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You have many choices to make when forming your new business. Choosing a business structure and entity for state and federal taxation is one of the first (and important) choices you’ll make as a small business owner.
One option to consider is a Connecticut S Corporation. Sometimes shortened to S Corp, this is not a separate business structure. Instead, the S Corp is a federal tax election that allows you to pay income taxes on your individual return rather than at the corporate level.
Your business name must be different from all other registered Connecticut businesses. Your name will identify to your consumer who you are and how the owners of the business are protected from liability.
When you use our Name Reservation Service, we’ll do the work of running your name against the list of existing businesses and file the paperwork for you. Once you choose a name, you can reserve it with the Secretary of State for 120 days.
Every Connecticut business needs to name a registered agent. The registered agent will receive service of process and other notices on behalf of the business. You can be your company’s registered agent, or you may choose an individual or company set up for this purpose. The agent must have an address in Connecticut.
Let us handle finding a registered agent when you sign up for our Registered Agent Service.
A corporation’s directors and an LLC’s managers or members make governing decisions for the business. A corporation must select appropriate directors and officers, while LLCs can decide to have their members manage the business or hire a manager to do so for them.
Before you can do business in Connecticut, you must register the business with the Secretary of State. If you’re forming a corporation, you’ll file a Certificate of Incorporation.
To form an LLC, you’ll file a Certificate of Organization. Your formation document will include information like your name, the owners’ names and addresses, the business’s registered agent, and the business’s purpose.
Once your business is registered, the final step is to elect S Corp status by filing Form 2553 with the Internal Revenue Service (IRS.) If you formed a corporation, once the IRS accepts your S Corp election, you’re finished forming your S Corp. An LLC must first elect corporate taxation and then File Form 2553 to elect S Corp treatment.
Before you file Form 2553, you must ensure that your business will meet the IRS requirements for S Corp status. To elect S Corp status, your business must have:
Your business must continue to meet these requirements to maintain its S Corp status. If you want to elect S Corp status, you must submit Form 2553 within two months and 15 days of the start of the year (or any time during the previous year).
The choice to make the S Corp election depends on your individual circumstances. Consider these pros and cons:
Forming a corporation or LLC and then electing S Corp status helps you protect your assets with built-in liability protections. With S Corp status, you get pass-through taxation and tax-favorable characterization of income, regardless of your business structure. Also, S Corp status allows your business to use the cash method of accounting.
Electing S Corp status means some extra paperwork and expenses during formation and maintenance. You’ll need to continue to meet the tight tax qualification obligations and stock ownership restrictions to maintain your S Corp status. Because the IRS has such tight rules, the IRS may have closer scrutiny over your tax returns, and you’ll have less flexibility in allocating income and loss.
The IRS classifies business corporations by default rules unless you elect a different status using Form 2553. By default, corporations (known as “C Corps”) are subject to “double taxation.” C Corps pay corporate income taxes and then shareholders must pay income taxes on their distributions from corporate income.
S Corporations are basically small business corporations that have limited corporation shareholders but aren’t subject to corporate double taxation.
The IRS considers an S Corp a pass-through entity. Owners report the business profits and losses on their individual returns. In addition, S Corp owners pay employment taxes on their salaries rather than the self-employment tax. Finally, the S Corp must pay the business entity tax (BET) on its Connecticut S Corporation tax return each year. S Corps pay the BET instead of the corporate business tax.
The main difference between an S Corp and a C Corp is the taxation method (corporate vs. “pass-through” taxation), although S Corps are limited by other IRS requirements, such as limited shareholders. The owners of “pass-through entities” report the business’s profits and losses on their individual income taxes, whereas traditional C Corps pay corporate business taxes.
To create an S Corporation, you have to form a business that falls within the limitations identified above. Then, you’ll need to file Form 2553 with the IRS within the timeframes listed above.
Yes, LLCs can make an S Corp election, and they often do. By default, the IRS taxes LLCs as a sole proprietorship or disregarded entity (one member) or general partnership (multiple members). Electing S Corp status does not change the business structure, only the tax requirements.
The owners of an LLC may want to elect S Corp status to avoid self-employment tax liability. When you elect S Corp status, you must pay yourself a reasonable salary, on which you will pay employment taxes rather than the self-employment tax at tax time. We’ve put together a page on LLC tax information if you want to learn more.
If forming Connecticut S Corporation sounds like a good fit for your business, we can help! When you’re ready to start your business, let us help you form your Connecticut LLC or Connecticut corporation. Then, see how we can help your keep your business compliant and give it the tools to grow by checking out our full range of products and services.
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Connecticut automatically recognizes your S Corp status once you file Form 2553 to elect S Corp tax treatment with the IRS. You’ll get pass-through taxation regardless of your business structure (LLC or corporation) and can avoid self-employment tax liability by paying yourself a salary.
The S Corp election is a tax treatment rather than a business structure. Therefore, your company name should reflect its underlying structure. Corporations should include “Corp.,” “Co.,” “Inc,” or similar terms. LLCs should have “limited liability company” or “LLC” at the end of their name.
No, you should continue to identify your LLC with “LLC” or “limited liability company.” This designation alerts the public to the owner’s protected liability status. The S Corp election does not change the underlying business structure.
Under Connecticut law, your S Corporation should pay business taxes on the income apportioned to Connecticut. The business will report your share of the taxes based on your portion of ownership.