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Starting a new business can be an exciting venture, but it’s easy to get bogged down in the rules and paperwork required. A step-by-step strategy can help. Colorado offers a few tax incentives for businesses that can help reduce your federal tax liability, as well as technical skills training for foreign labor. Read on to learn more about how to start a business in Colorado.
1. Choose a business idea
Brainstorm business ideas you think you could turn into a viable and sustainable business model. Coming up with a concept is more than figuring out what products to sell or services to provide. Here are a couple of questions you may want to ask yourself:
- Who is your customer? Have a clear understanding of who you’re selling to. Whether it’s a retail dropshipping business or video yoga on demand, research the market and your competition to find out who is buying what products or services from whom and why.
- How much do you need to sell to cover your costs? Make sure your idea is worth your investment. This research can also help you figure out how much money you need to get your business off the ground, which areas of your process need the most financial help, and how your budget may limit what types of services.
2. Name your business
Next, you’ll need to choose a name for your business. Keep it short, memorable, and relevant to your products or services. Colorado has several rules when selecting a business name:
- Include a term that identifies the entity type. Colorado requires most business entities to include a term or abbreviation that identifies the entity type of the business in their name. The entity name of a Limited Liability Company (LLC), for example, must contain the terms or abbreviations “limited liability company,” “ltd. liability company,” “limited liability co.,” “ltd. liability co.,” “limited,” “l.l.c.,” “llc,” or “ltd.”
- Include distinguishing terms. An entity name must also be distinguishable—i.e., different—from other entity names on record. Terms and abbreviations included in an entity name, such as “LLC”, as well as articles of speech such as “the” and “a,” can make a name distinguishable. On the other hand, periods (.), commas (,), underscores (_), apostrophes (’), and inverted apostrophes (‘), as well as uppercase and lowercase letters, do not make a name distinguishable. For example, “XYZ LLC” is not the same as “The XYZ LLC,” and therefore distinguishable, whereas “XYZ Inc” is the same as “X.Y.Z. Inc,” and therefore not distinguishable. The Colorado Secretary of State offers a detailed explanation.
- See if your name is available. Use Colorado’s Name Availability search tool to see if the name you want is available. The Business Availability tool can show you how many businesses already have names similar to yours—though it won’t disclose name availability.
- Buy a domain. If you’ve settled on a name, secure a simple, memorable domain name that aligns with your business name.
- Reserve a business name. In Colorado, you can reserve a name for up to 120 days by filling out a Statement of Renewal of Reservation of Name form. Be prepared to provide your ID number and name of choice, along with your name and address or the name and address of a registered agent.
- File a DBA. “Doing business as,” also known as an assumed name or trade name, is when a business operates using a name different from its legal name. Think of a DBA as your company’s alias. Entities such as sole proprietorships, corporations, LLCs, and domestic limited partnerships must file for a trade name when conducting business under a different name. You’ll need to select your business entity before accessing the correct form.
3. Create a business plan
- Help outline your business structure
- State your mission
- Devise a profitable business model
- Determine day-to-day operations
- Describe what’s expected of leadership and employees
- Include relevant market research
4. Choose a business structure and get started
Before you form your business, you have to decide what kind of business you’ll be running. Among other factors, your business structure determines how your company is taxed and how easily you can secure investments. The most popular types of business include:
A sole proprietorship is a business owned and operated by a single person. It’s a “pass-through” entity, meaning that the net income from the business passes through to the owner, which is included on their personal tax return. There’s no legal distinction between a sole proprietorship and its owner, meaning that as the owner you’re liable for all legal matters (such as lawsuits) and financial responsibilities (such as any debts or asset seizures).
Limited liability company (LLC)
An LLC, or limited liability company, is a separate legal entity designation that also offers pass-through taxation for owners (known as members). An LLC limits the owner’s liability in business matters, meaning members’ personal assets are not at risk should the company experience financial or legal difficulty. An LLC can have one or multiple owners.
Colorado LLCs come with a one-time filing fee of $50 and an annual Periodic Report filing fee of $10. In addition to yearly fees, Colorado LLCs are responsible for three tax levels: federal, state, and local—each with its rates and filing procedures.
Corporations, taxed as C corporations under IRS rules, offer the same degree of personal asset protection as LLCs but are generally more work to incorporate and maintain. Corporations raise funds by selling stocks, which makes the management responsible to shareholders and requires that they stay abreast of business updates. Corporations are not pass-through entities, meaning the corporation is taxed separately from its owners and that it is subject to state and federal corporate tax. As of 2022, the corporate tax rate in Colorado is the same as the individual income tax rate of 4.55%, while the federal tax rate for corporations is 21%.
Rather than filing Articles of Organization, Colorado requires owners to file Articles of Incorporation. These forms differ slightly depending on the type of corporation, i.e., profit or nonprofit, but require the same general information: your principal office’s mailing address and your registered agent’s address.
Get a federal employer identification number (EIN)
A federal employer identification number (EIN) is an identifying number assigned by the IRS—much like your personal Social Security number, but for your business. An EIN is required for a company to file taxes (except sole proprietorships, which can file taxes under the owner’s Social Security number). An EIN is also required for a company to hire employees and open a business bank account. You can file for an EIN through the IRS website.
Incorporating within Colorado
All Colorado businesses must file Articles of Organization (for LLCs) or Articles of Incorporation (for C corporations) with the Colorado Secretary of State. Incorporating in Colorado requires some paperwork and a filing fee of $50. To start, go to the Colorado business forms page and choose your entity structure to find the proper form. You can also find links to specific documents for mistake correction or business dissolution.
5. Obtain a business license and permits
The state of Colorado does not have a general business license, however, counties and cities have their own licensing requirements. Some Colorado businesses may require specific licenses and permits:
- Register with DORA. In Colorado, businesses within specific sectors, including banking, real estate, insurance, and conservation services, must register with the Department of Regulatory Agencies (DORA). View a list of all departments that require DORA regulation and also apply for or renew your license for these types of businesses.
- Check locally. Some counties and cities in Colorado have their own requirements for doing business. For instance, businesses needing liquor licenses must apply at the local government level before obtaining state certification. (There are several fees involved in obtaining a liquor license in Colorado at the local and state level.)
- Apply for a retail sales tax license. In Colorado, only goods—not services—are subject to retail sales tax. This license covers standard retail and wholesale transactions, but you can obtain a separate license if you only wish to sell wholesale goods.
- Obtain a registered agent. Anyone wishing to do business in Colorado must have a registered agent. A registered agent serves as the point of contact between your business and the state of Colorado; they collect and file essential documents on your behalf and deliver correspondence regarding your business. An agent must be over 18 years of age and have a permanent Colorado address. If you have a permanent Colorado address or plan on obtaining one, you can serve as your own registered agent. If you do not have a Colorado address, you can pay a service to act as your registered agent.
6. Examine insurance options in Colorado
Colorado requires particular types of insurance. While some insurance policies in Colorado are optional, the state mandates businesses to carry specific policies, including:
- Workers’ compensation. All Colorado businesses must provide workers’ comp for their employees, regardless of their part-time or full-time status. Workers’ comp covers most workplace-related injuries and illnesses.
- Commercial vehicle insurance. All commercial automobile owners in Colorado must carry vehicle liability insurance in case of property damage or bodily injury to another person. This insurance specifically covers vehicles used on the job.
- Professional liability insurance. Professional liability insurance protects individuals against errors while performing their professional duties. For example, all licensed medical professionals, such as physicians, must carry professional liability insurance like malpractice insurance coverage.
- General liability insurance. General liability insurance is a good idea for businesses with a physical location. (Some commercial leases even require it.) General liability policies can protect your business against injury claims or property damage. This type of insurance also protects owners against libel, copyright violations, or advertising injuries.
- Business liability insurance. While not state mandated, it’s recommended that businesses purchase business liability insurance to protect against workplace, product, or service claims.
7. Understand financial considerations
Starting a business in Colorado means preparing yourself for all kinds of costs—some expected, others not. Aside from registration fees, licenses, permits, taxes, and insurance costs, you may need funds for a physical space, inventory, advertising, or travel. Keep in mind that some permits or licenses may have annual renewal fees. If you’re not a resident of Colorado but want to start a business there, you’ll still have to pay Colorado income taxes. If you need help funding your business venture, you can try taking out a small-business bank loan from qualified lenders or applying for capital through alternative financial lending programs like Shopify Capital.
8. Market your business
Marketing is a crucial element of running a business. Marketing is how people find out about your company and how it can reach people with its products, services, influence, or brand. Business marketing strategies include developing a social media presence, building a website, creating advertisements, and observing metrics (like sales growth and customer loyalty) to establish a better picture of who your target audience is and how you can connect with them.
Starting a business in Colorado FAQ
What is Colorado’s state sales tax?
Colorado’s sales tax is 2.9%, but cities and counties may impose additional taxes. For instance, Denver has its own sales tax of 4.81%, plus a Scientific and Cultural Facilities District (CD) sales tax of .1%, and a Regional Transportation District (RTD) tax of 1%, adding up to a total sales tax of 8.81%.
How much does it cost to start a business in Colorado?
t costs $50 to file Articles of Organization, plus $25 to reserve a trade name.
What are the advantages of starting a business in Colorado?
Colorado businesses can take advantage of the Work Opportunity Tax Credit (WOTC), which helps reduce federal liability for employers who hire specific job seekers, training and job placement assistance for unemployed US workers to reduce outsourcing, as well as the Federal Bonding Program, which helps insure employers who hire applicants with at-risk backgrounds who may have difficulty obtaining other employment due to their history.