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.
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 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.
Some businesses that operate in Colorado can elect to pay taxes on gross receipts, instead of paying the normal income tax. To be eligible:
Here is a brief look at the differences between Colorado C-corporations and S-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:
The following are some disadvantage of Colorado C-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
The following are some disadvantages of S-corporations:
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, Consult with a knowledgeable and experienced Colorado business lawyer.