Colorado LLC Tax Elections — S-Corp, C-Corp & Partnership Options

One of the biggest advantages of forming an LLC in Colorado is tax flexibility. Your LLC's legal structure stays the same — filed with the Colorado Secretary of State as an LLC — but you can choose how the IRS taxes it. This page explains your options. For the full tax picture, see our Colorado tax guide. For formation, see how to form a Colorado LLC.

Your Tax Classification Options

S-Corporation Election (Form 2553)

The most common election for profitable Colorado LLCs. Here's why:

How it works:

• You pay yourself a "reasonable salary" (subject to payroll taxes: ~15.3%)
• Remaining LLC profits are distributed as dividends (NOT subject to SE tax)
• Savings: For every dollar over reasonable salary, you save ~15.3% in SE tax

Example for a Colorado LLC owner:

• LLC net income: $120,000
• Reasonable salary: $60,000 (payroll taxes: ~$9,180)
• Distribution: $60,000 (NO payroll taxes)
• SE tax savings vs. default: approximately $9,180
• Additional costs: payroll processing ($500-$2,000/year), additional tax return preparation
• Net savings: approximately $7,000-$8,600/year

Colorado-specific notes:

• Colorado recognizes S-corp election at the state level automatically (no separate Colorado S-corp election needed)
• Colorado income tax remains 4.4% on total pass-through income regardless of election
• Salary is subject to Colorado income tax withholding
• Must file Colorado DR 0106 or S-corp equivalent

How to elect:

• File IRS Form 2553 (Election by a Small Business Corporation)
• Deadline: March 15 for existing LLCs (for current tax year), or within 75 days of formation
• Late election relief available under Rev. Proc. 2013-30 if you miss the deadline

Requirements:

• 100 or fewer shareholders (members)
• Only one class of stock (membership interest)
• All members must be US citizens or residents
• No corporate members

C-Corporation Election (Form 8832)

Less common for small Colorado LLCs but appropriate in specific situations:

When it makes sense:

• You plan to retain significant earnings in the business (21% federal rate may be lower than your personal rate)
• You're planning to seek venture capital or institutional investment (VCs often prefer C-corps)
• You want to offer employee stock options or equity incentives
• You're planning an IPO or acquisition exit

Colorado impact:

• LLC pays Colorado corporate income tax at 4.4% on entity-level income (Form DR 0112)
• Dividends to members are taxed again on personal returns (double taxation)
• Colorado does not offer dividend exclusion for in-state corporations

How to elect:

• File IRS Form 8832 (Entity Classification Election)
• Effective on the date specified on the form (can be retroactive up to 75 days)
• No Colorado-specific filing needed — Colorado follows the federal classification

Changing Your Election

You can change your tax election, but timing restrictions apply:

• S-corp to C-corp: Revoke S election (effective January 1 of following year, or mid-year if done in first 2.5 months)
• S-corp back to LLC default: Revoke S election; cannot re-elect S for 5 years
• C-corp to S-corp: File Form 2553; effective January 1 of current year if filed by March 15
• Any election to default: File Form 8832; timing rules apply

Which Election Is Right for Your Colorado LLC?

Stay as default (disregarded/partnership) if:

• LLC net income is under $50,000
• You value simplicity over tax optimization
• Your LLC has losses you want to use on your personal return
• You're in early stages and reinvesting everything

Elect S-corp if:

• Net income consistently exceeds $50,000-$60,000
• You can justify a "reasonable salary" that's lower than total net income
• You don't mind payroll processing and additional compliance
• All members are US citizens/residents

Elect C-corp if:

• You plan to retain most earnings in the business
• You're targeting venture capital or institutional investors
• Your personal tax rate exceeds 21% and you don't need distributions
• You want to offer equity-based compensation

FAQ

Does Colorado require a separate state tax election?

No. Colorado follows your federal tax classification automatically. If you elect S-corp with the IRS, Colorado treats your LLC as an S-corp for state tax purposes too. No additional state filing is needed for the election itself.

Can I elect S-corp mid-year?

Yes, for new LLCs (within 75 days of formation). For existing LLCs, you can file Form 2553 by March 15 to be effective January 1 of the current year. Late elections may qualify for relief under Rev. Proc. 2013-30.

What's a "reasonable salary" for S-corp purposes?

There's no fixed formula. The IRS looks at comparable wages for similar positions in your industry and location. In Colorado's market, a software developer might need to set salary at $80,000-$120,000; a consultant at $50,000-$80,000. Setting salary too low invites IRS scrutiny.

Do I lose my LLC liability protection if I elect S-corp or C-corp?

No. Your LLC's legal structure with the Colorado Secretary of State doesn't change. Tax elections only affect how the IRS taxes your income. You retain full LLC liability protection regardless of tax classification.