Colorado Tax ID (EIN) Number & Business RegistrationPublished:
If you’re considering Colorado as the best place to start your business, there’s a strong incentive to move there as an entrepreneur. The per capita income in Colorado is higher than the national average, and the annual growth rate is hovering around 2.7 percent, which is higher than the national average of 2.4 percent. In the state of Colorado, small businesses alone employ more than 1 million people, representing nearly half of all Colorado employees. Colorado also has multiple programs and incentives available for entrepreneurs, including its Colorado Small Business Development Center (COSBDC). Many also want to move to Colorado to enjoy its beautiful natural scenery and impressive metropolitan areas.
Steps to Obtain a Colorado Tax ID & Business Registration:
- Business Formation in Colorado
- Obtain your Federal Tax ID (EIN) Number
- Colorado State Tax ID Number
- Colorado Local Licenses and Permits
You have several options when forming your business and you’ll need to choose a business structure that fits your business best, based on two central needs: tax structuring and liability protection. Your main options will be sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
The simplest businesses for taxes are sole proprietorships and partnerships. In these models, you’ll pay taxes on any income you make through the business as an individual—the only difference with a partnership is that one or more other people will also be involved, splitting profits with you. LLCs and corporations work a bit differently; they’re considered distinct legal entities, or pass-through entities. The business will earn profits and losses, and you’ll withdraw profits or a salary as needed from those entities.
For liability protection, nothing beats a corporation. It’s an entirely separate legal entity, so your individual assets will be protected in almost all scenarios. As an added bonus, you can use your corporation to raise money by issuing shares, provided you’re willing to file all the necessary paperwork and comply with SEC regulations. LLCs offer a similar level of liability protection, but may not be as effective in some circumstances. In a sole proprietorship or partnership, you could bear full, personal liability for anything that goes wrong with the business.
In Colorado, LLCs are required to fill out an annual report, but they don’t need to pay income taxes; in other states, LLCs may be required to pay a tax on all income. Corporations in Colorado must pay a flat 4.63 percent tax on all taxable income (though an alternative tax may be available), which means you could end up paying a double tax on any income you make through this structure.
After you’ve decided on a business structure, it’s a good idea to get a federal tax ID number, otherwise known as an employer identification number (EIN). This is how you’ll register your business with the federal government for tax purposes, and will be necessary for a variety of business functions.
For example, you’ll use your EIN like a social security number (SSN) at the end of the year, filing your taxes. You’ll also need an EIN before you open a bank account for your business, and when you hire your first round of employees. Your EIN will also be used to build credit for your business, so you can take out a loan if and when you need one.
Next, you’re going to need a state tax ID number. As you might have guessed already, your state tax ID will function for state-level taxes the same way your federal tax ID will work for federal taxes.
For the most part, only corporations need to worry about state-level taxes in Colorado; as previously mentioned, you’ll pay a flat rate of 4.63 percent on taxable income. However, you’ll also need to register for sales taxes and excise taxes on specific types of products (like liquor or cigarettes). Make sure you research the full list of excise taxes before proceeding.
For the most part, you won’t need a general business license to operate in Colorado, though your local area may have different rules. Instead, you’ll only need to apply for a license or permit if your business falls into one of several specific categories. For example, you’ll need a license if you want to be a lobbyist, distribute medical equipment, or open a casino. The application process for Colorado business licenses and permits is usually straightforward, though you may have to pay a one-time fee and wait a few weeks for your application to process.
After you follow all the steps on this list, you’ll have most of the basics you need to begin operations. From a legal standpoint, as long as you have the licenses necessary to operate and have registered for taxes, you’re free to start doing business.