LLC vs S-Corp in Colorado

Colorado has a flat 4.40 percent personal income tax and a 4.40 percent corporate income tax (both rates set under CRS Title 39 Article 22 and as adjusted by voter-approved TABOR refunds for a given tax year). The Colorado Secretary of State handles the entity filing. The IRS handles the tax classification via Form 8832 and Form 2553. A Colorado LLC can elect to be taxed as an S corporation. Verify current rates on the Colorado Department of Revenue site (https://tax.colorado.gov/business-income-tax) before relying on them for a given tax year. Colorado LLC basics. - Articles of Organization filed online with the Colorado Secretary of State Business Center (https://www.sos.state.co.us/biz/). The standard filing fee is low (under $100 at the time of writing; verify current fee on the SOS site before filing). - Annual periodic report. Every Colorado LLC must file a periodic report with the SOS each year during a three-month filing window tied to the formation month. The periodic report fee is modest. Missing the window puts the entity in Noncompliant status. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with IRS Form 2553. - No Colorado franchise tax. Colorado S corp basics. - Colorado recognizes the federal S election. An S corporation files Colorado Form DR 0106, the Colorado Partnership and S Corporation Income Tax Return. Income generally passes through to shareholders and is reported on their individual Colorado returns at the 4.40 percent flat rate. - Colorado's 4.40 percent corporate income tax applies primarily to C corporations. An S corp is generally not subject to that corporate-level rate, except for items specifically subject to corporate-level tax. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Colorado imposes state unemployment insurance (UI) tax through the Colorado Department of Labor and Employment (CDLE) once the business crosses the wage threshold. Why a Colorado trades shop might elect S corp. The main driver is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. Colorado's 4.40 percent flat state rate applies to the owner's pass-through income either way, so the state-tax side is roughly neutral between LLC and S corp. The federal payroll-tax math is where the decision is made. Rule of thumb. Start as a Colorado LLC. When annual profit after a reasonable owner wage is high enough that payroll tax savings clear the payroll, retirement plan, and accounting costs, elect S corp. A CPA with Colorado construction clients can run the breakeven for your numbers and confirm the Colorado filings, periodic report schedule, and any DORA wireman/plumber license-holder requirements for the entity you choose.