Are you looking to form a limited liability company (LLC) in the state of Colorado, but you’re not sure how the formation process works? There are several important steps when it comes to creating a Colorado LLC that is compliant and able to do business in the state.
What is a Colorado LLC?
The Colorado LLC is one of the most popular business structures in state. It's a more casual and flexible type of business than a corporation, but includes the same personal asset protection you get with a corporation. That means you aren't personally liable for debts or lawsuits against your business. This is a critical protection that is lacking from sole proprietorships and general partnerships.
LLCs in Colorado have simple formation and maintenance requirements, several options for how they can be taxed, and flexible management. From one-person businesses to multi-member LLCs with several owners, the LLC is a popular choice for a reason.
Forming an LLC in Colorado (in 6 Steps)
Step One) Choose an LLC Name
Your LLC’s name is often the first impression you get to make on potential customers, and therefore it goes without saying that this is an important step. There are a few different aspects to take into consideration when selecting a name for your business:
Legalities: In the state of Colorado, every limited liability company is required to have either the initials “LLC” or the phrase “limited liability company” in the name. In addition, you cannot include any words that refer to other business types (like “corporation” or “incorporated”), and you also can’t use words that are typically used to refer to specific kinds of businesses (like “bank” or “law office”).
Explanatory Naming: Another aspect to consider is including language that explains what your business does ― for example, if you’re a plumber, put the word “plumber” or “plumbing” in your LLC name. Additionally, if your business has strong values like being environmentally friendly, you can indicate that by including the word “green.”
Do You Like It?: At the end of the day, this is your business, and you should choose a name that makes you proud. You should also make sure your LLC name both sounds good when spoken out loud, and looks good when written down.
The most important consideration for naming an LLC is to not get too attached to any one business name until you have either reserved the name with the state of Colorado, or you’ve officially formed your business. Colorado makes this process rather easy, as you can search their entire state business database at this link, and if you’re not yet ready to form your LLC, you can reserve your desired name with the Application for a Reservation or Renewal of an Entity Name form. Reserving a name gives you another 120 days to get all your LLC’s affairs in order.
Step Two) Designate a Registered Agent
Every LLC in Colorado is required to designate a registered agent, which is the individual or registered agent service that receives government correspondence on behalf of your business, then forwards those documents to you.
According to the Colorado Secretary of State,
The registered agent is the individual or business responsible for accepting service of process for an entity and isn’t necessarily an owner or director. The registered agent is responsible for forwarding service of process to the entity.”
Incorporation Rocket Note: In Colorado, you are permitted to serve as your own registered agent, or you can appoint another person 18 years or older with an in-state permanent address. The registered agent must be available during regular business hours.
Without a registered agent, you could lose your good standing with the state of Colorado, and the state also has the right to dissolve your LLC if they decide to. In a worst-case scenario, the state could fail to alert you regarding a lawsuit against your company, which could even lead to a judgment against your business because you didn’t defend yourself.
Our Recommendation: At the end of the day, we recommend designating a Registered Agent service to handle these requirements. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off public record. Incfile and Northwest Registered Agent both offer a free Registered Agent service when you utilize their services to form an LLC. Both are fast and affordable. In fact, they’re the best available.
Step Three) File Formation Documents with State
Once you are ready to form your Colorado limited liability company, you will fill out the articles of organization.
This is THE document that will register your LLC with the state. You’ll want to ensure all of the following information is correct on the form:
- Your chosen business name
- Name and address of your registered agent
- Management style (member-managed or manager-managed)
- Name(s) and address(es) of the LLC’s manager
- Name and address of the LLC’s organizer
- Signature of organizer and registered agent
- Effective date
You can either fill out this form online. There is no paper filing method for the articles of organization in Colorado.
Cost to Form an LLC: The state of Colorado charges a $50 fee to form an LLC.
Processing Time: It takes 7-10 business days for the state to process your Colorado LLC formation paperwork and get your finalized documents in the mail to you. However, most filings that are completed online are finalized within one business day. Please note that the estimate of business days begins once ALL required paperwork is in order and filed correctly.
Step Four) Create an Operating Agreement
After you register an LLC in Colorado, create a detailed outline that explains how you will run and manage your new business. Even though it doesn’t need to be filed with the state, put one together and keep it for your records.
When you open a bank account, you may be asked for this document in order to open an account. You’ll also want to keep in mind that any future business partners or managing members may also be interested in seeing your Operating Agreement before joining your company. After all, this document essentially serves as your overall plan for success.
An attorney can help you outline your Operating Agreement or create one from a free template online. You can read more about Operating Agreements here, but some of the basic information you’ll want to have includes:
- Individual members' ownership percentages
- Rights and responsibilities
- Voting powers and meeting guidelines
- Allocation of profits and losses
- Management rules for the LLC
- Provisions for buying a member owner out, or transferring their shares in the case of illness or death
Step Five) Handle Taxation Requirements
The vast majority of LLCs require a federal tax ID number, or EIN. An EIN is basically the business version of a social security number, and it’s used for a variety of important LLC functions.
For instance, you’ll need an EIN if you want to hire any employees, and many banks require them to open business bank accounts as well. You’ll also need one for tax purposes, hence the name federal tax ID number. Get an EIN for your LLC for free through the IRS.
When it comes to state-level LLC taxes, Colorado levies these taxes based on the nature of your business. First and most important of these is your income tax. How you’re taxed will depend on the nature of your LLC. For example, if you’re a sole proprietor LLC or a partnership LLC, your business is considered a pass-through entity, and the LLC’s taxes are paid on the individual tax returns each year. LLCs choosing to be taxed as corporations will pay corporation taxes, which you can learn more about here.
LLCs in Colorado conducting sales or rentals of goods must also pay sales tax. Unlike some states, Colorado does not apply sales tax to services, only sold or rented goods. You can apply for a Sales Tax License here.
Colorado LLCs are also responsible for paying unemployment insurance taxes if they have employees on payroll. The typical tax rate is 0.0208 on the first $11,700 each employee earns, but some industries, such as construction, may pay a higher rate. You can learn more about unemployment insurance taxes here. Similarly, LLCs with employees are also responsible for filing withholding taxes. You can learn more and file your withholdings taxes here.
Depending on where in Colorado your business is located, you could also need to pay some local taxes. For example, some cities within Colorado charge use tax (not levied by the state) or additional sales tax. For the full tax requirements in your city, you’ll want to contact your local governing agency. You can call for assistance from a Colorado Tax Examiner at the government’s Call Center at 303-238-7378. Don’t overlook this potentially crucial step.
Step Six) Obtain Business Licenses and Permits
The state of Colorado does not have a general business license that each LLC needs to acquire in order to do business.
However, the state does uphold any licenses that are required in federally-regulated industries such as aviation, fisheries, and nuclear energy. The Small Business Administration provides a resource listing these regulated industries. Consult it to be sure you’ve acquired any necessary federal licenses.
In addition to federal requirements, Colorado also regulates several different industries ranging from acupuncture to barbers to chiropractors. You can find out which licenses may apply to your business with the Secretary of State and register for those licenses here.
Would you prefer to have a professional form your LLC?
If you would prefer to have a professional handle the paperwork for you, consider hiring an online incorporation service like LegalZoom and Incfile. To see which is the better option for you, check out our side by side comparison.
Next Steps: What to do After Creating a Colorado LLC
Open a business bank account: We highly recommend that you establish a separate business banking account so that your business and personal finances are maintained completely separate. This is important because it helps protect your personal assets and also makes filing taxes much easier. Once you receive your EIN from the IRS, you’ll be able to use it to establish an account at the bank or credit union of your choice.
Get Business Insurance. Most Colorado businesses with employees are strictly required to acquire workers’ compensation insurance. However, according to the Colorado Department of Regulatory Agencies, a member of an LLC is exempt from this requirement. That said, you can still choose to get a policy; if you have a lot of employees or run a potentially risky business, it may be recommended. You can read more about the state’s requirements for workers’ compensation here. Colorado’s most popular option for workers’ compensation is Pinnacol, as it is recommended by the state for new businesses. After you obtain these legally required policies, it’s probably also a good idea to pursue general liability insurance, as well as some industry-specific policies.
Understand income reporting. Income reporting is just what it sounds like – reporting the income you made from your business. It’s important to note that you must file this form whether you made or lost money over the course of the year. The state of Colorado has several forms based on how your business is set up: pass-through entities can find their forms and instructions here. LLCs set up as corporations can find theirs here.
Understand annual reporting. Colorado requires that all LLCs file an annual report. You can file it online here. The fee for filing is $10 and is due each year within three months of your LLC’s formation anniversary. You’ll also want to ensure you file on time; late reports incur a $50 late fee. Your annual report will essentially serve to update the state on any pertinent information regarding your business that has changed over the course of the year.
Find an accountant. We don’t recommend that you attempt to manage your business finances without the help of a professional. There is too much room for error, and a professional can ultimately save you time and money by guiding you on how best to manage your business finances. At a minimum, enlist professional help to set you up with software and the steps for keeping up with your finances on a regular basis. Then, consult back with your accountant at least a couple of times per year – and especially at tax time – to ensure you’re keeping track of everything correctly.