An owner's draw is when you transfer money from your LLC's business bank account to your personal account. This represents a distribution of the LLC's profits to you as an owner. You can take draws at any time and in any amount, as long as the LLC has sufficient funds and cash flow.
Tax treatment: Owner's draws are not subject to payroll taxes, but you'll pay self-employment tax on your share of the LLC's net earnings. In Colorado, you'll also pay the state's flat 4.40% income tax rate on your LLC income. The draw itself isn't taxed—you're taxed on the LLC's profits regardless of how much you actually withdraw.
How to do it
Transfer funds from your LLC's business bank account to your personal account
Record the transaction in your accounting system as an owner's draw or distribution
Set aside money for quarterly estimated taxes on your share of LLC profits
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Guaranteed Payment
A guaranteed payment is a predetermined amount paid to an LLC member for services rendered, regardless of the LLC's profitability. These payments are treated like wages for tax purposes but don't require payroll tax withholding. The LLC deducts guaranteed payments as a business expense, reducing the overall taxable income of the LLC.
Tax treatment: Guaranteed payments are subject to self-employment tax and treated as ordinary income on your personal tax return. Colorado taxes this income at the 4.40% flat rate. The LLC deducts guaranteed payments as a business expense, which reduces the remaining profits subject to taxation among all members.
How to do it
Establish guaranteed payment amounts and schedules in your LLC operating agreement
Pay the agreed-upon amount regularly (monthly or quarterly) via business check or transfer
Issue a Schedule K-1 to each member showing their guaranteed payments and profit distributions
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Salary via S-Corp Election
Your LLC elects S-Corporation tax treatment with the IRS, allowing you to become an employee of your own LLC. You must pay yourself a reasonable salary subject to payroll taxes, but additional profits can be distributed without self-employment tax. This method requires more administrative work but can provide significant tax savings for profitable LLCs.
Tax treatment: Your salary is subject to payroll taxes (Social Security, Medicare, federal and Colorado unemployment taxes), while distributions above your salary are not subject to self-employment tax. Colorado requires payroll tax withholding on your salary at the 4.40% rate. You'll need to file both federal and Colorado payroll tax returns.
How to do it
File Form 2553 with the IRS to elect S-Corporation tax treatment for your LLC
Set up payroll to pay yourself a reasonable salary with proper tax withholding
Distribute additional profits to yourself as distributions, which are not subject to payroll taxes
Colorado Tax Notes for LLC Owners
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Income Tax
Colorado imposes a flat 4.40% state income tax on all income, including LLC profits and guaranteed payments. This rate applies regardless of your income level, making Colorado's tax system relatively straightforward compared to states with graduated rates.
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Self-Employment Tax
Colorado LLC owners are subject to federal self-employment tax of 15.3% on their share of LLC profits when taxed as sole proprietorships or partnerships. Colorado does not impose additional state-level self-employment taxes beyond the flat income tax rate.
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Estimated Taxes
Colorado LLC owners must make quarterly estimated tax payments if they expect to owe $1,000 or more in state taxes for the year. Payments are due on the 15th of January, April, June, and September. You'll also need to make federal estimated tax payments quarterly.
Common Mistakes to Avoid
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Mixing personal and business finances by not maintaining separate bank accounts for the LLC and personal use
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Failing to make quarterly estimated tax payments and facing penalties from both the IRS and Colorado Department of Revenue
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Not properly documenting owner draws and guaranteed payments in the LLC's financial records and operating agreement
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Either paying yourself too little (missing out on reasonable compensation) or too much (creating cash flow problems for the business)