How to Start an S-Corporation in Connecticut (2024 Guide)

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Start an S-Corporation in Connecticut

If you want to start an LLC in Connecticut, there are things that you should consider. Connecticut is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Connecticut, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

How to Form an S-Corporation in Connecticut

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Connecticut if qualified for the limitations and requirements.

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How to Form an S-Corporation in Connecticut?

To create S-Corp in Connecticut, you must follow the below guidelines that include forming a business name, hiring a Resident Agent, filing your Certificate of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Connecticut

After you have decided on the idea to start an S-Corp in Connecticut, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Connecticut Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Connecticut.
  • Limit of restricted words that need a license in Connecticut
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Resident Agent

The next step in starting an S-corp in Connecticut is hiring a Resident Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Resident Agent in Connecticut.

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Step 3: File For Certificate of Organization

The Certificate of Organization is an important document to start your limited liability company (LLC). Connecticut Certificate of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Organization to be filed in CT Secretary of State, you need to pay a filing fee of $120. In Connecticut, the filing fee of forming an LLC is $120.

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Step 4: Creating an Operating Agreement

After you have filed your Certificate of Organization, the next step is to create an operating agreement in Connecticut. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Connecticut can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, LegalZoom can get your EIN for you. Their EIN service is quick and hassle-free. For more details about EIN for your business, check on how to apply for an EIN in Connecticut.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Connecticut, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Connecticut, including:

  1. Filing Fees: When forming a corporation in Connecticut, you must file Certificate of Incorporation with the Connecticut Secretary of State and pay a filing fee of $250 for filing online, in-person and by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Connecticut are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Connecticut General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Connecticut are subject to the annual franchise tax, which can financially burden some businesses.

In an Connecticut S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Connecticut franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation in Connecticut?
An S-corporation in Connecticut is a type of corporation that offers the advantages of incorporation while being taxed like a partnership or sole proprietorship.
How do I qualify to file for S-corporation status in Connecticut?
To qualify for S-corporation status in Connecticut, you must be a domestic corporation that meets certain requirements, including having no more than 100 shareholders.
What are the advantages of forming an S-corporation in Connecticut?
An S-corporation in Connecticut allows for pass-through taxation, limited liability protection for shareholders, and potential tax savings.
How do I form an S-corporation in Connecticut?
To form an S-corporation in Connecticut, you must file articles of incorporation with the Secretary of State and apply for S-corporation status with the Internal Revenue Service.
What is required to maintain S-corporation status in Connecticut?
To maintain S-corporation status in Connecticut, you must file an annual tax return on Form 1120S and meet all other requirements set forth by the IRS.
Are there any eligibility requirements for shareholders of an S-corporation in Connecticut?
Yes, to be eligible to be a shareholder in an S-corporation in Connecticut, a person must be a U.S. citizen or resident alien and, in most cases, cannot be another corporation or LLC.
Can my S-corporation in Connecticut have non-voting stock?
Yes, an S-corporation in Connecticut can have non-voting stock.
What is the process for electing S-corporation status in Connecticut?
To elect S-corporation status in Connecticut, the corporation must file Form 2553 with the IRS.
What is the cost to form an S-corporation in Connecticut?
The cost to form an S-corporation in Connecticut varies depending on the complexity and size of the corporation, but it generally ranges from $100 to $500.
How long does it take to form an S-corporation in Connecticut?
It typically takes 1-2 weeks to form an S-corporation in Connecticut, although the timeline can vary based on the complexity of the corporation and the volume of filings at the Secretary of State’s office.
Do I need a lawyer to form an S-corporation in Connecticut?
It is not required to hire a lawyer to form an S-corporation in Connecticut, but it is recommended to ensure compliance with all applicable laws and regulations.
Can an S-corporation in Connecticut issue stock to the public?
No, an S-corporation in Connecticut cannot issue stock to the public.
Can an S-corporation in Connecticut owned by a single shareholder?
Yes, an S-corporation in Connecticut can be owned by a single shareholder.
How do I determine if my business qualifies for S-corporation status in Connecticut?
Your business can qualify for S-corporation status in Connecticut if it is a domestic corporation and meets certain eligibility requirements set forth by the IRS.
Are there any disadvantages to forming an S-corporation in Connecticut?
Some potential disadvantages to forming an S-corporation in Connecticut include the requirements for shareholders, ongoing management requirements, and potential limitations on the ability to raise capital.
Does an S-corporation in Connecticut need to create bylaws?
Yes, it is recommended and sometimes mandated to create bylaws for an S-corporation in Connecticut to govern how the business will be run.
Can an S-corporation in Connecticut change its tax status if needed?
Yes, an S-corporation in Connecticut can change its tax status if it no longer meets eligibility requirements or chooses to be taxed differently.
Is Connecticut subject to any special rules for S-corporations?
Connecticut follows the federal guidelines for S-corporations but also has its own guidelines for corporate taxation and compliance.
Can an S-corporation in Connecticut be owned by a foreign entity?
Generally, an S-corporation in Connecticut cannot be owned by a foreign entity, unless it meets certain requirements set forth by the IRS.
What are the personal liability risks for shareholders of an S-corporation in Connecticut?
Shareholders of an S-corporation in Connecticut are generally not personally liable for the obligations of the corporation.
Can an S-corporation in Connecticut take on debt?
Yes, an S-corporation in Connecticut can take on debt.
Can an S-corporation in Connecticut have multiple classes of stock?
No, an S-corporation in Connecticut cannot have multiple classes of stock; it is limited to one class of stock with no voting differences.
Are dividends distributed by an S-corporation in Connecticut taxable to shareholders?
Yes, dividends distributed by an S-corporation in Connecticut are generally taxable to shareholders.
How are profits and losses divided among shareholders of an S-corporation in Connecticut?
The profits and losses of an S-corporation in Connecticut are divided among shareholders based on their respective share ownership in the company.
What is the tax rate for S-corporations in Connecticut?
S-corps in Connecticut are subject to the state’s corporate tax rate of 7.5% (as of 2021).
Do shareholders of an S-corporation in Connecticut need to be paid a salary?
Shareholders of an S-corporation in Connecticut who are also employees must be paid a “reasonable salary” to comply with federal law.
Can an S-corporation in Connecticut’s directors be held liable for corporate debts?
Directors of an S-corporation in Connecticut can be held liable for corporate debts in certain situations, such as if they engage in wrongful acts or breach their fiduciary duty.
Does Connecticut require an annual meeting for S-corporations?
Connecticut does not typically require an annual meeting for S-corporations unless it is outlined in the corporation’s bylaws or an issue arises that requires a meeting.
What are the tax implications of disposing of assets in an S-corporation in Connecticut?
There may be tax implications for disposing of assets in an S-corporation in Connecticut, such as through capital gains tax or recaptured depreciation.
What is an S-Corporation?
S-Corporation is a corporation that meets certain Internal Revenue Service (IRS) requirements and elects to be taxed under Subchapter S of the Internal Revenue Code.
Can my LLC be an S Corp?
Yes, it is possible for an LLC to elect an S-Corp status from the IRS.
How do I form an S-Corporation in Connecticut?
To form an S-Corporation in Connecticut, you need to file articles of incorporation with the Connecticut Secretary of State’s office and obtain all necessary permits.
What is the advantage of forming an S-Corporation in Connecticut?
The advantage of forming an S-Corporation in Connecticut is that the shareholder’s personal liability is limited, and the corporation is taxed like a partnership.
Does Connecticut recognize S-Corporations?
Yes, Connecticut recognizes S-Corporations.
How much does it cost to form an S-Corporation in Connecticut?
The filing fee for a Connecticut S-Corporation is $100.
What is the deadline to file an S-Corporation in Connecticut?
There is no deadline to file an S-Corporation in Connecticut if it is a new business.
What are the requirements to form an S-Corporation in Connecticut?
To form an S-Corporation in Connecticut, you need at least one director and one shareholder and a registered agent.
How many shareholders can an S-Corp have in Connecticut?
An S-Corp in Connecticut may not have more than 100 shareholders.
Can a non-US resident form an S-Corp in Connecticut?
Non-US residents can form an S-Corp in Connecticut, but they must have a physical address in the United States.
What taxes do I need to pay as an S-Corporation in Connecticut?
S-Corporations in Connecticut must pay Connecticut income taxes, federal income taxes, and Social Security and Medicare taxes.
Can a single member LLC be an S-Corp in Connecticut?
Yes, it is possible for a single-member LLC to elect to be taxed as an S-Corporation in Connecticut.
Do I need an attorney to form an S-Corporation in Connecticut?
It is not mandatory to hire an attorney to form an S-Corporation in Connecticut, but it is recommended to seek legal advice before starting your business.
Can an S-Corp own another S-Corp in Connecticut?
Yes, An S-Corp may own another S-Corp in Connecticut.
What is the difference between an S-Corporation and a C-Corporation?
S-Corporation has certain tax benefits that C-Corporations do not, such as avoiding double taxation.
How is an S-Corporation taxed in Connecticut?
An S-Corporation in Connecticut is taxed like a partnership, meaning they do not pay federal taxes as a corporation.
How is an S-Corporation different from an LLC in Connecticut?
An S-Corporation and LLC are different business structures, but an LLC can elect an S-Corp tax status with the IRS if desired.
Can an S-Corp have multiple businesses in Connecticut?
Yes, an S-Corp may have multiple businesses in Connecticut, but it must be structured as a separate entity.
How often do I need to file taxes for my S-Corporation in Connecticut?
S-Corporations in Connecticut are required to file estimated payments, and the taxes are due quarterly.
Is there a minimum capital requirement for forming an S-Corporation in Connecticut?
No, there is no minimum capital requirement to form an S-Corporation in Connecticut.
What is a registered agent, and do I need one for my S-Corporation in Connecticut?
A registered agent is a person or entity that is responsible for receiving important legal documentation on behalf of your company, and it is required in the state of Connecticut.
How do I choose a registered agent for my S-Corporation in Connecticut?
The registered agent may be an individual, corporation, or LLC that is authorized to do business in the state of Connecticut.
Can I change the tax status of my S-Corp to a C-Corp in Connecticut?
Yes, an S-Corp can change its tax status to C-Corp in Connecticut or vice versa by filing the appropriate forms and meeting IRS eligibility requirements.
Can I convert my LLC into an S-Corporation in Connecticut?
Yes, you can convert your LLC into an S-Corporation in Connecticut, but you will need to file the appropriate paperwork with the IRS.
Is Connecticut an attractive state to form an S-Corporation?
Connecticut can be attractive to form an S-Corporation due to its thriving business climate, low filing fees, and robust support network.
What is the benefit of a hybrid entity?
It allows your corporation to have S-Corp status with some shareholders and other separate entity status with other shareholders in their portion of the business earnings.
Do S-Corporations require annual meetings in Connecticut?
Connecticut S-Corporations are not required to hold annual shareholder meetings, but it’s recommended to do so for clarity and organization of management.
Do I need to file a separate tax return if my S-corporation hasn’t yet begun trading?
As long as you have elected to be taxed as an S-Corporation; you should file your company’s annual form 1120S tax return whether or not your company has started trading in Connecticut.

Also Read

Why You Should Start Connecticut S Corp

One of the key benefits of choosing an S Corp as your business structure is the pass-through taxation. Unlike a traditional C Corporation, where income is taxed at both the corporate and individual level, an S Corp allows income and losses to pass through to the shareholders. This means that profits are only taxed at the individual level, potentially resulting in lower overall tax liability. For entrepreneurs in Connecticut, where state taxes can be significant, this can lead to substantial tax savings.

Additionally, an S Corp offers greater flexibility in terms of management and ownership structure. While a C Corporation requires a board of directors and strict operational procedures, an S Corp can be managed and owned by the shareholders. This can streamline decision-making and give owners more control over the direction of the business. In a state like Connecticut, where small businesses make up a significant portion of the economy, this flexibility can be a major advantage for entrepreneurs looking to start or expand their business.

Furthermore, choosing an S Corp can help mitigate personal liability. While both LLCs and corporations offer limited liability protection, an S Corp provides an extra layer of protection for its shareholders. This means that personal assets are shielded from business debts and liabilities, reducing the risk for business owners. In a state like Connecticut, where lawsuits against businesses are not uncommon, this added protection can give entrepreneurs peace of mind knowing that their personal assets are secure.

Another advantage of starting an S Corp in Connecticut is the potential for easier access to capital. When looking to raise funds for their business, S Corps have the ability to sell shares of the company to investors, allowing for greater flexibility in securing financing. Additionally, S Corps often have an easier time attracting top talent, as they can offer stock options to employees as part of their compensation package. In a competitive state like Connecticut, being able to attract and retain top talent can be crucial for the success of a business.

In conclusion, starting an S Corp in Connecticut offers a range of benefits that can help entrepreneurs succeed in today’s competitive business environment. From tax savings and liability protection to flexibility in management and easier access to capital, the advantages of choosing an S Corp are clear. For entrepreneurs looking to start or grow their business in Connecticut, choosing an S Corp as their business structure is a smart and strategic decision that can set them up for success in the long run.

Conclusion

Forming an S-Corporation in Connecticut can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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