If you own a business in Denver, choosing between an S-Corp and an LLC affects how much you pay in taxes every single year. Most business owners don't realize that the wrong entity structure can cost them $10,000 or more annually in unnecessary self-employment taxes.
We see this all the time at Succentrix. Denver business owners come to us frustrated because they're paying too much in taxes, and usually it's because they set up an LLC years ago and never converted to an S-Corp.
An LLC is a legal entity that protects your personal assets from business liabilities. That's great for protection. But here's what most Denver business owners don't know: by default, the IRS treats single-member LLCs as sole proprietorships and multi-member LLCs as partnerships.
This means all your business income gets hit with self-employment taxes. That's 15.3% right off the top for Social Security and Medicare taxes, according to the IRS self-employment tax guidelines. If you made $100,000 in profit, you're paying $15,300 in self-employment taxes before you even get to federal income taxes.
An S-Corp isn't actually a business entity. It's a tax election you file with the IRS using Form 2553. You can have an LLC taxed as an S-Corp. You get to keep the liability protection of your LLC while changing how the IRS taxes your income.
Here's the benefit: S-Corp owners split their income into two categories. You pay yourself a reasonable salary through payroll (subject to those 15.3% self-employment taxes), and then you take the rest as distributions (which avoid self-employment taxes completely).
Our Denver business CPA services help clients implement this strategy correctly. Done right, you're only paying self-employment taxes on your salary portion, not on your distributions.
Let's say your Denver business makes $150,000 in profit. As a standard LLC, you're paying 15.3% on the full $150,000 (up to the Social Security wage limit of $176,100 for 2025, per the IRS Social Security wage base). That's $22,950 in self-employment taxes.
As an S-Corp, you might pay yourself a $70,000 salary and take $80,000 in distributions. Now you're only paying 15.3% on $70,000, which equals $10,710 in self-employment taxes. You just saved $12,240.
This is why S-Corp strategy is so popular among Denver small business owners. The savings add up year after year.
Converting to an S-Corp isn't automatic free money. The IRS has rules. You must run payroll, which means you need a payroll service. You must pay yourself a reasonable salary for the work you do. You can't just pay yourself $1 and take $149,999 as distributions.
The IRS guidelines on S-Corp compensation are clear: your salary must reflect what someone would earn for similar work in your industry. If you try to game the system, the IRS can reclassify your distributions as salary and hit you with back taxes and penalties.
You also need to file a separate tax return (Form 1120-S) each year. This adds complexity and usually increases your accounting fees. But for most Denver businesses making over $60,000 in profit, the tax savings far exceed the additional costs.
Not every Denver business should convert to an S-Corp. If your business is barely profitable or you're in the startup phase, the administrative burden might outweigh the tax savings. If you're making under $40,000 to $60,000 in profit, an LLC is probably simpler.
LLCs are also easier to maintain. No payroll requirements. No separate corporate tax return. No reasonable salary calculations. Just simple pass-through taxation on Schedule C of your personal return.
Some businesses also face restrictions. S-Corps can only have up to 100 shareholders, and all must be U.S. citizens or residents. If you're planning to bring in foreign investors or have more than 100 owners, an LLC might be your only option.
Colorado doesn't have a special S-Corp tax. Your S-Corp income flows through to your personal Colorado tax return and gets taxed at the state's flat 4.40% rate for 2026. This is the same whether you're an LLC or S-Corp.
But here's what Denver business owners need to know: Colorado requires S-Corps to file an annual report with the Secretary of State and pay a periodic report fee. This is separate from your federal S-Corp election.
Both LLCs and S-Corps can benefit from the Qualified Business Income (QBI) deduction, which lets you deduct up to 20% of your qualified business income. But S-Corp owners need to be strategic.
Your QBI deduction is based on your W-2 wages and the value of your business assets. If you set your S-Corp salary too low, you might reduce your QBI deduction. This is where professional tax reduction planning becomes critical. You're balancing self-employment tax savings against QBI deduction optimization.
Converting your Denver LLC to S-Corp status is straightforward. You file Form 2553 with the IRS. The deadline is March 15 if you want S-Corp status for the current tax year. Miss that deadline and you're waiting until next year, unless you qualify for late election relief.
Once you file, you need to set up payroll immediately. You need to determine your reasonable salary. You need to start running payroll at least monthly or quarterly. Our Denver bookkeeping services help businesses handle this transition smoothly.
Here's the truth: it depends on your specific situation. If you're making solid profits and want to minimize self-employment taxes, S-Corp election usually saves you thousands. If you're just starting out or your profits are modest, an LLC keeps things simple.
Most small business tax planning experts recommend staying as an LLC until you hit around $60,000 in profit, then converting to S-Corp status. That's the point where the tax savings justify the additional complexity and costs.
Want to know if S-Corp election makes sense for your specific Denver business? Our team at Succentrix provides tax strategy and fractional CFO services to help you make this decision based on real numbers from your business. We'll run the calculations and show you exactly what you'd save.
Don't let another tax year go by overpaying on self-employment taxes. Book a consultation with our Denver CPA team and let's find out if converting to an S-Corp is the right move for your business.
