File a Colorado S Corp

Embarking on the journey to establish an S corporation in Colorado represents a strategic move for entrepreneurs aiming to take advantage of the state’s supportive business environment alongside significant tax advantages. An S corp, shorthand for Subchapter S corporation, is a tax designation that can lead to potential savings for your business. This guide is designed to navigate you through the process of setting up an S corp in the Centennial State, from understanding the initial requirements to unpacking the complexities of state-specific regulations.

For both limited liability companies (LLCs) and traditional corporations contemplating this transition, S corp status in Colorado can provide an attractive pathway to reducing self-employment taxes and avoiding the double taxation often experienced by C corporations. As you consider making this pivotal decision, we’ll walk you through the benefits, the paperwork, and the key considerations to help ensure that your Colorado business maximizes its tax advantages.

Colorado S Corp Filing Requirements

For the IRS to accept your application for S corp election, you’ll have to meet the filing requirements of the Internal Revenue Code. Specifically, to qualify for S corporation status, an entity must:

• Be a domestic LLC or corporation
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Only have one class of stock
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If your business entity meets these conditions, you can apply for an S corp election. 

Considerations for Colorado S Corp Taxes

In an S corp, the business itself doesn’t usually pay income tax at the federal level. But what about Colorado income tax?

For state income tax purposes, Colorado will treat your S corp the same way the federal government does, meaning that the business itself won’t pay state income taxes, just the business owners. However, an S corporation in Colorado must file a Partnership and S Corporation Income Tax Return (DR 0106) for every year it does business in the state.

How to Start an S Corp in Colorado

To set up a Colorado S corporation, you’ll need to create either a limited liability company (LLC) or a C corporation if you haven’t already done so. Then, you’ll file an election form with the IRS.

Forming a Colorado LLC

1. Picking the right name for your business
2. Appointing a Colorado registered agent
3. Filing the Articles of Organization
4. Drafting an operating agreement
5. Registering your business with the Internal Revenue Service (IRS) and reviewing your tax responsibilities
6. Apply for S Corp status with IRS Form 2553

For more details on these steps, see our “Start a Colorado LLC” page.

Forming a Corporation in Colorado

1. Name your Colorado corporation
2. Appoint Directors
3. Choose a Colorado Statutory Agent
4. File the Colorado Certificate of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report
11. Apply for S Corp status with IRS Form 2553

For more detailed steps on the process review our Colorado corporation page.

File Form 2553 to apply for S corp status

When your LLC or C corporation formation is accepted by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

Here’s a note for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

All of the shareholders/members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Keeping Your Colorado S Corp Compliant

Whether your S corp is an LLC or a corporation, you must file a Colorado periodic report report with the Secretary of State each year. It’s meant to keep the state current about your business’s basic information. For both LLCs and corporations, there’s an accompanying $10 fee.

If your S corp is a corporation, you’ll also be responsible for holding an annual shareholder meeting at a time and place determined by your bylaws (see bylaws definition). In addition, you’ll need to keep minutes of those meetings and other corporate records, such as a list of shareholders and a record of all actions taken by the board of directors and the shareholders on behalf of the company.

Pros and Cons of S Corp for Colorado LLCs and Corporations

While S corporation tax status does come with a number of benefits for some businesses, making this election might not be right for everyone. Carefully weigh the pros and cons before deciding how you want to continue. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for LLCs

The advantages of filing as an S corp for an LLC aren’t quite the same as they are for C corporations. A traditional LLC already has pass-through taxation, so the benefits of S corporation election for an LLC come from federal self-employment tax. We’ll explain.

Self-Employment Taxes 

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.

Dividing Salary and Profits

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by becoming an employee of the LLC. Once they do that, they only pay taxes for Social Security and Medicare on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay federal income taxes and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One provision to this is that the IRS expects you to pay yourself a “reasonable salary” while you’re employed by the LLC. Otherwise, you could pay yourself an annual salary of $0.06 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.

Advantages of S Corp Status for C Corporations

If you have a C corporation (the default form of corporation), filing as an S corp has these advantages:

Pass-Through Taxation

One big disadvantage for traditional corporations is “double taxation.” When the corporation makes a profit, the IRS taxes those profits on the business level. But when those profits are ‌distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

When a C corporation qualifies to be an S corp, though, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation.” Read pass-through taxation definition.

Writing Off Losses

Unlike the shareholders of a C corporation, S corp owners can write off the business’s losses on their personal income statements. 

Qualified Business Income Deduction

Under the 2017 Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

Disadvantages of S Corp Status for LLCs

LLCs with S corp status can have its pitfalls, though:

Stricter Requirements 

S corps have more qualifying conditions than a standard LLC. An S corp can have no more than 100 members, and none of them can be corporations, partnerships, or non-resident aliens. A traditional LLC doesn’t have these limitations.

Extra IRS Scrutiny

Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely. That could mean a greater chance of being audited.

More Accounting and Bookkeeping

Having an LLC that files as an S corporation generally means more paperwork. If you don’t already have to do payroll for your business now, being an owner-employee means that you’ll have to start. Your taxes will be more complex, as well.

Disadvantages of S Corp Status for C Corporations

S corp status also has its pitfalls for C corps:

Limited Number of Shareholders

As we said, an S corp can’t have more than 100 shareholders, while a C corporation has no such restriction.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand beyond the U.S. You also can’t have corporations or partnerships as shareholders. 

One Class of Stock

One way corporations attract investors is to offer preferred stock, but the IRS doesn’t allow this for S corps.

More IRS Scrutiny

Because of the extra limitations S corps have, the IRS watches them more closely to see if they’re in compliance. Thus, your corporation is more likely to get audited.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

Colorado and Federal Resources

For additional information about how S corporations are treated in Colorado and other important tax information, see the Colorado Department of Revenue website. The IRS website can also provide more information on the federal guidelines for S corporations. We recommend having a trusted Colorado tax advisor. They can help you through legal and financial challenges, helping ensure compliance and tax efficiency.