Forming An S Corporation In Colorado
At the Law Offices of Clifton Black, PC, our business formation attorneys have been helping business owners in Colorado Springs and the surrounding communities establish their corporations for decades. Our founding attorney, Clifton Black, has been practicing law in Colorado since 2000.
Our business formation attorneys can help you choose the best corporate structure for your business venture. They can also help you understand if your business entity qualifies for an S Corporation designation.
What Is An S Corporation?
An S Corporation is a special business structure intended for small businesses. An S Corporation is also sometimes referred to as an S Corp, a subchapter S, or a sub S. When a corporation is eligible for S Corp status, there is a special IRS tax election that allows an S Corp to avoid the double taxation that a C Corporation is subjected to paying.
What Are The Eligibility Requirements For An S Corp?
To qualify as an S Corporation in Colorado, your company will have to meet specific criteria.
- Domestic corporation: First, your business must be a domestic corporation.
- Limited size: Your corporation cannot have more than 75 shareholders.
- Types of shareholders: These shareholders must be individuals. A shareholder interest can also be held by certain types of specific trusts or a decedent’s estate.
Partnerships, corporations and nonresident aliens cannot be shareholders. Additionally, you can only have one class of stock. Your business must also meet the definition of a small business corporation. This includes having a valid S Corp election filed with the IRS.
How Do You Form An S Corporation?
You can form an S Corporation in Colorado through the Colorado Secretary of State website. You must first file as a “for-profit” organization and begin your filing by electing a C Corporation designation. Once your business has been established as a corporation, and, assuming that the corporation is eligible for S Corp status, the shareholders sign and file Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service (IRS).
Establishing Bylaws For An S Corporation
A bylaw is a rule or law established by the corporation to regulate itself and is required by law when forming a corporation. The bylaws are a set of rules or regulations created to direct the corporation in its business operations and organization. Generally, the bylaws determine the rights of the stockholders and provide guidance to the board as to how business will be conducted. Bylaws are extremely important and should be written in a manner that, when followed, will protect the board of directors, officers and stockholders from personal liability. Legal requirements for what the bylaws should contain vary by state.
Taxes For S Corporations
One of the major drawbacks of operating a corporation (C Corp) is the double taxation. A corporation is taxed on its profits and then the stockholders are taxed on dividends. However, an S corporation allows the profits and losses to pass through to the stockholders’ personal tax returns. An S Corp is not taxed for its profits, but the tax liability is passed through to the stockholders, thus eliminating the double taxation that happens with a C Corp.
Because an S Corporation is generally a small corporation, the owners will have different roles, which may consist of being a shareholder, director and officer. Employee earnings are taxed at a higher rate than dividends. However, if a shareholder is also an employee, it is important that the person receives a reasonable salary or payment. If an employee/shareholder is paid too low of a salary and makes too much in dividends, the IRS may reclassify corporate earnings as salary or pay.
What Are The Differences Between An S Corp And A C Corp?
To summarize, S Corps have restrictions on the number and type of shareholders, while C Corps do not. C Corps can have multiple classes of stock, but S Corps can only have one. In addition, an S Corp allows income to pass through to shareholders, avoiding double taxation. This means the business itself isn’t taxed, but the shareholders are taxed on their individual returns. On the other hand, a C Corp faces double taxation.
If you think that your business would qualify for eligibility under an S Corporation, we recommend consulting with a knowledgeable business law attorney to ensure you meet all the requirements. Our business formation lawyers can help guide you through the process and answer any questions you may have.
Consult A Corporate Formation Lawyer Today
At the Law Offices of Clifton Black, PC, our business law attorneys are available for initial consultation appointments. This is a great opportunity for you to sit down with a knowledgeable and experienced business attorney to ask any questions you may have and get guidance regarding your specific business scenario.
To schedule an initial consultation, call our office at 719-328-1616. You can also reach out to us using our online form.