LLC vs S-Corp | What Entrepreneurs Need to Know in Connecticut

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LLC vs S-Corp in Connecticut

When starting a small business in the Connecticut, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Connecticut. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Connecticut. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Connecticut

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Connecticut?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Connecticut?

Unlike a limited liability company (LLC) or other business structures, Connecticut S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Connecticut

Creating a business in Connecticut requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Connecticut Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Connecticut does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Connecticut.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Connecticut

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Connecticut is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Connecticut. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Connecticut are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Connecticut are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Connecticut to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Connecticut with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Connecticut State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Connecticut, it costs $80, which can be paid to the CT Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $120 to the Connecticut Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Connecticut have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Connecticut LLC: An LLC can have any number of owners, called members, from starting Connecticut Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Connecticut S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Connecticut LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Connecticut.

Connecticut S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Connecticut LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Connecticut S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Connecticut LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Connecticut Operating Agreement.

Connecticut S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Connecticut LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Connecticut: LLC or S-Corp?

Filing an LLC or S-Corporation in Connecticut requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Resident Agent. To establish an LLC in Connecticut, you must submit the Certificate of Organization to the Connecticut Secretary of State. Your Certificate of Organization must include information about your Connecticut LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Connecticut S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Connecticut: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Connecticut depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Connecticut LLC Cost for detailed information.

Connecticut S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Connecticut LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Connecticut?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Connecticut. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Connecticut.

FAQs

What is the main difference between an LLC and an S-Corp in Connecticut?
The main difference is that LLCs are more flexible in terms of management, while S-Corps have more strict ownership requirements.
Can an LLC or S-Corp be taxed as a C-Corp in Connecticut?
Yes, both LLCs and S-Corps can choose to be taxed as a C-Corp in Connecticut.
What are the filing fees for forming an LLC in Connecticut?
The filing fee for forming an LLC in Connecticut is $120.
What are the filing fees for forming an S-Corp in Connecticut?
The filing fee for forming an S-Corp in Connecticut is $50.
Which entity type offers greater personal liability protection in Connecticut?
Both LLCs and S-Corps offer personal liability protection in Connecticut.
Can a Connecticut LLC be owned by another LLC or corporation?
Yes, a Connecticut LLC can be owned by another LLC or corporation.
What is the maximum number of members allowed in a Connecticut LLC?
There is no maximum number of members allowed in a Connecticut LLC.
What is the maximum number of shareholders allowed in a Connecticut S-Corp?
There is a maximum of 100 shareholders allowed in a Connecticut S-Corp.
Is there a residency requirement for LLC members or S-Corp shareholders in Connecticut?
There is no residency requirement for LLC members or S-Corp shareholders in Connecticut.
Can a Connecticut LLC be taxed as a sole proprietorship or partnership?
Yes, a Connecticut LLC can choose to be taxed as a sole proprietorship or partnership.
What is the annual report filing fee for a Connecticut LLC?
The annual report filing fee for a Connecticut LLC is $20.
What is the annual report filing fee for a Connecticut S-Corp?
The annual report filing fee for a Connecticut S-Corp is $150.
Which entity type offers more favorable tax treatment in Connecticut?
It depends on the business’s specific circumstances, but S-Corps generally offer more favorable tax treatment in Connecticut.
Are there any restrictions on S-Corp ownership in Connecticut?
Yes, S-Corp shareholders must be individuals or certain types of trusts or estates in Connecticut.
How is an S-Corp’s income allocated to its shareholders in Connecticut?
An S-Corp’s income is allocated to its shareholders based on their percentage of ownership in Connecticut.
Can a Connecticut LLC have a board of directors?
Yes, a Connecticut LLC can have a board of directors if it chooses to do so.
What is the minimum number of directors required for a Connecticut LLC?
There is no minimum number of directors required for a Connecticut LLC.
Can an S-Corp have more than one class of stock in Connecticut?
No, an S-Corp can only have one class of stock in Connecticut.
Do Connecticut LLCs need to have officers?
No, Connecticut LLCs do not need to have officers.
Are there any restrictions on LLC ownership in Connecticut?
No, LLC ownership is generally very flexible in Connecticut.
What is the tax rate for LLCs and S-Corps in Connecticut?
The tax rate for LLCs and S-Corps in Connecticut is 7.5%.
Can Connecticut LLCs issue stock?
No, LLCs cannot issue stock in Connecticut.
What is the minimum and maximum number of members allowed in a Connecticut S-Corp?
There must be at least one shareholder and no more than 100 shareholders in a Connecticut S-Corp.
What is the formation process for a Connecticut LLC?
The formation process for a Connecticut LLC involves filing articles of organization with the Secretary of State and paying the filing fee.
What is the formation process for a Connecticut S-Corp?
The formation process for a Connecticut S-Corp involves filing articles of incorporation with the Secretary of State and paying the filing fee.
Can a nonresident of Connecticut be a member of an LLC or shareholder of an S-Corp in Connecticut?
Yes, nonresidents can be members of an LLC or shareholders of an S-Corp in Connecticut.
Can an S-Corp have foreign shareholders in Connecticut?
Yes, an S-Corp can have foreign shareholders in Connecticut.
Can an LLC be converted to an S-Corp in Connecticut?
Yes, an LLC can be converted to an S-Corp in Connecticut.
Can an S-Corp be converted to an LLC in Connecticut?
Yes, an S-Corp can be converted to an LLC in Connecticut.
What are the differences between LLCs and S-corps in Connecticut?
LLCs and S-corps in Connecticut have different structures, ownership and tax treatment.
Can LLCs in Connecticut be taxed as a corporation?
Yes, LLCs in Connecticut can elect to be taxed as an S-corp or a C-corp for federal and state tax purposes.
What is the cost of forming an LLC in Connecticut?
The cost of forming an LLC in Connecticut is $120 for filing articles of organization with the Secretary of State’s office.
What is required to form an S-corp in Connecticut?
To form an S-corp in Connecticut, you need to file articles of incorporation with the Secretary of State and obtain an EIN from the IRS.
Are there any differences in taxation for LLCs and S-corps in Connecticut?
Yes, LLCs in Connecticut are taxed as pass-through entities while S-corps use a tax-jurisdiction ‘pass-through deal’ with an in-state agent.
Can LLCs be formed and managed by one person in Connecticut?
Yes, LLCs in Connecticut can be formed and managed by one person.
Are the owners of LLCs personally liable for the company’s debts in Connecticut?
No, the owners of LLCs in Connecticut are generally not personally liable for the company’s debts.
How much does it cost to file for an S-corp in Connecticut?
The cost of filing for an S-corp in Connecticut is $50 for filing articles of incorporation with the Secretary of State.
Are there any annual report requirements for S-corps in Connecticut?
Yes, S-corps must file an annual report in Connecticut.
How long does it take to form an LLC in Connecticut?
It generally takes about 5 business days to form an LLC in Connecticut.
Can an LLC in Connecticut have the members as managers?
Yes, an LLC in Connecticut can have the members as managers.
Will LLCs in Connecticut have tax benefits?
Depending on the number of members, LLCs in Connecticut can save on payroll taxes.
Can a foreign company form an LLC in Connecticut?
Yes, foreign companies can form LLCs in Connecticut; however, they must have a registered agent in the state.
Does Connecticut mandate Workers Compensation insurance coverage for LLC and S-corp?
Yes, Workers’ Compensation insurance is required coverage in Connecticut for every employer having at least one employee working 26 hours or more per week.
Can an owner of an LLC also be an employee?
Yes, an owner of an LLC in Connecticut can also be an employee of the company.
Can an S-corp in Connecticut have more than 100 shareholders?
No, S-corps in Connecticut are limited to 100 shareholders.
How long does it take to form an S-corp in Connecticut?
It generally takes 5 to 10 business days to form an S-corp in Connecticut.
Is it easy to convert an LLC to an S-corp in Connecticut?
Yes, LLCs in Connecticut can be easily converted to S-corps.
Who is responsible for filing the Articles of Organization in Connecticut?
The owners of an LLC in Connecticut are responsible for filing the Articles of Organization.
Can LLCs in Connecticut issue different classes of equity ownership?
Yes, LLCs in Connecticut can issue different classes of equity ownership.
How do LLC members withdraw money from a company’s earnings in Connecticut?
LLC members can withdraw money from a company’s earnings in Connecticut through distributions or owner’s draw.
Are LLCs and S-corps required to have meetings of the owners in Connecticut?
Yes, LLCs and S-corps in Connecticut are required to have meetings for important company decisions.
Are there any restrictions on who can form an LLC in Connecticut?
No, restrictions on who can form an LLC in Connecticut.
Can an S-Corp be owned by a foreign IT/Software consulting company of India with no US employees?
Millions of small business owners are eligible to apply for the original Paycheck Protection Program without fear of the govt accusing them of wrongdoing.
Will a foreign IT/Software consulting company qualify to operate as an LLC in Connecticut?
As long as a registered agent of the company resides in Connecticut, a foreign LLC or foreign corporation is permitted to operate a business in Connecticut.
Will an LLC provide the same limited liability protection as an S-corp in Connecticut?
Yes, LLCs in Connecticut offer the same limited liability protection as S-corps.
Are there any annual fees for LLCs in Connecticut?
Yes, LLCs in Connecticut are required to pay an annual reporting fee.
Is it allowed to be an S-corp with less than 100 shareholders in Connecticut?
Yes, S-corps in Connecticut can have up to 100 shareholders.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Connecticut will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Connecticut and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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