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Whether you’re starting a new business, growing an existing one, or joining a partnership, starting an LLC is a good idea. It provides your business with better flexibility, tax benefits, and legal protections for your private property from your business.
However, opening an LLC in America is slightly different for each state, as some states use different terms and have unique requirements. But in this post, we’ll guide you through how to open LLC in Colorado in 7 steps.
We’ll also talk about some of the advantages and disadvantages of starting an LLC, and what to do next after you’ve opened your LLC.
So let’s get started.
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Pros Of Starting An LLC In Colorado
Limited Liability Protection
One of the biggest advantages and main reason business owners choose LLC is because of the protection it provides their private property.
So if anything goes wrong, either your business is sued or falls into debt, your private assets such as homes, cars, or money in the bank will not be tampered with.
Pass-Through Taxation
With pass-through taxation, your business profit will not be taxed at the entity level, instead, it is passed through to the individual level, so you’re taxed based on personal income.
The main benefit is that you’ll avoid being double-taxed, and your business will save a lot in tax spending.
Flexibility Management
An LLC also provides business owners with the option to either manage their business themselves or hire other people to do it.
This is possible because an LLC exists as a different entity on its own without a mandatory face behind it.
This offers great flexibility for business owners who prefer not to be involved in the day-to-day operation of business activities.
Few Formalities
Unlike other business structures, most especially Corporations, LLC businesses do not require any formal activities such as meetings with the board of directors and investors, keeping tons of detailed records, or complying with several legal requirements.
This helps the business owners save more time, effort, and of course, money.
Cons Of Starting An LLC In Colorado
Limited Growth Potential
Growing and scaling an LLC business can be difficult to do.
Firstly, LLCs are not structured to have shareholders or investors, limiting their ability to raise capital.
Also, LLCs do not offer as much protection as those offered by corporations, making them a risky investment for investors.
Worst of all, the lifespan of an LLC can be cut short anytime – either by a partner filing for dissolution or by the death of a partner.
Less Prestige
While LLCs are becoming increasingly popular, they’re still perceived as having lesser prestige than other business structures, such as a corporation.
This is because LLCs do not have the same organizational structure or formalities common in authority corporations.
Eventually, if your business will have to scale to a giant business, you’ll need to upgrade to a corporation.
Self-Employment Tax
Being taxed based on personal income may be an advantage for LLCs, but the level of tax is usually way higher than what a traditional employee’s payroll is taxed.
For instance, the Colorado LLC tax rate is 15.3% for each member, while the average Colorado employee tax rate is just 4.50%.
Meaning you’re highly taxed about 3 times the average personal income tax rate.
How To Open An LLC In Colorado In 7 Steps
Now that you’ve seen the pros and cons of starting an LLC, let’s dive into the required steps to set up one.
1. Select A Name For Your LLC
According to Colorado law, your LLC business must include either of the following word or abbreviations;
- Limited Liability Company
- Ltd. Liability Company
- Limited Liability Co.
- Ltd. Liability Co.
- Limited
- LLC
- or LC
Also, your business name cannot include official terms such as;
- Treasury
- State Department
- FBI
- CIA
And more.
You must make sure that the name you choose is unique, and has never been registered in Colorado or any other state in America.
You can check whether a business name is available by searching for it online using Google or the Colorado Secretary of State website.
If the name you choose is available, you are allowed to reserve the name for up to 120 days by filing a statement of Reservation of Name at the Colorado Secretary of State website.
And the cost for the LLC name reservation is $25, but you can register the name immediately to avoid this Fee.
2. Appoint A Registered Agent
The next step is to appoint a registered agent for your LLC in Colorado.
A registered agent could either be an individual or a business entity, and their role is agreeing to accept legal documents on behalf of your LLC business.
This is especially important in cases where your business is sued, and they’ll stand as your representative.
The registered agent you choose must be within the state of Colorado:
- Individual agents must be a full-time Colorado resident
- Business entities must have a physical location for business operations in Colorado
- Foreign businesses can serve as registered agents, as long as they’re authorized by the Colorado government, and have a physical place of operation.
3. File Articles Of Organization
The Articles of Organization is a legal document that will include some basic information about your LLC such as name, street address, registered agent name & address, and a statement from at least one member of the LLC.
You’ll also be asked to specify how your business will be managed – either by the LLC members or hired managers.
The filing fee for the Articles of Organization is done online, you can also download a Sample of the document yourself, and it costs $50.
4. Prepare An Operating Agreement
Although you don’t need an Operating Agreement to register your LLC in Colorado, preparing one has tons of benefits.
An Operating Agreement is an internal document with a written form of how your business will be structured and run and must be agreed on by members of the LLC.
It contains information on the legal, operational, and financial aspects of your business, which can be turned to in the future when issues arise.
Every member of the LLC would have to sign the document to make it a legally binding document, and each member should also own a copy of the document.
You can use our free Operating Agreement template to draft one for your LLC business.
5. Obtain An Employer Identification Number (EIN)
An EIN is a unique number assigned to your LLC by the Inter Revenue Service (IRS), which is used by various government agencies to identify your business for various legal activities.
This is a must-have for every LLC business, especially if it has more than one member, and you don’t need to have any employees before you file one.
The EIN is free to apply for, and you can get it by filing an online application on the IRS website or by submitting a Form SS-4 to the IRS.
Obtaining an EIN will benefit your LLC business in many ways. For example, with an EIN, an LLC can easily open a business bank account, apply for business credit, and file tax returns.
6. Obtain The Necessary Licenses and Permits
After opening your LLC, there are other additional licenses and permits you may need to obtain from the Colorado Government.
The type of license or permit you’ll need for your LLC business varies and depends on your business industry or location.
With that said, here are some of the major licenses and permits you may have to obtain after opening an LLC;
- Sales Tax License
- Professional License
- Occupational License
- Liquor License
- Health Permits
- Building Permits
- Environmental Permits
7. File Annual Reports
To establish your business as an official business entity in Colorado, you have to file the LLC Annual Reports.
The annual report must be filed once every year, and the due date is based on the month in which your LLC was first formed – your LLC’s anniversary.
You’ll have to visit the Colorado Secretary of State’s website to file your LLC Annual report, and it costs $10.
Some of the information you’ll provide in the LLC annual reports include its name, address, registered agent information, and other relevant details.
The periodic report will be fully due during the three months after your LLC anniversary, and failure to file the reports on time attracts a late fee penalty of $150.
What To Do Next After Opening After Opening An LLC In Colorado
Once your LLC is successfully set up, we usually recommend that LLC business owners do the following, as it will help run their business smoothly;
Open A Business Account
Opening a business account is crucial for any official business in Colorado – whether it’s an LLC or not. And if you’ve obtained your EIN, opening a business account will be very easy.
With a business account, you can separate your finance from your business finance, which will help you effectively track your expenses, income, and taxes.
Also, some of the best banks for business owners in Colorado offer tons of benefits such as higher transaction limits, lower fees, and access to credit cards, and loans.
Obtain An Insurance Policy For Your Business
Obtaining an insurance policy for your LLC business will provide peace of mind and protection against unforeseen events that could impact your business.
So you have to talk with an insurance agent to understand which insurance policy your business will need.
However, we recommend you should – at least – consider general liability insurance and employee protection insurance.
Other insurance policies for LLC businesses include protection for business property, business interruption coverage, and professional liability protection.
Set Up An Accounting System
Setting an accounting system for an LLC business is essential for financial management, compliance, and growth.
It will help you keep accurate financial records, make sure your business complies with tax laws and regulations and improves your relationship with investors.
There is various accounting software you can use to efficiently manage your daily business financial activities.
And we also recommend you seek the advice of a professional bookkeeper or accountant if you are unsure about how to set up an accounting system for your LLC business.
FAQ For Opening LLC In Colorado
Conclusion
Opening an LLC in Colorado requires careful planning and fulfilling all legal obligations.
It involves selecting a unique business name, choosing a registered agent, filing the necessary paperwork, obtaining licenses and permits, and considering insurance to protect your business.
By taking these steps and seeking professional guidance if needed, you can start your journey as a business owner in Colorado with confidence and ensure your LLC’s longevity and profitability.
