There are many reasons that people may want to form an LLC in Colorado, but most commonly, it is done for liability protection or tax purposes. The state has only a few requirements to form your company, and they are very simple to meet.
Given how easy it is to set up a Colorado LLC, many people overlook how beneficial this type of company structure can be for their business. This blog post will explore how to go about setting up a limited liability company in this state, including all the steps involved and what the benefits of doing so are.
What is a Colorado LLC?
An LLC in Colorado represents a business entity that provides personal liability protection to all of its members (most commonly the owner).
Setting up an LLC can be beneficial if you want to avoid paying taxes as a sole proprietorship or partnership but remain privately owned rather than publicly traded.
A limited liability company is considered a "pass-through" entity, which means that your company's profits are passed directly onto you and taxed as ordinary income.
This is beneficial compared to setting up an S-Corp or C-Corp if you want to avoid being taxed double (where the business pays taxes on its earnings, and so do you).
Always consult with professionals on what business structure would best suit your needs before setting one up.
For example, there may be some LLC tax benefits that don't outweigh certain other factors, such as limited liability protection in the event something were to happen at your company's location that required legal action against it by another party claiming damages/injuries resulting from negligence, etc.
What Are the Benefits of Colorado LLCs?
There are many benefits associated with forming this type of limited liability structure for your Colorado business:
- The LLC itself is not taxed; taxation falls upon its members (owners) instead
- Easy to set up and maintain, requires minimal ongoing filings with state/federal agencies
- Personal liability protection for all LLC members (owners)
- LLCs are considered separate legal entities, meaning that you cannot use personal assets to pay off business debts if the company goes bankrupt or is ever sued
- Provides an excellent way to protect your personal wealth and future financial stability should something happen at your Colorado business location that requires legal action against it by another party claiming damages/injuries resulting from negligence, etc.
Small business owners interested in setting up LLCs should note that the process is not difficult to complete.
Limited liability companies are ideal for small business owners because personal assets are separated from your business assets and protected in a lawsuit.
What Are the Cons of Colorado LLCs?
Although running an LLC in Colorado has its irrefutable perks, there are some potential downsides to consider.
Suppose future business plans include opening additional locations in other states. In that case, an LLC may not be the best choice for a business structure because individual state laws will govern and must all adhere to one another.
This becomes especially important concerning interstate commerce issues such as employee hiring/firing practices and specific benefits that apply to individual states.
Furthermore, future business growth may be limited if the LLC is transacting solely within Colorado and neighboring state lines because of interstate commerce restrictions.
This can become even more complicated depending on the industry associations individual businesses are a part of and contractual agreements with other companies such as vendors or suppliers that require adherence to certain standards.
Taxes are another potential issue because individual LLC owners are responsible for reporting business revenue and expenses on individual tax returns. Also, individual state laws can vary by county or city, affecting an individual's taxation responsibility. This can be solved if individual LLC owners elect a different type of taxation, more specifically, S or C corporation.
Related Article: How to Dissolve an LLC in Colorado?
Steps to Setting Up an LLC in Colorado
There are several steps every business owner should take when setting up an LLC in Colorado. If future LLC don't follow certain steps when registering as a business, then they will face a lack of protection and other legal issues. These steps must be taken as soon as possible.
Keep in mind that professional advice is always best when setting up any business, especially for those who are new to this process or have no experience with it.
Step 1: Choose a Business Name
Before you can form an LLC in Colorado, you need to find a suitable business name. The business name should be unique and meet all requirements, including the length.
The business name must also end with either an 'LLC' abbreviation for Limited Liability Company; 'LLC,' 'LLC Ltd or 'LC.' This will ensure legal protection and allow you to obtain the necessary licenses required for your business entity registration in Colorado.
There are a few additional naming requirements, such as restricted terms or terms requiring a special license (attorney, for example).
You can find the detailed requirements for an LLC name at the Colorado Secretary of State (SOS). You can also check whether your desired name is available by browsing the Colorado Secretary of State Business Database Search.
You can even file the Statement of Reservation of Name, which allows you to reserve a business name for 120 days while you finalize the business formation documents. The name reservation filing fee is $25.
Step 2: Hire a Registered Agent
Colorado law requires that any individual or business entity must hire a registered agent service to accept important legal documents on its behalf and provide legal advice when needed.
The law states that an LLC operating within the state must have a registered office and must designate an individual as a resident agent.
This means you should hire a registered agent for your LLC who can receive lawsuits, court summonses, and other official filings from courts or government agencies on your behalf.
Theoretically speaking, this person will always be available at their street address to sign for these notices even if they are out of town - making it possible to reach them 24/365 or at least during regular business hours.
LLC's registered agent services in Colorado start around $50 a year, but this cost can go up depending on the company structure and the individual needs of your business.
Additionally, in most cases, it is not possible to file your LLC without a registered agent or using just an address service (PO Box) that forwards mail to you. This means that if you are thinking about forming an LLC, then setting up a registered office for this LLC becomes necessary - otherwise, preparing all of your business paperwork will be impossible.
Step 3: File Colorado LLC Articles of Organization
Filing Articles of Organization represents a procedure that allows businesses to form an LLC in Colorado.
Articles of organization represent a document that creates the company. It must be filed with the Colorado Secretary of State by any owner, member, or manager of your business who has not signed up under another name (aka anonymously). The articles themselves can contain basic information about the company's structure, purpose, and members/managers.
Once this procedure is completed, you'll receive official Articles of Organization forms with important details, including the date articles were filed, LLC's street address on record as principal office location, registered agent information, and so on.
The Articles of Organization for your LLC can only be filed online through the Colorado Secretary of State's website. To file Articles of Organization, you need to pay a $50 filing fee.
Step 4: Make Your LLC Operating Agreement
Operating agreements are legal documents that contain specifications about the rights, duties, and responsibilities of LLC members.
The operating agreement also defines procedures for resolving issues within the company, managing major financial decisions, or changes in membership status.
Operating agreements are not required by Colorado business law, but they're highly recommended because:
- It's a great way to ensure all business owners have a clear understanding of their roles and how the business works;
- Operating agreements can help hold you accountable as a manager or member since breaking the rules set out in your operating agreement may be grounds for expulsion from the LLC;
- They create legally binding contracts between each owner/manager, which protects all parties involved. If an issue ever comes up where it needs to go before a judge, the operating agreement offers a clear interpretation of how the company should operate.
An operating agreement is essentially an internal document that outlines all rules, regulations, and guidelines for operating your LLC business. It sets out each member's percentage interest in their membership status.
Operating agreement can contain items like how often meetings are held, whether your LLC is a single-member LLC or a multi-member LLC, the management structure (member-managed or manager-managed), how you hire employees, and so on.
Other Important Steps
Once you register your Colorado LLC, you need to follow a few additional steps.
These steps will make your LLC a fully functional business entity, and they include: opening a business bank account, obtaining an EIN and potentially, a business license, filing an annual report, maintaining accurate company records (usually this means keeping at least one copy of all important documents within the state), etc.
Opening a Business Bank Account
LLC owners should open a business bank account because personal assets can get easily mixed up with the company's funds.
This is especially important if you are planning to take out loans or other types of financing in the future. If you use one bank account for LLC and your personal need, you risk losing personal asset protection in case of bankruptcy or personal injury lawsuits.
Opening a business bank account also allows you to keep track of the company's assets and expenses, which is crucial for an LLC owner.
Obtaining an EIN
In order to open a business bank account or hire employees, your Colorado LLC will need an EIN tax number - employer identification number.
Tax ID number is created to be used for tax filing purposes and can be obtained by applying through an online form with Internal Revenue Service. The procedure usually takes no more than 15 minutes and is free of charge.
Employer Identification Number helps you to maintain a corporate veil and protect your personal assets from tax liabilities and other legal claims. A corporate veil is a legal separation between the LLC and its owners. It means that one party's tax debts, liabilities, or other obligations will not be automatically transferred to another entity.
As soon as tax ID is received via mail by registered Colorado LLC owners, they are able to recruit employees and open business bank accounts without limitations.
Obtaining a Business License
Business licenses for a Colorado LLC could be obtained on the federal, state, and local levels, although you might not be required to have them all.
To check the federal license requirements, make sure to visit the U.S. Small Business Administration website and obtain information about business licenses.
State licenses are mandatory for LLCs to be able to start sales and pay sales tax.
Businesses that supply services, manufacture products, or sell items might also need a sales tax license from state agencies. You can inquire about state licenses by contacting Colorado's Department of Regulatory Agencies.
You should also contact the State Licensing Board if your LLC plans to provide professional services, such as dentistry, architecture, engineering, etc. In these instances, all or some members of the else need to be licensed.
If you plan on starting your business in a certain town/city of Colorado, make sure they have general business license requirements before moving forward with the establishment process. Contacting your county clerk is the best way to obtain information regarding local permits and licenses.
Colorado LLC Taxes
Figuring about whether LLC is the right business structure for your business involves understanding the state tax requirements. LLCs need to pay federal taxes and continue collecting sales tax.
A single-member LLC is not taxed as its own entity but rather through his/her personal federal return via Schedule C (similar to a sole proprietorship).
Single-member companies are considered disregarded entities by default which means all profits or losses are reported on their owner's federal returns.
A Colorado LLC that chooses to be taxed as a corporation needs to file Form 2553 with Internal Revenue Service, in which case the LLC files a separate tax return. You can download this form from the IRS website. The corporate income tax rate in Colorado is 4.63%.
Employer taxes are payable both to the Internal Revenue Service and to the Colorado Department of Revenue.
To avoid penalties, small businesses in Colorado with employees must withhold and pay business income taxes to the Department of Revenue. Upon registering your LLC with the DOR by filling out the Form CR), you'll need to go online and file withholding taxes through a periodic report.
Department of Labor and Employment handles state unemployment insurance taxes while the Department of Revenue must collect sales tax. For details about these filings, you need to contact each individual government agency.
Colorado LLC FAQs
Does Colorado Require a Periodic Report?
Yes, Colorado LLCs are required to file periodic reports, sometimes also called annual reports. The periodic report fee is $10.
How Long Does It Take to Register a Company in Colorado?
Registering an LLC in Colorado might take more than in some other states (usually up to 5 weeks). If you want your LLC formed much quicker, you can opt for expedited processing at an additional fee. This shortens the waiting period dramatically to just a few business days.
Can Anyone Be a Registered Agent in Colorado?
Yes, a Colorado LLC's registered agent may be anyone who is of legal age (18 or above) and has an address in the state. You can be your own registered agent too, but the state does not recommend that. You will need to appoint a person who is eligible for an 'authorized representative' status, plus local banks might ask you for one too.
Can I Form a Foreign LLC in Colorado?
Yes, existing businesses registered in other states can operate in the state of Colorado. Foreign LLCs that want to conduct business in Colorado must first submit a Statement of Foreign Entity Authority and pay a $100 fee. You can file The Statement of Foreign Entity Authority online at the Colorado Secretary of State website.
Can I Domesticate an LLC in Colorado?
Yes. The conversion (domestication) of an LLC in Colorado entails filing the Combined Statement of Information with the Colorado Secretary of State. This document must contain the LLC's formation documents (usually the Articles of Organization). After you complete this step, the LLC undergoes its dissolution in the mother state.
Can I Use a Virtual Business Address for My Colorado LLC?
According to information provided at the Colorado Secretary of State website, you can't use a virtual business address for your principal office or a registered agent service.
Does a Single-Member LLC Need an Operating Agreement in Colorado?
No, an operating agreement is not mandatory in the state of Colorado, no matter if you have a single-member or a multi-member LLC. You should, however, draft one because it protects you and your limited liability company.
Forming a Colorado LLC: Conclusion
Forming a Colorado LLC is a straightforward process that can be done on your own.
The state has detailed instructions for filing the necessary paperwork and creating bylaws, so you should have no problem getting started without any outside assistance.
Suppose you need more information or want to save time with the tedious work of filling out forms, or you simply don't want anything overlooked.
In that case, it's always a good idea to consult with your attorney or tax professional just in case.