN
EIN stands for Employer Identification Number. EINs is a nine-digit number assigned by the Internal Revenue Service (IRS) to help identify businesses for tax purposes. It is essentially a Social Security number for a business.
An EIN is sometimes referred to as a Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN).
Here is why you need an EIN:
- Open a business bank account
- File and manage Federal and State Taxes
- Hire employees
If you already have an EIN for your sole proprietorship, then the IRS requires that sole proprietorships get a new EIN when converting to an LLC. You can get an EIN for free from the IRS. Getting an EIN is an easy process that can be done online or by mail.
What Must You Do After You Have Formed an LLC?
If your personal and business accounts are mixed, your assets like your home, car, and other valuables are at risk in the event your Colorado LLC is issued. In business law, this is referred to as piercing the corporate veil. Here is how you can protect your LLC in Colorado.
Business Checking Account
Separates your personal assets from your company's assets, which is necessary for personal asset protection. It makes accounting and tax filing easier.
Get Yourself A Business Credit Card
Helps categorize and separate all business expenses for end-of-year tax purposes. It helps build your business credit score, an essential step toward getting a line of credit or business loan in the future. It allows you to keep track of department expenses by issuing multiple cards (with multiple budgets).
Hire an Accountant
It prevents your business from overpaying on taxes while helping you avoid penalties, fines, and other costly tax errors. It makes bookkeeping and payroll easier, leaving you with more time to focus on your growing business, Managing your business funding more effectively, and discovering areas of unforeseen loss or extra profit.
Get a Business Insurance and Safe Proof Your Company
Business insurance helps you manage risks and focus on growing your LLC. The most common types of business insurance are. General Liability Insurance. A broad insurance policy that protects your business from lawsuits. Most small businesses get general liability insurance.
Professional Liability Insurance is business insurance for professional service providers (consultants, accountants, etc.) that covers malpractice claims and other business errors.
Workers' Compensation Insurance, A type of insurance that provides coverage for employees’ job-related illnesses, injuries, or deaths. In Colorado, businesses with one or more employees, excluding officers and LLC members, must have workers' compensation insurance.
Get a Business Website
Creating a website is a big step in legitimizing your business. Every business needs a website. Even if you think that your business is too small or in an offline industry if you don’t have a website, you are missing out on a large percentage of potential customers and revenue.
Some may fear that creating a business website is out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that make the lives of small business owners much simpler.
Send Out Press Release
Press releases are among the easiest and best ways to promote your business. They are also one of the most cost-effective strategies as they:
- Provides publicity
- Establish your brand presence on the web
- Improve your website’s search engine optimization (SEO), driving more customers to your website
- Are a one-time cost in terms of effort and money
- Have long-lasting benefits
LLC Colorado Laws
The following operating agreement statutes are from the Colorado Limited Liability Company Act:
Section 7-80-108. Effect of operating agreement - nonwaivable provisions - the statute of fraud
(a) The operating agreement may contain any provisions for the affairs of the limited liability company and the conduct of its business to the extent such provisions are consistent with the law.
Except as otherwise provided in subsection (1.5), (2), or (3) of this section, an operating agreement governs the rights, duties, limitations, qualifications, and relations among the managers, the members, the members’ assignees, and transferees, and the limited liability company.
Such provisions shall control over any provision of this article to the contrary except as outlined in subsection (1.5), (2), or (3) of this section. To the extent the operating agreement does not otherwise provide, this article shall control.
(b) Any operating agreement of its members binds a limited liability company.
(c) An operating agreement may be entered into before, after, or at the time of filing of articles of organization and, whether entered into before, after, or at the time of such filing, may be made effective as of the formation of the limited liability company or as of the time or date provided in the operating agreement.
(1.5) To the extent that a member or manager or another person that is a party to, or is otherwise bound by, the operating agreement has duties, including, but not limited to, fiduciary duties, to a limited liability company or to another member, manager, or other person that is a party to or is otherwise bound by an operating agreement, the duties of such member, manager, or other person may be restricted or eliminated by provisions in the operating agreement, as long as any such provision is not manifestly unreasonable.
(2) An operating agreement may not:
(a) (Deleted by amendment, L. 2006, p. 855, § 20, effective July 1, 2006.)
(b) Unreasonably restrict the rights of members and managers under section 7-80-408;
(c) (Deleted by amendment, L. 2006, p. 855, § 20, effective July 1, 2006.)
(d) Eliminate the obligation of good faith and fair dealing under section 7-80-404 (3); except that the operating agreement may prescribe the standards by which the performance of the obligation is to be measured if such standards are not unreasonable;
(d.5) Eliminate or modify the provisions of section 7-80-801 (1)(c)(I), except to extend the time set forth therein to a time not later than the first anniversary of the date of the termination of the membership of the last remaining member; or
(e) Restrict rights of, or impose duties on, persons other than the members, their assignees and transferees, and the limited liability company without the consent of such persons.
(a) An operating agreement may contain one or more provisions concerning the enforcement, interpretation, construction, application, severability of provisions, integration, the effect of parole evidence, and other matters with respect to the operating agreement or any of its provisions.
(b) Unless otherwise provided in the operating agreement, if any provision of an operating agreement or application thereof to any person or circumstance is unenforceable or otherwise invalid under subsection (1.5) or (2) of this section or otherwise, the provision shall be limited, construed, and applied in a manner that is valid and enforceable, and, in any event, the remaining provisions of the operating agreement shall be given effect without the invalid provision or application.
(c) Unless otherwise provided in the operating agreement with respect to the unenforceability, invalidity, or application of any provision of the operating agreement under subsection (1.5) or (2) of this section, when it is claimed or appears to the court that any provision of the operating agreement may violate subsection (1.5) or (2) of this section, the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose, and effect, to aid the court in making the determination.
(3) Unless contained in a written operating agreement or other writing approved by a written operating agreement, no operating agreement may:
(a) (Deleted by amendment, L. 2004, p. 936, § 3, effective July 1, 2004.)
(b) (Deleted by amendment, L. 97, p. 1503, 12, effective June 3, 1997.)
(c) (Deleted by amendment, L. 2004, p. 936, § 3, effective July 1, 2004.)
(d) Vary any requirement under this article that a particular action or provision be reflected in writing.
(4) This article intends to give the maximum effect to the principle of freedom of contract and the enforceability of operating agreements.
(5) An operating agreement is not subject to any statute of fraud, including section 38-10-112, C.R.S., regarding void agreements, but not including any requirement under this article that a particular action or provision be reflected in writing.
FAQs on LLC in Colorado
Does the state require a signature to file an LLC?
We can sign as organizers as part of our service, thus eliminating the need for your signature. If you upload the document to us, please sign it prior to uploading. Some states do require your signature on the formation documents. We will notify you if we need a signature or any additional information.
Which state is the best state to form an LLC?
Your CPA or attorney better answers this question. We can say that most small businesses start in their home state (where the company is located). We're based in Sacramento and help many businesses form their LLCs in California.
Due to their " corporate-friendly " laws, other popular states are Delaware and Nevada. If you form in another state other than your home state, you would then be required to “qualify” to do business in your home state.
Do I need to register or “qualify” to do business in every state in which I do business?
Operating your business in multiple states will cost you both initially and annually. Depending on your type of business, you may need to qualify in every state where you transact business.
Can any type of business form an LLC?
No, some industry types cannot be formed as LLCs. Make sure to verify that your state allows the use of an LLC for your industry.
In which state do I file taxes upon forming an LLC?
Most states have annual filing requirements, including licenses or permits that may be required based on your industry. We strongly advise you to seek the advice of a tax professional to comply with all state tax laws and regulations.
What are the most common reasons for choosing an LLC?
Pass-through taxation is one of the most common reasons. It means that you can report your share of the company's profit or loss on your individual tax returns. The IRS does not tax your LLC separately. Again, contact a tax professional for specific details.
What is pass-through taxation as it relates to multiple owners?
This means that each member of an LLC reports their share of profit and loss in the company on their tax returns, and the IRS does not assess a tax on the LLC itself. This avoids the "double taxation" of general corporations, where profits are taxed at the corporate and shareholder levels.
How much does it cost to set up an LLC in Colorado?
The state of Colorado charges $50 to form a domestic LLC and $100 to register a foreign LLC.
Can I act as my own registered agent in Colorado?
Yes, as long as you’re a Colorado resident who is at least 18 years of age and you have a physical address within Colorado. It is also possible to have another member of the LLC step into the agent's role.
What if I wish to dissolve my LLC?
If you wish to end your Colorado LLC, file a Statement of Dissolution with the Secretary of State and pay a $10 charge.
What do I do about sales tax?
You may be required to register with the Colorado Department of Revenue and get a sales tax license. State laws are always subject to change through new legislation, rulings in the higher courts (including federal decisions), ballot initiatives, and other means.
While we strive to provide the most current information available, please consult an attorney or conduct legal research to verify the state law(s) you are researching.
Do I need to get a DBA for my LLC?
Trade name registration is required if you plan to use a name other than your legal business name for conducting business activities. If you solely use the name you registered as your LLC name with the Colorado Secretary of State, you don't need to register a DBA.
Do I need to get a business license or business permit for my LLC?
You might need to get a license or permit to operate your limited liability company in Colorado. Some licenses and permits are required for particular businesses, so you'll need to contact your local and state agencies to find out what is necessary for your type of business.
How Can Deskera Assist You?
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- An LLC is an excellent choice for business owners who want the liability protection of a corporation but without double taxation.
- The LLC is a type of organization with all the advantages of a corporation and the ability to pass business profits and losses along to you personally.
- In LLC, you can choose from the multitude of options on tax treatments.
- Limited liability companies additionally benefit from the advantages of corporations.
- Corporations also offer limited liability, but they have to observe certain requirements that may not be well suited to a small, informally run business.
- Corporations also offer limited liability, but they have to observe certain requirements that may not be well suited to a small, informally run business.
- LCs don't have their own federal tax classification but can adopt the tax status of sole proprietorships, partnerships, S corporations, or C corporations.
- Corporations have a fixed management structure that consists of a board of directors that oversees company policies and officers who run the day-to-day business.
- LLCs have flexibility in the way they distribute profits to their owners, and they aren't required to distribute them equally or according to ownership percentages.
- To form an LLC, you must first name your company, select a registered agent, file your Colorado LLC articles, create your Colorado LLC operating agreement, and get your EIN.
- Once you have formed an LLC, you must have a checking account, get yourself a business credit card, hire an accountant, get business insurance, get a business website, and send out a press release.