Start an S Corporation in Colorado

There is more to an S corporation (S corp) election than simply declaring the type of tax classification you want for your business entity. An easy way to differentiate S corps from other small business corporations is by thinking that the S abbreviation is short for “shareholder.”

It’s important to understand that every state has its own rules for starting and maintaining an S corp, including Colorado.

S Corporation in Colorado: Key Points

• S corporations in Colorado aren’t subject to state income tax but will likely need to pay franchise taxes.

• S corps must operate within the U.S. because they must take on federal and state business taxes.

• In contrast to LLCs, S corporations are required to hire a board of directors.

What Is an S Corporation?

According to the Internal Revenue Service (IRS), an S corp is a tax classification in which a business passes any of its income, losses, deductions, and/or credits through to its shareholders.[1] You can learn more about S corps throughout this article, like how they might benefit small business owners, how to form them in Colorado, and more. For more information, check out the IRS website.

Most businesses acquire some form of corporation tax, which needs to be filed at the end of every tax year. According to the Colorado Department of Revenue, any Colorado business or corporation, partnership, joint venture, limited liability company (LLC), or any other combination of the above that is required to file a federal income tax return must also file a Colorado Income Tax return.[2]

When electing S corp status, you’re choosing a tax classification for your business entity. Any of your company’s profits and losses will go through to its shareholders. It is a pass-through entity, and the IRS will recognize that its taxes pass to individual shareholders. Owners file business taxes on their personal tax returns.

Tax Considerations for an S Corporation in Colorado

Again, it is essential to note that electing S corp status is a tax classification, not a business structure. Registering your business as an S corp means it must follow specific tax considerations with another set of specifications when operating in Colorado. As a result, shareholders may be liable for income tax, employment taxes, excise taxes, and estimated tax.

This section is primarily for informational purposes to walk you through the tax treatment of S corps in Colorado, which focuses on franchise tax and pass-through taxation. Any Colorado S corp must file a Partnership and S Corporation Income Tax Return (DR 0106) for any year it does business in the state.[3] Electing an S corp for federal income tax purposes marks the same classification for state tax.

Colorado Tax Treatment of S Corporations

S corps are pass-through entities, meaning any company income or losses pass through to shareholders’ tax returns. This helps shareholders and owners avoid double taxation on corporate income. This makes the S corp election especially attractive to small business owners.[4]

Note that S corps are not subject to Colorado income tax. S corps can file a composite return on behalf of its shareholders, or it can pass liability to shareholders, who will file the income on their personal returns.[5] This is an easier way of paying any income tax that shareholders or partners may owe.[6] File via the Colorado Partnership and S Corporation and Composite Nonresident Income Tax Return form.

Colorado Franchise Tax for S Corporations

Enterprises will pay what is known as franchise tax to do business in specific states.[7] If an organization only does business in Colorado, then its tax is assessed by the state’s taxable income. However, if it operates in other places, its taxable income is doled out as distributions to each state in which it operates. For this reason, S corps are very appealing as pass-through entities.

Pass-Through Taxation

As an S corp, all corporate income, losses, deductions, and credits pass through to shareholders for federal tax purposes. They are responsible for filing business-related taxes on their personal tax return. Since their taxes are assessed at their individual income tax rates, this allows them to avoid being taxed twice on corporate income, as noted in the section above.[8]

Self-employment tax may also come into play here since shareholders are more likely to own the business and employ themselves in the case of small businesses. Self-employment tax refers to Social Security and Medicare taxes. It does not include any other taxes that self-employed people must file. The IRS collects self-employment tax at a rate of 15.3%.[9]

Requirements for Forming an S Corporation in Colorado

At this point, it may be clear why electing S corp status is a good choice for your business. However, there are different requirements that a company must meet to qualify. Our online filing service can help ensure you don’t miss any requirements if you’re interested in registering your organization as an S corp.

Businesses must meet the requirements below to qualify for S corp status:

• Be a domestic corporation, i.e., operate in the United  States

• Have only allowable shareholders

  • Allowable: individuals, certain trusts, U.S. citizens, and/or estates

  • Not allowable: partnerships, corporations, and/or non-resident aliens

• Have no more than 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation, e.g., certain financial institutions, insurance companies, or domestic international sales corporations[10]

S corporation shareholders must take on state and federal business taxes. For this reason, the business must operate within the U.S., and shareholders and the company itself must follow a specific set of rules. While this tax classification especially appeals to small businesses and LLCs, only some companies can elect S corp status.

Filing as an S Corp in Colorado

If you want to start your own S corp, you should know that the filing process varies from state to state. There is no standard set of rules to get S corp status across the United States, so research what your specific state requires. You don’t want to find yourself paying unnecessary filing fees or missing required payments because you looked up the guidelines for the wrong place of business.

To register as an S corp in Colorado, check out Swyft Filing’s step-by-step guide. We’ll take you through each part of the process, from choosing your business name to hiring a registered agent to applying for an Employer Identification Number (EIN). You can use our services to help ensure that your business follows corporate bylaws and acts according to Colorado’s specific rules.

Step 1: Choose a Business Name

Thinking of your business name comes with more than just being creative or riding on the hope that no other business owner has already taken it. It also requires you to register your name according to specific guidelines, check if it’s available via government databases, and trademark it. Keep on reading for an informational rundown on what it takes to choose a business name.

As mentioned, every state has its own set of rules for forming a business. Even details like choosing a name have guidelines. Colorado has different regulations for trade names, LLCs, profit corporations, and nonprofits. The first thing you should do is check if your business name is available. You can do this via the Colorado Secretary of State website using its name availability search tool.

Suppose you’re not ready to form an S corporation in Colorado but have a name in mind. In that case, you can reserve a name for a certain period of time until you’re ready to form your company. Again, first, use a business name search tool to sift through the state’s corporate records to ensure that no other business is operating under the same name.

Step 2: Appoint Directors and a Registered Agent

Next, owners need to consider the importance of hiring directors. This is a unique aspect of filing for S corp status compared to filing for an LLC. With an elected board of directors, S corps are responsible for conducting shareholders’ meetings, documenting significant meeting minutes, and writing corporate bylaws. There are specific internal practices and formalities that come with S corps.[11]

S corporations must elect a Colorado registered agent in addition to a board of directors. Registered agents help support your business needs, and there are several benefits to hiring one, like acting as the primary point person to receive legal documents and being the address associated with your S corp. Check out Swyft Filings’ registered agent service to help you find an agent that fits your needs.

State law requires all business owners to appoint an initial registered agent, otherwise, the state will not accept your business formation documents.[12] Additionally, the registered agent must be listed on the business’ periodic report, which means that you must have a registered agent beyond the time of formation. You must also file a change of registered agent form whenever the agent changes.

According the Colorado Secretary of State, not maintaining a registered agent puts your business at risk in four ways:

1. You may miss receiving important information that you and your business need.

2. Your business risks its good standing with the state, negatively impacting your business.

3. You and your company may incur fines and penalties for violating state law.

4. Your business entity status will change to delinquent.

Step 3: File Articles of Organization

You’ll need to file your Articles of Organization to establish your business further. Also known as a Certificate of Formation, the Articles of Organization contains specific information so that the state successfully recognizes your fully-formed business entity. Each state has rules and instructions to follow when filing, as well as a filing fee. Colorado’s filing fee is $50 online.[13]

Because S corp status is a tax classification, business owners will likely have to file for an LLC before applying for S corporation status. The process for filing Articles of Organization follows the requirements for forming an LLC in the state of Colorado:

Colorado Articles of Organization must contain these critical pieces of information:

• Your S corp’s registered name and business address

• The registered agent’s name, business address, and mailing address (if different)

• A statement regarding the registered agent’s consent

• Name and mailing address of the person forming the S corp

• Whether the business is managed by manager or members

• Any other additional information

Step 4: Create an S Corp Operating Agreement

After completing the paperwork, work toward formalizing ownership by creating an S Corp operating agreement. The primary purpose of this legal document is to determine and verify the business’s owner. While it’s not mandated by state law, it is encouraged.

An operating agreement establishes ownership but also outlines the individual responsibilities of those with ownership over the business and their specific obligations to keep it running. When drafting your operating agreement, describe the business structure, including the owners, and explain how they will manage the business according to different styles.

Step 5: Apply for an Employer Identification Number

Toward the end of the process, you must apply for an Employer Identification Number (EIN). Like an individual social security number (SSN), the IRS uses an EIN to identify your business when you file your tax return. You must have an EIN to open a business bank account, get a credit card, apply for required licenses, and report taxes.

Step 6: File Form 2553 for S Corporation Election

Arguably the most crucial step, business owners must complete Form 2553. A business entity explicitly applies for S corp status with this form.

The IRS states that corporations must submit Form 2553, also known as Election by a Small Business Corporation, to become an S corp. All shareholders must sign it to be eligible, meaning they recognize and take full ownership that they are responsible for filing the business taxes on their personal filings.

You’ll want to elect S corp status during the tax year before the one you wish to apply to your election to. [14] This cannot be any later than two months and 15 days after the tax year starts. However, there are options available for late elections. Those filing in Colorado can contact the Department of the Treasury at the IRS Center in Utah or find more information here.

Also, be sure to note the following caveat: If a business owner has an LLC they want to classify as an S corp and the LLC is already past the deadline, they will need to file an additional form. This is known as Form 8832, Entity Classification Election, which allows the business to be taxed as a corporation. This will need to be done together with Form 2553.

Colorado S Corp vs. Colorado LLC

There are pros and cons to each tax classification and type of business structure. While we have gone over the ins and outs of obtaining S corp status, there might be reasons why you take your Colorado LLC a different route than S corp election. Each classification can be appealing for different tax purposes and offer benefits that might interest you and your business needs.

Advantages of Starting an LLC in Colorado

Apart from being relatively cheap and easy to form compared to other businesses, an LLC offers personal liability protection and flexible taxation. It is an excellent option for individuals who want to start a business and want flexibility in ownership and management. If you’re a small business owner looking to create an LLC, try using Swyft Filings as an online filing service for ease and support.

Disadvantages of Starting an LLC in Colorado

There are some downsides to operating an LLC. They may face stricter administrative requirements than sole proprietorships or limited partnerships. And while they offer flexibility when filing taxes and with ownership, they may complicate things when choosing a tax classification and managing members. Colorado’s regulations may also be stricter than other states’.[15]

Advantages of forming an S Corporation in Colorado

Electing S corp status can come with significant benefits when filing taxes. For one, S corps are not subject to Colorado income tax.[16] Additionally, as a pass-through entity, S corp shareholders report the company’s income and losses on their personal tax returns, using individual income tax rates, which allows them to avoid being taxed twice on corporate income.

Disadvantages of forming an S Corporation in Colorado

An S corporation’s tax benefits help small business owners the most. Suppose you want to operate a business on a larger scale. In that case, electing an S corp may (further) complicate your annual tax filings. Also, there are strict requirements for who can form an S Corp, limiting it to business within the U.S. and discriminating against certain types of corporations, like financial institutions.

Ready to File for S Corp Status in Colorado?

Starting an S corp in Colorado involves several steps, each needing to be done right to get your business up and running. Let Swyft Filings take you through getting S corp status. We help small business owners save time and effort by filing everything correctly.

Use our S-corp filing service, and we can handle the paperwork for you. With the administrative headache out of the way, business owners can focus on what matters.

Frequently Asked Questions

What is an S Corporation in Colorado?

An S corp is a business that passes any income, losses, deductions, and/or credits through to its shareholders for tax purposes. Shareholders then file business taxes on their personal tax returns.

Does Colorado recognize S corporations?

Yes, an S corp is one of the four organizational structures used to identify business income tax recognized by the Colorado Department of Revenu.[17]

What is the turnaround time for filing for S corp status with the IRS?

Generally, business owners will receive a determination of S corp status within 60 days after filing Form 255.[18]

What is the difference between an S corp and an LLC?

An S corp is a type of tax classification, not a business structure. An LLC is a business structure that needs to elect a tax classification.

What are the requirements for an S corporation in Colorado?

According to the IRS website, to qualify for S corp status, your business entity must:

• Operate domestically

• Appoint only allowable shareholders (individuals, certain trusts, and/or estates)

• Have no more than 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation, e.g., certain financial institutions, insurance companies, or domestic international sales corporations

Are taxes for LLCs and S corps the same?

No, the way LLCs are taxed depends on the type of tax classification they choose: S corp, C corp, Partnership, or Sole Proprietorship. While LLCs provide professional services like other businesses, they are not treated as separate tax entities. They must determine a tax structure.

What is the S corp tax rate?

According to the Colorado General Assembly, corporate taxes are currently assessed at a rate of 4.63.[19]

How do I dissolve an S corporation in Colorado?

To dissolve or withdraw a business, owners must file electronically through the Colorado Secretary of State website. However, it will still show in the state’s records, as all documents filed with the office are maintained as part of the public record for historical purpose.[20]

Bibliography

1. Internal Revenue Service. “S Corporations.” Accessed January 23, 2023.

2. Colorado Department of Revenue. “Business Income Tax Information.” Accessed January 23, 2023.

3. Colorado Department of Revenue. “Business Income Tax: Organizational Structure.” Accessed January 23, 2023.

4. Internal Revenue Service. “S Corporations.” Accessed January 23, 2023.

5. Colorado Department of Revenue. “Business Income Tax: Organizational Structure.” Accessed January 23, 2023.

6. Colorado Department of Revenue. “Nonresident Partners & Shareholders.” Accessed January 23, 2023.

7. Investopedia. “Franchise Tax Definition, Rates, Exemptions, and Example.” Accessed January 23, 2023.

8. Internal Revenue Service. “S Corporations.” Accessed January 23, 2023.

9. Internal Revenue Service. “Self-Employment Tax (Social Security and Medicare Taxes).” Accessed January 23, 2023.

10. Internal Revenue Service. “S Corporations.” Accessed January 23, 2023.

11. Investopedia. “What is an S Corp?” Accessed January 23, 2023.

12. Colorado Secretary of State Jena Griswold. “Business FAQs: Registered Agent.” Accessed January 23, 2023.

13. Colorado Secretary of State Jena Griswold. “Fee Schedule.” Accessed January 23, 2023.

14. Internal Revenue Service. “Instructions for Form 2553 (12/2020).” Accessed January 23, 2023.

15. Upcounsel. “Disadvantages of an LLC: Everything You Need to Know.” Accessed January 24, 2023.

16. Colorado Department of Revenue. “Business Income Tax: Organizational Structure.” Accessed January 24, 2023.

17. Colorado Department of Revenue. “Business Income Tax Information.” Accessed January 23, 2023.

18. Internal Revenue Service. “Instructions for Form 2553 (12/2020).” Accessed January 23, 2023.

19. Colorado General Assembly. “Corporate Income Tax.” Accessed January 24, 2023.

20. Colorado Secretary of State Jena Griswold. “Business FAQs: Registered Agent.” Accessed January 23, 2023.