Colorado has mountains, lakes, skiing, and all kinds of hiking. It also has business opportunities for those seeking to start their own company. Colorado is like every other state in that it has its own tax rates and rules for those wanting to start sole proprietorships.
You need to be prepared to address all those unique aspects if you want to start a sole proprietorship in Colorado. We’ve prepared this guide to help you find your way through the state websites and also answer some questions about setting up this type of business in The Centennial State.
What is a sole proprietorship?
A sole proprietorship is a business structure in which the business is unincorporated and has a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a business that one can form, and many people who freelance or sell goods are operating as sole proprietors without realizing it. Because there is no separation between the business and the owner, the owner is personally responsible for all debts and litigation that the business is named in.
Who is a sole proprietorship best for?
By definition, a sole proprietorship is a business with a single owner. Anyone looking to form a partnership or have multiple owners should choose a different structure. A sole proprietorship will be a good fit for someone looking to maintain total ownership of their business who is willing to take on the liability associated.
Because a sole proprietorship is simple to start and requires no fees or paperwork, it can be a good option for anyone who needs to get a business up and running quickly. It can also offer a good test case for a business idea without any upfront requirements.
It can be more difficult to get funding and credit in a sole proprietorship, so if investments are required, having capital at the start can make this structure easier.
How to set up a sole proprietorship in Colorado
1. Choose your business name
Whether you set up shop in Denver or Aurora, Colorado law allows you to operate a sole proprietorship under a name other than your own. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the Colorado Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In Colorado, a business name must not:
- Match any other business name in the state
- Be misleading
- Use any certain government agency terms or abbreviations like FBI or EPA
2. File a trade name
It isn’t required to register a trade name with the State of Colorado but doing so helps protect your name from others using it. Filing a trade name, or a doing-business-as (DBA) name begins with the Colorado Secretary of State’s corporate information website. That is where you download and fill out the necessary forms.
- Find Trade Names link – Go to Trade Names under the LLC, Corporations, and Trade Names Section and click on the link.
- File Individually – Click on the first link to file individually.
- Fill out the form – You will see an online form where you put in your name, address, the date you want your trade name to become effective, and your email address. There are other items on the form to look at if you want to upload information. You will also put in the trade name you want and a brief description of your business.
- Submit – Hit the submit button at the bottom and it will take you to a fee page. The fee is $20. It may take up to three weeks to hear back from the state.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your business, you may need to obtain a variety of business licenses or permits. This is managed by the Colorado Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
You should also explore local regulations like building permits and zoning clearances where appropriate.
Although you don’t need a sole proprietorship license to do business in Colorado, you may need a professional or occupational license. A number of professions, such as counselors, require those. Go to the Colorado Professional Licensing website to see if your occupation needs a professional license.
Local cities and counties will also have their own requirements for business licenses, permitting, and zoning. You will need to check the local municipality where your business is located to see what rules apply. There could be some zoning issues if you operate certain businesses out of your home.
4. Obtain an Employer Identification Number (EIN)
If you’re planning a new hire, you need to obtain an EIN. This nine-digit number is issued by the IRS and used for tax purposes when you need to report wages. You can file for an EIN online through the IRS website.
If you do not have employees, you can use your Social Security Number to file taxes and are not required to have an EIN. However, some banks will require new business owners to have an EIN to open a business bank account, so you may want one anyway.
Next steps
Once you have these pieces in place, your business is ready to operate! You can begin thinking about things like marketing materials, landing your first clients, and how you want to grow over time.
How is a sole proprietorship different from an LLC or freelancing?
Anyone who does work on a freelance basis can technically be considered a sole proprietor of their business. They will pay taxes individually and usually operate under their own name, assuming liability associated with their work. However, there are a number of ways the two can differ.
A sole proprietor is able to hire employees and is responsible for employment taxes, while a freelancer usually cannot do this without filing paperwork and effectively becoming a sole proprietor. Freelancers also do not have to adhere to the same local regulations that a business might and cannot purchase the same types of insurance. A freelancer is considered somebody who has a relationship with external clients, while a sole proprietorship operates as a small business.
In contrast, a limited liability company (LLC), is another business entity option for small startups. An LLC must file articles of organization and register with their state. It also offers the owner (or owners, as an LLC can have multiple) liability protection, and the business is treated separately for tax purposes. Because of this separation, LLCs are often given larger lines of credit or more likely to attract future investments in times of growth.
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What are the benefits of a sole proprietorship?
Fast and inexpensive startup
Unlike other business structures, a sole proprietorship does not have to register with the state or pay the associated fees. The business can simply be run under your legal name, or you can give it a fictitious name. If you opt for a fictitious business name, you can register it with the state, but it’s optional. This lack of paperwork and cost means that you can start a sole proprietorship almost immediately and without bureaucracy.
Tax benefits
In a sole proprietorship, all profits and losses for the business are included in the owner’s individual tax returns. This leaves the owner responsible for state, local, and federal taxes that include their business, but they are not subject to corporate tax rates or specific business taxes. Additionally, being self-employed offers tax credits and benefits to the owner.
Complete control over your business
The sole proprietor of a Colorado business has complete control and is responsible for all decision-making within their business. With no partners or shareholders, you are free to run your business as you choose and take risks without implicating others.
What are the cons of a sole proprietorship?
Personal liability
Because the owner and the business are the same in a sole proprietorship, it can leave the owner vulnerable in multiple ways. Any debts that the business owes are also considered personal debt, and any lawsuits against the business also implicate the owner. If these result in collections or seizures, the owner’s personal property can be taken in order to meet the obligations of the business.
Difficulty with funding
If a sole proprietor wants to raise capital, they may have fewer options to do so. Without stock in the business to sell, investors are less likely to get involved. Banks may also be less inclined to offer credit because the owner will be responsible for the loans in the end. Even funding options through the Small Business Administration, or SBA, may be limited.
Risks of hiring employees
As long as they have a valid Employer Identification Number, a sole proprietor is able to hire employees as needed. However, if any legal issues arise related to an employee, it could put a strain on the owner as their personal assets are on the line for lawsuits and other costs.
How are sole proprietors taxed in Colorado?
Income taxes
With this type of business, taxes are a part of the personal tax return of each owner. Business profit is calculated and reported on a Schedule C form which is for Profit or Loss from Small Business.
A Schedule C will calculate the income of the business, including all income and expenses, along with the costs of goods sold and costs for home-based businesses. The rest of the calculation is the net income, which is the amount of taxable business income.
This net income is entered on the Schedule C and included with other income and losses the owner (and their spouse) reports for the purpose of income taxes.
The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Colorado has a flat rate tax of 4.5%. A flat rate tax means everyone pays the same tax regardless of earned income.
Additionally, voters in Colorado will be voting on a proposal on the Nov. 8, 2022 ballot to reduce the flat rate to 4.4%.
Other taxes
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor must pay Social Security and Medicare taxes. If the business operates at a loss, the tax is not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and property taxes that are applicable.
Colorado has a 2.9% sales tax and local governments are allowed to have a local option sales tax of up to 8% to pay for local projects. The average local tax rate collected is 4.09%.
Sole proprietors must also pay any other local taxes plus pay any property taxes on buildings they own to do business.
FAQs
No, Colorado doesn’t require you to register your business as a sole prop nor does it require you have a general business license. You do not need to select a registered agent either. However, local cities and counties may have that requirement.
It’s simple and easy to start and operate a sole proprietorship in Colorado, as it is in most all the states. You don’t have any of the legal requirements of a sole prop that you would have in an LLC or other business organization.
It depends on the business you are in but general liability insurance is advised for most businesses to avoid assuming all liability yourself.
Yes, you can open a business banking account with your DBA name. In fact, it’s advised to have a separate business account from a personal account for liability and tax accounting reasons. You may need to provide a statement of trade name, depending on the bank’s requirements.
You will be required to report any sales from your sole proprietorship in Colorado. Generally, this is filed on your personal income tax returns. However, you are expected to pay taxes on sales to the Colorado Department of Revenue.
You only need an EIN number if you plan to hire employees, pay the wages and report all earnings on a W-2.
Colorado doesn’t have any limitations on the business you start but there could be city and county limitations. You may need special licensing or a zoning approval for some businesses.
A use tax is a tax on property stored, used, or consumed at retail Property falling under the sales tax is exempt from any use tax.
You file a state tax return as an individual and include all profits made from the business in your earnings on the return, just as you do for the federal return.
Since your earnings are reported on the state income tax form, you are only taxed if you made a profit. Plus, expenses are deductible to reduce the amount you’re taxed on.
