Corporate taxation is an extremely important issue when it comes to selecting a business entity. That is, owners of businesses want to take advantage of the most beneficial tax regime possible in order to reduce the tax burden on the business entity and on the individual owners. This may mean you stick with the default C-corporation taxation, or elect to be taxed as an S-corporation. For some businesses, it is better to be taxed as an LLC, which is why you should understand the differences between a Colorado LLC and a Colorado S-corp so you can choose the right option for your business.
There are very complicated tax rules that apply to each type of business entity. When selecting a business entity, these rules and regulations should be carefully considered.
What follows is a basic overview of the most important things you need to understand about how C-corporations and S-corporations are taxed in Colorado.
Understanding the basics will allow you to move forward with understanding more complicated tax rules associated with these two Colorado business entities.
What's more, a fundamental understanding of corporate taxation in Colorado will enable you to confidently select an entity type for your Colorado company or to work with an experienced attorney in determining the most appropriate tax structure for your business entity.
Colorado's Corporate Income Tax Rate
Colorado levies a corporate income tax, along with, an alternative tax on gross receipts, but has no franchise or privilege tax that is universally applicable to all businesses. So, other than C-corporations, Colorado businesses pay no state income tax.
On the other hand, if any profits from the business are passed on to you personally, you must report that income on your personal state tax return. The Colorado corporate income tax rate is a flat 4.63%, the same as the state’s personal income tax rate.
Tax On Gross Receipts
Some businesses that operate in Colorado can elect to pay taxes on gross receipts, instead of paying the normal income tax. To be eligible:
- The business's sole activity in the state must be procuring sales;
- Total sales from the business activity within the state must not be more $100,000; and
- The business must not lease or own any real estate in Colorado.
Here is a brief look at the differences between Colorado C-corporations and S-Corporations:
Colorado C-corporations
A c-corporation is the most common type of business entity in the United States and is formed under state law as a separate legal entity that offers its shareholders considerable protection from creditors' claims (limited liability).
Since a C-corporation is considered a separate entity for federal tax taxes and apart from its shareholders, it must file its own tax return.
The government taxes corporate earnings of the C-corporation and then taxes them again when the corporation distributes these earnings to its shareholders as dividends.
So, with a C-corporation, income is taxed at the corporate level and then again at the personal level, creating a situation referred to as "double taxation".
The following are some of the key advantages of Colorado C-corporations:
- Limited liability
- The ability to sell equity to raise money
- No shareholder limit
- The ability to deduct business expenses
The following are some disadvantage of Colorado C-corporations:
- Double taxation remains a challenge as owners seeking to be paid through dividends for the business will pay extra in taxes
- It is more expensive than an LLC or partnership
- Increased regulations and formalities
- There is a steep learning curve, especially for small businesses owner's
- Cannot deduct corporate losses for personal tax returns
Colorado S-corporations
Once you've incorporated in Colorado, you can elect to be taxed as an S-corporation for federal and state income tax purposes. S-corporations are more attractive for small business owners because they are considered pass-through entities and taxed under Chapter S of the Internal Revenue Code.
A pass-through entity doesn't pay income taxes, rather it passes its earnings and losses through to its shareholders. The shareholders then reported those earnings or losses on their personal income tax returns. As such, an S-corporation does not pay corporate income tax.
The primary risk associated with an S-corporation is that you must report your share of the company's profits and loss on your personal tax return. In addition, there is a limit of 100 shareholders, which can be a huge drawback if your company wants to raise money through a private placement.
The following are some key advantages of S-corporations
- Limited liability
- Pass-through taxation, thus eliminating double taxation of distributions
- The ability to raise capital by selling shares
- Once a year tax filing requirement vs. quarterly filing for C-corporations
The following are some disadvantages of S-corporations:
- A limited number of shareholders, a maximum of 100
- Closer IRS scrutiny and higher ongoing expenses
- Tax qualifications can be terminated if mistakes are made
Corporate Taxation Summary
To summarize, there are lots of similarities between S-corporations and C-corporations - both provide limited liability protection, require articles of incorporation to be filed, and are comprised of directors, officers, and shareholders. However, they differ when it comes to taxation and corporate ownership.
C-corporations are subject to double taxation, while S-corporations are pass-through tax entities that avoid double taxation. Furthermore, there is no limit to the number of shareholders a C-corporation can have, whereas there is 100-shareholder limit for a Colorado S-corporation. Most public companies are C-corporations.
For more information regarding the taxation of Colorado business entities, including the differences between a Colorado LLC and a Colorado S-corp, Consult with a knowledgeable and experienced Colorado business lawyer. For more information about how toincorporate in Colorado, checkout our pages on Colorado articles of incorporation and Colorado corporation bylaws
