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STARTING AND OPERATING A BUSINESS IN COLORADO Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Colorado has a fairly typical tax and legal structure under which businesses must operate. It is also notable for a very pro-business climate in which entrepreneurs can and do thrive. For example, the state of Colorado has set up a one-stop business assistance center (a joint effort of the Office of Business Development & International Trade and other government agencies) where your new or small business can get information and help in getting licenses, permits, and complying with various state tax and regulatory requirements. In addition, Colorado has been ranked as the fourth most "tax friendly" state by the Tax Foundation, and consistently places among the top ten best states in which to start or operate a small business. Like most states, Colorado imposes income taxes on both individuals and corporations, a sales and use tax, and various excise taxes, with property taxes imposed at the local level. There is no corporate franchise tax or other capital values tax. The state has also adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in Colorado in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Until recently, the state's economy has been very robust and growing rapidly, in terms of the level of unemployment and other economic measures, but began to weaken rapidly in the last half of 2008. For example, in December, 2007, the state's unemployment rate was only 4%, but had soared to 6.1% by December, 2008 (preliminary number), but was still well below the national unemployment rate of 7.2% for that month. To view the latest federal Bureau of Labor Statistics unemployment rate data for Colorado or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Colorado can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Colorado also provides for limited liability partnerships (LLP's), in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Any general or limited partnership can become a "registered limited liability partnership" or a "registered limited liability limited partnership" by simply filing a registration form with the secretary of state. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. Various partnership, corporation, and LLC business entity registration forms and, where required, annual reports, are all filed with the office of the Colorado Secretary of State. Filing fees are set by the secretary of state, not by statute. For more on business entity filings or registrations, annual reports, or other documents, contact the secretary of state at the address listed in Section VI(a) or see the Internet web link at Section VI(c). (b) Sole Proprietorships. In general, sole proprietorships in Colorado can be established with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. In addition, if you sell any kind of tangible personal property at retail or provide certain types of services, you may be required to obtain a sales tax license and collect sales tax, as discussed in Section IV(d). No separate tax form filing is required, generally, for a sole proprietorship, under the Colorado income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Colorado income tax and filing requirements for individuals. Doing business as a sole proprietor in Colorado is generally much simpler than operating as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), it will be required to register the name with the state, as discussed in Section IV(g). For more information on starting or operating a sole proprietorship or any other form of business in Colorado, see Section VI(a) for the address of the Colorado Office of Economic Development & International Trade. (c) Partnerships. Colorado's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions) and for a limited liability limited partnership (LLLP), which is a limited partnership that also elects limited liability partnership status, in order to provide liability protection for its general partners. Partnerships, as entities, are not subject to state income tax in Colorado. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, as discussed in Section IV(c), a partnership that has any nonresident partners may have to pay or withhold Colorado income tax on their behalf. Partnerships are required to file an annual tax information return with the state. For details on Colorado partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Colorado can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A general partnership may, but is not required to, file a Statement of Partnership Authority with the Secretary of State, which gives notice to the public of the authority granted by the partnership to specific partners who may act on behalf of the partnership, plus any limitations on the authority of any partners. The filing fee is $150. Unlike most other other business entities, general partnerships are not "reporting entities" and are thus not required to file annual reports. In addition, while all other foreign business entities (entities not formed under Colorado law) are required to file a Statement of Foreign Entity Authority and pay a filing fee of $125, general partnerships (that are not LLP's) are also exempted from that requirement. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Colorado law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state's office, along with a filing fee of $125 ($50 if filing online). A foreign limited partnership (one formed in a state other than Colorado) that does business in Colorado must register with the secretary of state by filing a Statement of Foreign Entity Authority and paying a fee of $125. (Online filing for foreign entities is not available.) Unlike limited liability partnerships, corporations and limited liability companies, a limited partnership, other than a limited liability limited partnership (LLLP), is not a "reporting entity" and thus is not required to file annual reports. However, beginning July 27, 2009, a domestic limited partnership may elect to become a reporting entity, and all limited partnerships (or LLLP's) formed after July 26, 2009 are reporting entities. For information on limited partnership filing requirements, see the contact information for the offices of the Colorado Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Colorado. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Colorado state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. A general partnership or the general partners of a limited partnership can achieve limited liability by simply registering the partnership with the state as an LLP or as a limited liability limited partnership (LLLP). To form an LLP in Colorado, you must file a registration form with the secretary of state, electing to become an LLP, and pay the applicable filing fee of $125 ($25 if filing online). Foreign LLP's, those created under the laws of another state, must register with the secretary of state by filing a Statement of Foreign Entity Authority and paying a fee of $125. (Online filing for foreign entities is not available.) Every LLP doing business in Colorado, including both domestic and foreign LLP's, must file an annual report and pay a fee of $100 ($10 if filing online). For more information on LLP registration and reporting requirements, see the contact information for the offices of the Colorado Secretary of State, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Colorado, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Colorado, you must file articles of incorporation in duplicate with the Colorado Secretary of State and pay a fee of $50 if filing online. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Colorado, by filing a Statement of Foreign Entity Authority and paying a fee of $125. (Online filing for foreign entities is not available.) For more information on filing articles of incorporation or applying for a certificate of authority to do business in Colorado, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and pay a filing fee of $100 ($10 if filing online). Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Colorado must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Colorado, see the contact information for the offices of the Colorado Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Colorado recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. However, as discussed in Section IV(c), an S corporation that has any nonresident shareholders may have to pay or withhold Colorado income tax on their behalf. (f) Limited Liability Companies. Colorado, like every other state, has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Colorado may also choose to operate in the form of an LLC. LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. While the LLC is also not a taxable entity under Colorado's tax laws, it may be required to pay or withhold Colorado income tax on behalf of nonresident members. See Section IV(c) for a discussion of the income tax treatment of LLC's under Colorado law. To form an LLC under the laws of Colorado, one or more persons must file articles of organization with the secretary of state, which must be accompanied by a filing fee of $50 for filing online. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Colorado, by filing a Statement of Foreign Entity Authority and paying a fee of $125. (Online filing for foreign entities is not available.) In addition to initial filing fees, an LLC formed in Colorado must subsequently file annual reports each year and must also pay an annual report filing fee of $100 ($10 if filing online) with each such report. A foreign LLC (one not formed in Colorado) is also required to file an annual report and pays the same filing fee as a domestic LLC. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Colorado Department of State, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, but which also takes into account other state tax laws, such as sales/use tax or property tax laws. EXAMPLE: Note, however, that there may be income tax disadvantages to you if you allocate more of the purchase price to non-depreciable assets like land, or slowly-depreciated assets such as buildings. Hence, you will need to consult a competent tax advisor to attempt to arrive at the allocation with the best overall tax result for you, and which is also beneficial or at least acceptable to the seller. Depending upon the state (or states) in which the seller's assets are located, if some assets are outside of Colorado, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Colorado is one of the states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Colorado. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business occurs. In Colorado, you should obtain a sales tax release by applying on Form DR0096 to the Department of Revenue and requesting a tax clearance letter and to find out if the seller has an outstanding sales tax liability. The seller is required to file a final sales tax return and pay all tax due within 10 days after the sale of the business, while the purchaser is liable for any tax owed by the seller, and must withhold enough of the purchase price to cover any taxes that are due and unpaid until the seller can provide proof that any such taxes have been paid. The purchase of the tangible personal property assets of the business (other than inventory) is itself a taxable event, and as the buyer, you must pay sales tax on items such as furniture, equipment, supplies, or other tangible personal property that are acquired in the transaction. Also, require the seller to obtain an unemployment tax release from the Unemployment Insurance Tax Section of the Colorado Department of Labor and Employment. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you may need to apply on a timely basis to the Colorado Department of Labor and Employment (Unemployment Insurance Tax section), requesting that you be treated as a successor employer. Generally, if acquiring all or over 90% of the employees of the seller's business, you will automatically succeed to the seller's experience rating. Otherwise, in the case of a partial acquisition, where you acquire a clearly segregated unit of the seller's business, you may be treated as a successor employer if both you and the seller request a transfer of experience within 60 days after the notice of employer liability is mailed to you, in which case you will succeed to a proportional share of the experience-rating record of the seller, including the actual taxes paid, benefits, and payroll experience. Note that if you are acquiring a business in whole or in part, you must complete and file Form UITL, Business Acquisition Questionnaire, with the Colorado Department of Labor and Employment. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. Colorado law requires that a buyer withhold income tax equal to 2% of the sales price (or the net proceeds, if less) of certain Colorado realty. The tax withheld is treated as an estimated tax payment on behalf of the seller. Withholding is generally required on any real estate sale exceeding $100,000 where the seller is a non-resident individual, estate or trust, or if the seller is a corporation without a permanent place of business in the state or will no longer have a permanent place of business in the state immediately after the sale. A corporation is considered to have no permanent place of business in Colorado if all three of the following conditions are true:
There are several exceptions to the withholding requirements, such as where:
Persons required to withhold tax on real estate transactions must file state Form DR 1083 (information return) and a Form DR 1079 with the tax payment, within 30 days after closing of the transaction. IV. COLORADO TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Colorado has a fairly typical system of state taxes, but with a very low
statewide sales and use tax rate. Overall, it has low, business-friendly
tax rates, with only a 4.63% tax rate on both individual and corporate
incomes, while exempting business inventories and intangible property
from property taxes entirely.
For state tax forms and tax information, see the contact
information for the Colorado Department of Revenue in
Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States,
will have to have at least one government license of some kind.
In most cases, this will be a local license, issued by your
city or county. Before you open your business, contact your
local city or county hall and find out if your particular
business needs one or more local licenses. Most kinds of
local business licenses are granted upon payment of a fee,
with no further requirements, except possibly for annual
or other periodic renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and any
construction or improvements to an existing structure will
usually require a building permit. If you intend to simply
operate your business from your home, you may be in
violation of local zoning requirements, but this is less
likely to be a concern if you don't have clients, customers,
suppliers, or employees coming to your house on business,
on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Colorado has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
For information on state licensing and business registration
requirements in Colorado, see the contact information for the
Office of Economic Development & International Trade and their
helpful web site, as listed in Section VI(a)
and Section VI(c). It provides a "one-stop"
center for starting or relocating a business in Colorado.
You should obtain and complete a copy of the Colorado business
registration form, Form CR 0100, from the
Colorado Secretary of State or the Colorado Department of
Revenue. This form is used to register for sales and use
tax licenses and, if you have employees, for wage withholding
and Colorado state unemployment tax.
(c) Income and Franchise Taxes.
Colorado has both an individual income tax and a corporate
income tax, each of which is discussed below, as applicable
for different types of legal entities. Colorado does not
impose any kind of franchise tax or tax on capital.
While a partnership, LLC, or S corporation is generally
not subject to state income tax in Colorado (the taxable
income "passes through" to the owners), such a pass-through
entity with nonresident owners (partners, members, or
shareholders) is required to ensure that its nonresident
owners file a Colorado income tax return to report their
share of Colorado source income earned by the entity.
This is accomplished in one of three ways:
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Colorado individual income tax is imposed at a flat
tax rate of 4.63%, which is one of the lower tax rates of
those states that impose income taxes on individuals.
However, Colorado is one of only a few states that imposes
an alternative minimum tax(AMT), which is somewhat like the
federal AMT but imposed at a tax rate of 3.47% of "alternative
minimum taxable income."
Individual taxpayers generally pay state income tax on
their business earnings from a sole proprietorship, or on
their share of the earnings of a pass-through entity, such
as a partnership, S corporation, or LLC. The Colorado
personal income tax return, Form 104, must
be filed with the Colorado Department of Revenue by April
15th each year for the preceding calendar year.
Partnerships, or entities taxable as partnerships
for federal income tax purposes, such as LLP's or LLC's,
are not subject to state income taxation in Colorado.
Instead, they must file an information return with the
Department of Revenue each year, showing each partner's
share of taxable income, losses, and credits, on
Form 106. However, as noted above in
this Section IV(c), partnerships
that have nonresident partners may be required to pay
or withhold Colorado income tax on their behalf.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income
from the business, will generally be required to make advance
payments of estimated Colorado individual income taxes,
on Form 104-EP, if their net tax liability
(not covered by withholding) exceeds $1,000. Estimated tax
payments are due in four installments, on the 15th day of
the 4th, 6th, and 9th months of the taxable year, and the
15th day of the first month of the following year. To avoid
penalties, you must either pay in 70% of the current year's
tax, or 100% (110% for certain high-income taxpayers) of the
previous year's tax.
The Colorado corporate income tax rate, on corporations
other than S corporations, is a flat tax of 4.63% of the
corporate taxable income. The state corporation income tax
return is Form 112, which must be filed with
the Department of Revenue by the 15th day of the fourth month
following the end of the taxable year, or by April 15th in the
case of a corporation whose taxable year is the calendar year.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their
tax liability for the year plus estimated credits exceeds
$5,000. Estimated tax payments are due in advance, payable
in four equal installments, on the 15th day of the 4th, 6th,
9th, and 12th months of the taxable year, the same as for
federal estimates.
The total estimated tax that must be paid in is usually
an amount equal to the current year's tax rates applied to
the previous year's facts, or 70% of the current year's tax.
However, if the preceding year was a full year of 12 months,
the current year payments need only be equal to 100% of the
prior year's tax liability, if that is less. (But, as under
federal law, certain large corporations can only base
their first quarter estimate on the prior year tax
liability.) No penalty applies if the total tax for the
year is less than $5,000.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
As under federal tax law, S corporations are generally
not subject to Colorado corporate income taxes,
as described above in this Section IV(c).
but S corporations, like partnerships or LLC's, may have to
withhold or pay tax on behalf of nonresident shareholders,
Like partnerships and LLC's, S corporations file annual tax
information returns on Form 106.
TAXATION OF LIMITED LIABILITY COMPANIES
In Colorado, a limited liability company (LLC) formed
under Colorado law will be treated as a partnership. A
foreign LLC, will be taxed in the same manner as for federal
income tax purposes. LLC's that are treated as partnerships
avoid the possible double taxation of income that can occur
with a corporation, and Colorado law also allows for the
formation of one-owner LLC's, which can now qualify for
treatment as sole proprietorships for federal tax purposes.
While an LLC, like a partnership or S corporation, is not
itself a taxable entity under the Colorado tax laws, it
may have to withhold or pay Colorado income tax on behalf
of any nonresident members, as summarized above in this
Section IV(c).
Note that it is not always entirely clear whether an LLC is
a "single-member LLC" or not, where the "single owner" is a married
couple who hold the entire ownership of the LLC in some form of
co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal
Internal Revenue Service (IRS) has taken a very lenient position
in Rev. Proc. 2002-69, where a couple hold the LLC
interest as community property, ruling that the IRS will accept
whatever choice the couple make, either to disregard the LLC as
an entity (treating it as a "single-member LLC") or to treat it
as a partnership between the husband and wife.
However, Colorado is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Colorado would treat the LLC as a single-member
LLC or as a partnership.
(d) Sales and Use Tax.
Colorado imposes a general sales tax on retail sales of tangible
personal property at the low statewide rate of 2.9%. In
addition, local governments are allowed to adopt local sales
taxes, at varying tax rates. The total state and local tax
rate supposedly is limited to a maximum of 6.91%, but there
are numerous exceptions to this ceiling, so that, for example,
Denver city and county imposes a general local sales tax of 3.62%
(4% on food and liquor sold for immediate consumption), in addition
to a 1% Regional Transportation District tax, a 0.1% Scientific
and Cultural Facilities District tax, and a 0.1% Football Stadium
District tax. Thus the total general tax rate in Denver is 7.72%
since 2007. Denver also imposes a special local tax of 7.25% on
revenues from the rental of automobiles for less than 30 days.
Most services are exempt from sales and use taxes in
Colorado. However, there is a special Tourism Promotion
Tax that applies to short-term lodging, auto rentals,
admissions to tourist attractions, ski lift tickets, and
similar tourist-based activities.
Colorado recently (2006) adopted a new sales tax
regulation regarding computer software. Software is
considered tangible personal property and is subject
to tax if it is:
Software is exempt from sales and use tax if it is
provided through an application service provider, delivered
by electronic software delivery, or transferred by load
and leave software delivery.
Purchases of machinery or machine tools and parts are
generally exempt from Colorado state sales and use tax
when the machinery is used in manufacturing.
There are numerous other exemptions from the sales tax,
the most important of which is the resale exemption. If you
are a wholesaler or retailer who purchases goods that you
will resell, your purchase of such goods may qualify as an
exempt sale for resale. Similarly, if you sell goods to
wholesalers or retailers for resale by them, your sale may
also qualify as an exempt sale for resale. In any such
transaction, the exemption is ordinarily available only if
the purchaser gives the seller a valid resale certificate,
certifying that the items are being purchased for resale,
and not for use or consumption by the buyer.
A parallel tax, the use tax, is also imposed at the same
rate as the sales tax. It is primarily intended to tax
property that is acquired from sources outside of the state,
in transactions not subject to sales tax, when such property
is used or consumed within Colorado. Use tax may also apply
to items purchased on an exempt basis, such as for resale,
if such items end up being used or consumed, instead of
being resold.
Colorado allows vendors who collect and pay over sales
and use taxes to retain 3.33% of the tax as a sales and
use tax service fee, to cover their administrative costs.
Vendors are generally required to file monthly sales tax
returns, with the following exceptions:
Businesses that pay more than $75,000 a year in state
sales tax must pay by Electronic Funds Transfer (EFT).
EFT filers should obtain Form DRP 5782
from the Department of Revenue.
Before making any taxable sales, you will need to register
with the Department of Revenue on Form CR 0100,
which can also serve as a your registration as an employer,
and for the tourism promotion tax. Formerly, this form was also
used to register a trade name, but effective since May 30,
2006, trade name registration is now handled by the Colorado
Secretary of State Business Center. See Section IV(g)
for more on trade name registration.
Sellers are required to obtain a seller's permit and
to collect and pay over the state and local sales and use
taxes to the Colorado Department of Revenue. There is a
$16 license fee, for a two-year period, and a $50 refundable
deposit is required. The deposit is refunded automatically
after $50 of state sales and use tax has been remitted.
A considerable number of "home rule" cities, including Denver,
require you to separately register for sales tax and make payments
directly to the city. Most other cities and local governments allow
the state to collect their local sales and use taxes along with the
statewide tax.
Note that small home businesses are not generally required to
obtain a Colorado sales tax license if:
Operators must collect state sales tax, and if applicable,
RTD, cultural facilities district, football district, and
state-collected local tax on products that are sold. The total
annual sales tax collected must be submitted to the Department
when the individual's income tax return is due (April 15).
Extensions to file personal income tax returns will also
extend the time to file sales tax. Taxpayers are to use
Form DR 0100A, Retail Sales Tax Returns For Occasional
Sales, to report the sales tax collections. The license
exemption does not apply if the taxpayer or any member of the
household is engaged in a business or trade outside the home
where items are sold that are similar to those sold within the home.
For more information on Colorado sales and use tax registration
and compliance, see contact information for the offices of the
Department of Revenue in Section VI(a).
(e) Real and Personal Property Taxes.
In Colorado, as in every other state, any business real estate
you own will be subject to real property taxes. In general,
there is little that you must do, unless you wish to challenge
your assessed valuation, since the assessor will bill you for
each year's property taxes as they come due.
Colorado also imposes personal property taxes on tangible
personal property. ("Personal property" is any kind of property
that is not real estate.) However, certain types of business
personal property, such as business inventories, are exempt
from the personal property tax in Colorado.
If your business owns personal property, you are required
to file a personal property declaration with the county
tax assessor each year, by April 15th. No business personal
property tax is owed if the value of the taxable personal
property on January 1st is $2,500 or less.
The $2,500 exemption applies to all of a taxpayer's
reportable (non-exempt) personal property in a given
county, reported on a single schedule.
Beginning January 1, 2009, the $2,500 exemption for
personal property will be increased to the following
amounts over several years:
For information on property taxes, there are two publications
you may want to obtain from your county assessor, or from
the Division of Property Taxation:
See the contact information for the Division of Property
Taxation, part of the Colorado Department of Local Affairs,
in Section VI(a).
While Colorado generally taxes tangible personal property,
it does not impose a property tax on computer software or
other intangible personal property, such as stocks, bonds,
promissory notes, and other such paper assets.
(f) Other Business Taxes.
Colorado imposes a number of excise and other taxes on businesses, including:
UPDATE NOTE: (g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Colorado, if a sole proprietorship or partnership (other than an LLP) uses such a fictitious name, it is required to register the name with the secretary of state and re-register it each year. For a sole proprietorship or a general partnership, a business name is considered to be a fictitious name (trade name) if it does not include the name of the proprietor or the name of all the partners in the general partnership. No re-registration is required of a "reporting entity." A "reporting entity" is one that is required to file annual reports with the secretary of state, and includes corporations, LLC's, and LLP's, but not sole proprietorships or partnerships (general or limited) that are not LLP's. Failure to register a trade name or to renew it when required has several consequences, including the inability to collect a debt in the Colorado courts and a fine of up to $500. Prior to May 30, 2006, Colorado had a very complex system of trade name registration, where some businesses filed trade name registrations with the Department of Revenue and other types of entities were required to file with the secretary of state, but the system has been greatly simplified since May 30,2006, and all businesses now file with the secretary of state. Filing can be done online, at the secretary of state's website, for a small registration fee. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. In addition, since Colorado imposes a state income tax on the income of individuals, you will need to also withhold Colorado income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Revenue on Form CR 0100, Colorado Business Registration. For more information on Colorado income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Revenue, listed in Section VI(a). NON-WAGE WITHHOLDING Under legislation enacted in 2006, any person that makes payments to a natural person, where filing of a federal Form 1099 is required, will have to withhold Colorado income tax at the rate of 4.63%, where the payment is not otherwise subject to state income tax withholding (such as wage withholding), if the person who provided the services:
In addition, businesses that pay a natural person for services where the payment is not reported on a Form 1099 information return will also generally be required to withhold state tax at the rate of 4.63%, unless the employer has a validated taxpayer identification number from the person to whom payment is made. The foregoing withholding provisions, which are apparently designed to collect taxes on payments businesses make to undocumented workers, were to go into effect on the first January 1 following the date on which the state implements a Colorado work eligibility verification portal that enables a person to verify the validity of taxpayer identification numbers, but not before January 1, 2008. Businesses are also required to file an Affirmation of Legal Work Status within 20 days after hiring a new employee, beginning January 1, 2007. Copies of the affirmation form may be downloaded from the website of the Colorado Division of Labor. Colorado voters also approved a measure in the November, 2006 election that prohibits businesses from claiming wages for unauthorized aliens as a business expense for state income tax purposes. It applies only where an employer pays an individual at least $600 in a year. (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in one calendar quarter, you, as an employer will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Colorado unemployment tax are required to register with the state on Form CR 0100, Colorado Business Registration. This form is used to register as an employer and for other tax purposes, as well as to register a trade name. After you open an employer account, you will be contacted by the Unemployment Insurance Tax section of the Division of Employment and Training, Colorado Department of Labor and Employment, regarding your obligations under the unemployment compensation law. New employers are required to pay tax at a rate of 2.52% in 2009 on the first $10,000 of wages paid to each employee (1.7% base rate plus 0.82% surtax and solvency surcharge). After you have had employees for at least 12 consecutive calendar months prior to a July 1 computation date, you will develop an unemployment tax experience rating, which will be effective on the following January 1. This experience rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Colorado law, cannot be charged to your employees or withheld from their wages. For more information on your Colorado unemployment tax obligations as an employer, see the contact information for the offices of the Division of Employment and Training, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Colorado, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee, but may elect coverage if actively working in the business. Similarly, certain officers of a corporation or members of an LLC who own at least 10% of the corporation or LLC may reject coverage, if they so choose and submit a written election by certified mail to that effect to the company's workers' compensation insurance carrier (or, if no carrier, to the Division of Workers' Compensation). Real estate agents and brokers may also be exempt from workers' compensation coverage if substantially all their compensation is based on commissions and if they have a written agreement that specifies that they are independent contractors, and not employees, of the real estate firm. The definition of an employee entitled to coverage under the workers' compensation law includes "aliens" without distinguishing between legal and illegal aliens and therefore does not preclude an illegal alien from proving an entitlement to benefits. Champion Auto Body v. Indus. Claim Appeals Office, 950 P.2d 671 (Colo. App. 1997). Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Your workers' compensation insurance carrier will provide you with posters that you are required to post in your workplace, notifying employees of their workers' compensation coverage. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. For more detailed information regarding your obligations as an employer under the Colorado workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Division of Workers' Compensation, part of the Department of Labor and Employment, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they may still be subject to the Colorado wage-hour laws, which provide for a state minimum hourly wage. Prior to 2007, the state minimum wage was $5.15 an hour, the same as the federal minimum wage. In the November, 2006 election, Colorado voters passed an initiative (Amendment 42) to increase the state minimum wage to $6.85 an hour, beginning January 1, 2007, and indexed for inflation in each subsequent year ($7.02 for 2008, $7.28 in 2009). Colorado state law provides that employers must pay time-and-a-half for overtime, which is defined as any hours worked in excess of 40 a week, 12 hours in a day, or 12 consecutive hours. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Colorado Division of Labor -- Labor Standards Unit. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Colorado. Unlike many states, Colorado does not require employers to obtain child labor work permits in order to hire minors. However, employers may require employees to submit proof of age when hiring, and any 14- or 15-year-old child who will work during school hours must provide the employer with a school release permit, signed by the school district superintendent or some person designated by the superintendent. Minors under the age of 9 generally may not be employed. Older minors may be employed in the following occupations:
State law defines a wide range of activities as hazardous, which are generally the same type of activities that are considered hazardous under the federal child labor laws and regulations. In addition to the hiring restrictions on child labor, there are Colorado state law limitations on the hours that children may work. In general, no child under 18 may work more than 40 hours in a week or more than 8 hours in any 24-hour period. Children under the age of 16 may not work during school hours without a school release permit, and after hours they may not work more than 6 hours in a day on a school day, unless the next day is not a school day. Except for baby-sitters and children working as actors, models, or performers, no child under age 16 may work between the hours of 9:30 p.m. and 5:00 a.m., unless the next day is not a school day. For more information on employer responsibilities under Colorado's wage/hour and child labor laws, contact the Labor Standards Unit of the Colorado Department of Labor and Employment, at the address listed in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Colorado is one of the states that does not have its own local equivalent of OSHA. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case in states with their own OSHA programs, where, if you request a safety consultation from the state agency and they detect violations, they will not cite you if you promptly correct the unsafe conditions. For information, required posters, and possible on-site safety consultations, see the contact information for the Denver offices of OSHA (federal), listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Colorado labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. If you, as an employer, terminate an employee, you must pay him or her any unpaid wages that are owed immediately, in general. If the employee is terminated at a time when the bookkeeping unit is closed, the employer has SIX HOURS from the time it reopens to issue the check (or within 24 hours, if the bookkeeping unit is located off-site). The employee may pick up the check at the regular site or have it mailed to a specific address. If an employee quits, you need not pay him or her until the next regular payday. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Colorado does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Colorado, and display a poster informing employees of their rights. You can obtain this poster from the Civil Rights Division, at the address listed in Section VI(a). Colorado state law makes it illegal for an employer to refuse to hire, to discharge, to promote or demote, to harass during the course of employment, or to discriminate in matters of compensation against any person otherwise qualified because of disability, race, creed, color, sex, sexual orientation, age, religion, national origin, or ancestry. However, with regard to disability, it is not an illegal discriminatory practice if there is no reasonable accommodation that the employer can make with regard to the disability, the disability actually disqualifies the person from the job, and the disability has a significant impact on the job. With regard to harassment, harassment is not an illegal act unless a complaint is filed with the appropriate authority at the complainant's workplace and such authority fails to initiate a reasonable investigation of a complaint and take prompt remedial action if appropriate. (4) Reporting new hires. Under federal welfare reform laws, employers in all states now have to report newly-hired (or rehired) employees to a designated state agency (the Colorado State Directory of New Hires for Colorado employers) within 20 days after the date of hire. Employers who file reports electronically must file twice each month (if needed), on dates not more than 16 days nor less than 12 days apart. See the contact information for the Colorado State Directory of New Hires listed in Section VI(a). (5) Employment of illegal aliens. On January 1, 2007, a new Colorado law became effective, concerning employment verification requirements. This law applies to all employers who transact business in Colorado. There are two main components to the law:
The documents described above should not be submitted to the Colorado Division of Labor, unless specifically requested by the Division. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Colorado, as many states have done in recent years, has set up a "one-stop" web site (see Section VI(c)) to help your new or existing businesses to obtain all necessary state licenses and permits, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. It is a cooperative effort between the Colorado Office of Economic Development & International Trade, Secretary of State, and several other Colorado and federal agencies. The web site is also the initial referral point to the state's network of Small Business Development Centers, any of which can provide individualized consulting services to your new or small business. You can register your business with the state on a single form, Form CR 0100, Colorado Employer Registration, which is a multi-purpose form that you can use to register as an employer for state withholding tax and state unemployment tax, and obtain a sales and use tax license. You should also request a copy of their Colorado Business Resource Guide, which contains a great deal of useful information regarding the requirements for starting a business in Colorado. BUSINESS STARTUP INFORMATION. To obtain business registration forms and information on starting or relocating your business in Colorado, contact the Office of Economic Development & International Trade at: Office of Economic Development & International Trade Addresses and other contact information for other key state and federal government agencies in Colorado, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact the Department of State for information on:
Colorado Department of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the following agency, which is the main tax collection agency in Colorado. Also register with this agency for a sales tax license and as an employer, for state income tax withholding and unemployment tax purposes, on Form CR 0100. Colorado Department of Revenue STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Colorado Department of Labor and Employment STATE CIVIL RIGHTS LAWS. For information and to obtain the required state civil rights poster, contact: Civil Rights Division STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Colorado sales and use tax law, from the Department of Revenue, at the address listed above for that agency, by registering on Form CR 0100. PROPERTY TAXES. To obtain helpful booklets on local property taxation in Colorado, call or write your county assessor or: Department of Local Affairs/ STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for transfer of a seller's experience rating if you wish to be treated as a successor employer when acquiring an existing business with employees. Unemployment Insurance Tax NEW HIRES. Report newly hired or rehired employees within 20 days of hiring to the following state agency: Colorado State Directory of New Hires WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Colorado Department of Labor and Employment STATE OSHA PROGRAM. There is no state OSHA program in Colorado. The federal government provides federal OSHA enforcement instead. For required posters and information on federal occupational safety and health laws that affect you as an employer in Colorado, contact: U.S. Department of Labor -- OSHA Area Office (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Colorado to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. SBDC: State Headquarters (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Colorado state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Colorado. Since new sites are appearing frequently, you might also want to search for other Colorado government Web sites by using one of the popular Internet search engines, such as Google, MSN, or Yahoo. To start your Internet search for Colorado government information, you may want to begin with the following Internet sites: State of Colorado Home Page: Links to all Colorado state agencies: Colorado Office of Economic Development and International Trade: Colorado Secretary of State Home page (incorporation, formation of LLC's, registration of foreign -- out-of-state -- business entities, registration of LLP's and limited partnerships, trade name registration): Colorado Department of Revenue (tax forms and information): Colorado Department of Labor and Employment (labor laws and unemployment tax forms and information): Colorado State Directory of New Hires (new hire reporting): (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Colorado, at: U.S. Small Business Administration Or contact the following state agency: Colorado Office of Economic Development & International Trade (Provides direct loans to businesses that create jobs for low- and moderate-income people, in communities of 50,000 population or smaller.) |
Copyright © 2009 Michael D. Jenkins
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