Fact Checked by Editorial Staff
In general, a Limited Liability Company (LLC) in Colorado does not pay any taxes like corporations and other business structures. It has a pass-through taxation instead of business or corporate tax. Besides, the LLC tax structure includes state and federal mandatory taxes. LLCs are required to choose the tax structure at the time of filing the company.
IRS (Internal Revenue Service) allows an LLC in Colorado to choose its preferred classification of tax at the beginning of the LLC filing. For example, a single-member LLC is taxed as a sole proprietor, and a multi-member LLC is taxed as a partnership. As there is no fixed tax structure for LLCs, everyone certainly wants to opt for the most beneficial one. On this page, LLCBuddy editors shared all about the tax structure in Colorado LLC.
How Does Taxation Work in a Colorado LLC
For an LLC in Colorado, the tax structure is very simple and flexible. First of all, every LLC has the advantage of a pass-through taxation. On the other hand, an LLC can choose the desired tax structure at the time of formation. There are two ways an LLC can be taxed,
As a Sole Proprietorship
A single-member LLC is usually considered a sole proprietorship company. Hence, by default, it is taxed as a sole proprietorship. A single-member LLC is also called a disregarded entity. Under the U.S. tax law, it is assumed that a single-member LLC is owned by an individual (& not by another LLC), so the U.S. tax law levies rules on it as a Sole Proprietor. A single-member LLC’s owner (Sole Proprietor) has to report all the income of the LLC via their own income tax return.
As mentioned earlier, the single owner of the LLC is treated as the Sole proprietor of the LLC & has to file the Self-Employment Tax on all of the LLC’s earnings. Colorado does not levy State Income Tax, so a single-member LLC must file only the Federal Income Tax.
As a Partnership
Any LLC with more than one owner is referred to as a Multi-Member LLC & it is taxed as a partnership by default. Similar to the Single Owner or Single Member LLC, this LLC is also a pass-through entity. This means that the income of the LLC passes through the income of the members & they have to file taxes through their own earnings.
Partnership or Multi-Member LLC has to pay taxes similar to those of the Single-Member LLC. If the Partnership LLC is directly owned by individuals, it is exempt from the Franchise Tax. All the members of the Multi-Member LLC are liable to pay Self-Employment Tax & Federal Income Tax.
Pass-through Taxation for Colorado LLC
A Limited Liability Company (LLC) is a form of business structure that consists of members and/or managers (owners). The biggest advantage of an LLC in Colorado is the pass-through taxation. The limited liability company does not pay any federal income taxes based on the revenue of the company. Instead, the tax liability passes through to each member of the LLC. Furthermore, the members will have to pay individual income tax based on their income.
Both for a single-member LLC and a multi-member LLC in Colorado, the tax burden passes through to the member(s). In other cases, if an LLC chooses to be taxed as a Corporation, the LLC will have to pay federal income tax based on its revenue and profit. There is no pass-through taxation for C-Corp and S-Corp.
Options to Change Default Tax Classification
The LLCs are categorized either as sole proprietorships or as partnerships, depending on the number of members the LLC has. This is the default tax classification applicable to LLCs. However, the LLCs have an option of changing the default classification & opting to register under the following categories for taxation purposes:
C-Corporation
An LLC can prefer to be treated as a C-corporation by filing Form 8832 (the Entity Classification Election Form) with the IRS. The C-corporation is a regular corporation that is subject to corporate taxes & it is not a pass-through entity.
An LLC taxed as a C-Corporation is not a pass-through entity. In a C-corporation, the members/shareholders/ owners are taxed separately. The shareholders of the C-corporation are taxed twice on the dividends that they earn. The dividends of the shareholders are taxed at the corporate level, with a Corporate Tax filed with Form 1120 & at a Shareholder level, an Income Tax filed with Form 1040. Shareholders are subject to Federal Income Tax.
S-Corporation
The S-Corporation is the most common type of corporate structure used by small businesses. It was created to provide corporations with limited liability protection while maintaining the benefits of being a separate legal entity. An LLC can prefer to be treated as an S-Corporation by filing Form 2553. S corporations are small business corporations that choose to pass through the corporate income, losses, deductions, & credits to the shareholders for the purposes of Federal Taxes.
An S-Corporation is similar to an LLC except that it is treated by the IRS as a corporation for tax purposes. S-Corps do pay corporate income taxes; however, they are still considered disregarded entities for federal tax purposes.
Like an LLC, an S-Corp reports its annual earnings on a separate Schedule E on the member’s personal account. An S-Corp is treated by the IRS much like a partnership for tax purposes. Unlike Partnership, in S Corporation, the shareholders are required to pay Federal Self Income tax on their share of the company’s profits.
LLC Taxes to be Paid in Colorado
An LLC in the state of Colorado has to pay two types of taxes to the Colorado Department of Revenue:
State Income Tax
A member of an LLC in Colorado has to pay himself out of the earnings. These earnings get reflected in your personal Tax return & are calculated at the time of paying the Income Tax. The Standard Colorado State Income Tax rate of 4.5% is applicable to your earnings. You get the opportunity to claim all the standard allowances & deductions upon filing the tax return.
State Sales & Use Tax
The state of Colorado levies Sales & use tax on tangible goods & services provided by an LLC. The State Sales & Use tax rate in Colorado is 2.9%. However, certain localities or towns may charge an additional sales & use tax rate up to 11.2%.
Federal Self-Employment Tax
Every member or manager of the Colorado LLC earning profit from the LLC has to pay the Federal Self-Employment Tax (also called the Social Security or Medicare Tax). The Federal Self-Employment Tax applies to all the earnings of an LLC member or manager. The Federal Self-Employment Tax rate in Colorado is 15.3%. To deduct your LLC’s expenses from the income earned, you must calculate the Self-Employment Tax your LLC owes.
Federal Income Tax
Like State Income Tax, this tax also applies to the earnings you make in your LLC. The Federal Income Tax Rate is subject to the earnings you make, the type of your LLC’s industry, the LLC tax bracket applicable, deductions applicable, etc.
Employee & Employer Taxes
Any LLC with employees on the payroll has to pay different kinds of taxes that apply to all the employees. The Employee & employer tax implications are different from all the other types mentioned above. For Example, All employees of an LLC have to collect and withhold the Payroll tax at the time of receiving the salary. Irrespective of whether you withhold the Federal Tax or not, each employee has to file an individual Tax return.
Classification of Colorado LLC Taxes
An LLC is considered a Pass-through Entity because it allows the income to pass through & become self-employment income. The members of the LLC have to pay Self-employment tax or Self-Employment Taxes on any income they earn through the LLC. The LLC has to pay Franchise Tax on its income. In addition to the Self-employment tax, there are some other requirements that an LLC has to consider, such as:
- Franchise Tax – Franchise tax applies to or levies upon LLCs, C-corporations, & S-corporations. Sole Proprietorship & Partnerships (directly owned by individuals) are exempted from the Franchise Tax. This tax is to be paid to the office of the Comptroller of Public Accounts.
- Federal Tax Identification Number – An LLC with employees must obtain a Federal Tax Identification Number. Colorado does not have a separate State Tax Identification number.
- State Employer Taxes – If an LLC has employees on the payroll, it must pay state employer taxes in Colorado. These taxes are handled through the Colorado Workforce Commission.
- Franchise Tax Report – In Colorado, the LLCs file an annual report with the Secretary of State; they do not have Franchise Tax.
Federal Tax Classifications
When LLCs were recognized as one of the types of Business Corporations, the IRS did not create a new tax classification just for the LLC. LLCs were allowed to choose from the current tax classifications.
Choosing a Classification for Your LLC
In terms of owners’ protection against liability, perpetual existence, & savings in Taxation, Both LLCs (Limited Liability Companies) & Corporations are very much alike. However, with regard to formalities, Taxation, & capital, LLCs & Corporations differ in Colorado.
Liabilities
Both LLCs and Corporations provide liability protection to their owners. The LLC provides protection against inside liability (towards the employee) & outside liability (towards the creditor). The Corporation usually provides only the inside liability.
Tax Classification Flexibility
For taxation purposes, an LLC has a choice of being treated as a sole proprietorship, Partnership or C-corporation, or S-corporation. A corporation can choose to be treated only as C or S Corporation.
Taxation
As mentioned earlier, the LLC can choose to be treated as a corporation; the Corporation does not have the option of being treated as an LLC. A Colorado LLC is subject to Franchise tax, Federal Income Tax, Sales & Use Taxes & State Employment Taxes (for LLCs that have employees)
A regular corporation or a C-Corporation is subject to corporate tax, which can be filed through Form 1120 every year. The shareholders have to pay the income tax only when they receive dividends from the Corporation. These dividends are taxed twice at the corporate level (on a corporate form)& at the shareholder level (on shareholder form).
An S-Corporation in an LLC is not subject to corporate taxes. But the shareholders are subjected to Taxation – even if they do not receive any dividends. A member of a Colorado S-corporation has to pay Federal Self-Employment Tax only on his salary; any other profits that he makes through the LLC are not subject to the 15.3% Self-Employment Tax.
Classification of LLC Taxes – At a Glance
| Points of Difference | LLC | S- Corporation | C-Corporation | Sole Proprietorship |
| Taxation | As an LLC, by default, there is no tax levied at the entity level. The members’ income or even the loss is passed through to the members or owners. | Similar to LLC, no tax is levied on an S-Corporation at the entity level. The members’ income or even the loss is passed through to the members or owners. | The C-Corporation is often taxed at the entity level. The Dividends are taxed at the shareholders’ level. | The sole proprietorship as an entity is not taxable. The Sole Proprietor pays taxes as an Individual. |
| Double Taxation | The LLC does not have Double Taxation | There is no Double Taxation in S-Corporation | There is Double Taxation in C-Corporations, only when the Shareholders earn in the form of dividends. | No Double Taxation in a sole proprietorship. |
| Self-Employment Tax | The net income of the members or owners is subject to self-employment tax. | The salaries of the shareholder are subject to self-employment tax, but any other profits that the shareholder makes are not subject to the employment tax. | The C-Corporation is subject to self-employment tax. | The sole proprietorship is subject to self-employment tax |
| Pass-Through Income/Loss | An LLC is often referred to as a Pass-through entity because its income passes through/ passes to its members. | Yes, An S Corporation is a Pass-through Entity. | No, A C-Corporation is not a Pass-through Entity. | Yes, a sole proprietorship is a Pass-through Entity. |
FAQ
C-Corporation. It taxes the dividends of the shareholders at the corporate level as well as at the individual level.
An LLC is often referred to as a pass-through entity because the income or the assets pass through the members or owners of the LLC.
The LLCs have two default classifications. It can be termed as a single-member LLC or a multi-member LLC.
When choosing a different classification for taxation, it is essential to understand the liabilities & taxes applicable in that classification.
How Do LLCs Pay Taxes in Colorado
When it comes to paying taxes in Colorado, LLCs have a few options. If the LLC has multiple members, it can choose to be taxed as a partnership or as an S corporation. In either case, the profits and losses of the LLC are allocated to the individual members based on their ownership percentage. Each member is then responsible for reporting their share of the income or losses on their personal tax returns.
If the LLC has only one member, it is treated as a disregarded entity for tax purposes. This means that the LLC itself is not taxed, and all income and losses are reported on the owner’s personal tax return. The owner would report the income or losses on Schedule C of their Form 1040.
Another option for LLCs in Colorado is to elect to be taxed as a C corporation. This is less common for LLCs, as it can result in double taxation – once at the corporate level and again at the individual level when dividends are distributed to the shareholders. However, some LLCs may choose this option if they have complex tax planning needs that can be better addressed with corporate tax treatment.
Regardless of how an LLC chooses to be taxed, it is important that the owners understand their tax obligations and responsibilities. Keeping accurate records of income and expenses, maintaining proper documentation, and filing all necessary tax forms on time are crucial for LLCs to stay in compliance with Colorado tax laws.
It is also important for LLC owners to consult with a qualified tax professional or accountant to ensure they are taking advantage of all available tax deductions and credits. A tax professional can help LLC owners navigate the complexities of the tax code, minimize their tax liability, and avoid costly mistakes that could result in penalties or audits.
In conclusion, while the tax implications of forming an LLC in Colorado may seem daunting, the flexibility and benefits of this business structure outweigh the challenges. With careful tax planning and the guidance of a trusted tax advisor, LLC owners can ensure they are in compliance with Colorado tax laws and make the most of their business endeavors.
In Conclusion
Every Tax classification has its own set of benefits & restrictions. Every state will have different taxation rules for each of the categories of business corporations. Depending on the objective of formation of the business entity (Eg, to avoid dual Taxation- one can choose S Corporation, for more flexibility, one can choose the LLC format). It is essential to understand the taxing structure of each country & each Classification to decide how you wish to treat your LLC.