Colorado’s population is growing, its workforce is younger than the national average, and it ranks among the top states for higher education attainment. The Centennial State is also a popular retirement destination and a favorite of snow skiers and those who enjoy the Rocky Mountains. All of these factors make Colorado an attractive destination for businesses. However, businesses there also labor under costs that are higher than in most states, and the state’s overall tax burden is relatively high. Here’s what you should know if you would like to start a business in Colorado.
Consider working with a financial advisor as you build a business to help protect your personal assets and grow your wealth.
Make a Business Plan
Successful entrepreneurs start with a solid business plan. The first decision to make is what to sell or what service to render. Business owners tend to choose products and services that fit their skills and passions, as well as the demands of the market.
Colorado’s largest industries are manufacturing, mining, agriculture and tourism. Manufacturing tends to be of the advanced technology variety, with products including wind turbines, spacecraft and telescopes. The tourism economy is focused on the recreational opportunities offered by the Rocky Mountains that make up the western half of the state. Energy and natural resources support about 150,000 workers and account for nearly $11.4 billion annually.
Sales and Marketing Plan
Sales and marketing plans tailored to the Colorado market recognize that the state’s population is growing rapidly, mostly by attracting younger people, although it’s also a popular retirement destination. The roughly 5.8 million residents are 84% white, with only 4% African-American. The largest city and capital, Denver, has 700,000 residents. Most of the state is relatively sparsely populated.
Staffing plans for startups in Colorado benefit from the state’s excellent workforce. Forty-one percent of Coloradans have a college degree, the second highest among the states. And Coloradans tend to be young — only one other state has a higher percentage of residents aged 25-34.
When it comes to planning the financial aspect of a business startup, most founders rely on their savings, money from friends and family, bank loans and similar sources. In Colorado, the state government provides a number of financial incentives that can help.
Tax credits, exemptions, grants and other financing incentives are available for businesses in fields from aviation to venture capital. The Colorado Office of Economic Development and International Trade has details.
Choose a Business Structure
Part of a business startup is choosing a business structure. The selection of a business structure can affect a new business owner’s exposure to risk as well as the prospects for growth.
In Colorado, new businesses can register online with the secretary of state’s office. Here are the various business entities to consider:
- Sole proprietorship: The simplest and most common structure offers no liability protection to the owners. Sole proprietors don’t have to register with the secretary of state unless the business operates under a name other than the owner’s full first and last legal name.
- Partnership: When two or more people join to form a for-profit business, the partnership offers a simple structure that, like the sole proprietorship, provides little or no liability protection. Also like the sole proprietorship, a partnership doesn’t have to register with the state unless the business operates under a name other than the owners’ legal names.
- Corporation: Corporations offer liability protection and make it easier to attract investors, at the cost of additional filing and regulatory burdens. There are two types of corporations, C corporations and S corporations. The latter type lets a company pass all profits directly to the owner(s), who therefore avoid double taxation. Corporations must file articles of incorporation with the secretary of state.
- Limited liability companies (LLCs): LLCs protect owners from liability similarly to corporations but there are important differences. LLCs file articles of incorporation with the secretary of state.
- Limited partnership: These consist of general partners who manage the business and limited partners who are passive investors. Limited partnerships filed with the secretary of State.
- Limited liability partnerships and limited liability limited partnerships: These offer some liability protection to the limited partners. These entities file registration statements with the secretary of state.
Register the Business Name
Most Colorado businesses will register the business name with the secretary of state. This includes sole proprietorships and partnerships that do business as anything but the owner’s legal name. The secretary of state’s website has a tool for searching business names to see if another business has the same name.
Get Tax ID Numbers
New businesses must set up tax accounts and obtain tax numbers for both federal and state governments. Registering with the Internal Revenue Service provides a federal Employee Identification Number. The EIN lets employers withhold taxes on worker wages and salaries and file the business’s federal tax return.
To set up a state sales tax account, businesses file with the Department of Revenue. Businesses with employees also file with the Department of Revenue to set up state income tax withholding. For unemployment withholding, they file with the Colorado Department of Labor.
Employers are required to get workers’ compensation insurance. They can get this from a private insurance carrier, an independent insurance agent or Pinnacol Assurance.
How Colorado Businesses Are Taxed
Corporations in Colorado pay a flat income tax of 4.63%. There is no state franchise tax, however. And business structures other than corporations are not subject to income tax.
The state sales tax is 2.9%. Marijuana, whether medical or recreational, is subject to the 2.9% state sales tax plus any applicable local sales taxes – as well as an additional 15% sales tax and a 15% marijuana excise tax. Local municipalities can add their own sales taxes as well, up to a total maximum of 11.2%. However, local taxes in Colorado average 4.51%.
E-commerce businesses that sell physical goods through the internet to customers in Colorado pay sales taxes in the state just like brick-and-mortar retailers. However, website hosting, domain name registration and other services are not assessed the sales tax.
Obtain Licenses and Permits
Colorado licenses and regulates many different types of businesses at the state level. These range from accountants and acupuncturists to veterinarians and wholesale drug outlets. Learn about licensing requirements at the Department of Regulatory Affairs website.
Cities and counties may also have special permitting requirements. New businesses should contact their local authorities to find out what kinds of permits and licenses may be required. Zoning restrictions, personal property taxes and sales taxes are also under the purview of local authorities.
The Bottom Line
Colorado has a youthful, well-educated workforce, a growing population and a healthy economy. The state’s costs are higher than many others, but prospects for continued growth encourage new business startups. The environment makes Colorado a great home to many tourist-related and environmentally-friendly businesses. Overall, the state can make a great place for your business to call home if it is right for your situation.
Resources for Starting a Small Business
- Many financial advisors specialize in helping small business owners with their financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Some parts of starting a small business are the same no matter where you plan to operate. Here are some of the basic requirements for beginning a new enterprise.
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