A limited liability company, or LLC, can offer your organization several tax and asset protection benefits. In many ways, LLCs act as a hybrid of a partnership and a corporation, taking benefits from both entity types. For example, an LLC would generally pay lower taxes than a corporation would thanks to its default IRS classification. The IRS classifies LLCs the same as sole proprietorships and partnerships, which allow for pass-through taxation. Pass-through taxation means that the LLC profits are not taxed at the LLC level, but are instead just taxed when they reach you. Additionally, an LLC offers its members limited liability protection, just as a corporation does its shareholders. All of these same benefits are available to LLCs formed in the state of Colorado.
If you want to form a Colorado LLC, you must first file articles of organization with the Secretary of State. Your articles should list the name and address of your LLC, as well as the name and address of your members and managers. In Colorado, LLC members are required to mention if they will be managing the organization themselves or appointing managers without financial ownership in the LLC to do so. Additionally, members of your LLC must all be 18 years of age or older. Finally, your Colorado LLC must designate a registered agent and provide that agent’s name and address. The registered agent role can be fulfilled by an individual or registered business. The duties of the registered agent are to accept important documents and legal notices on behalf of your LLC. In Colorado, your registered agent must be at least 18 years old and reside in the state.
There are no requirements for LLC membership. An LLC can be formed by a single person or with multiple members. While it will generally not be a problem for most LLCs, if you intend to seek investments from the public, you may be required to register wth the State or the Federal Securities and Exchange Commission. In cases where there are several members who will run the business together or hire a manager to run the busines, each typically makes a capital contribution to the LLC. This contribution could be a monetary one or in the form of services for the LLC. Often, initial capital contribution may dictate that member’s share of profits and voting rights as LLC members. Members may choose to run their organization on their own, or they may choose to appoint an outside manager without an ownership share to manage the day-to-day operations of the business.
The IRS has not designated a unique tax classification for limited liability companies. For this reason, LLCs are assigned a default classification and taxed as a sole proprietorship or partnership would be. Pass-through taxation allows for the organization’s profits and losses to be treated as the individual’s own and therefore not subject to the double taxation that corporations experience. If there is more than one owner, the LLC will need to file a tax return that divides up the business profits or losses according to each owner's share of the company. Corporate taxation, on the other hand, requires that members file a separate return from that of the company and pay taxes on the amount the corporation earned. This amounts to paying taxes twice on the same profits: once by the corporation and again by the shareholders when the profits are distributed. With your Colorado LLC, be sure to select the same tax classification for the Colorado Department of Revenue that you have selected with the IRS.
LLCs are considered separate legal entities and therefore offer their members limited liability protection. Legally separating the entity from its members means that for any debts incurred by the company, member assets cannot be sought for payment. In the event that a judgment is won against your LLC, it is only the LLC assets at risk, not those of the members. However, this limited liability protection does not extend to other behavior. If a member engages in fraudulent behavior or other criminal behavior, they can be held personally responsible. Limited liability protection can also fail when the owners don't keep the LLC assets separate from their and use the LLC as their personal piggy bank.
A Colorado LLC can offer your business the benefits of pass-through taxation, limited liability protection, and more. If you are interested in forming a Colorado LLC, consider using our LLC formation service. Our expertise and experience can ensure your LLC is formed correctly and in accordance with all Colorado state law and regulation.