If you are planning to launch a business in Connecticut, one of the most important decisions you’ll need to make is choosing the right business structure. The two most popular options are Limited Liability Company (LLC) and S-corporation (S-corp) structures.
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Both LLCs and S-corps offer unique benefits and drawbacks, and which one suits your company best will depend on your specific needs and goals. In this article, we’ll explore the differences between LLCs and S-corps in Connecticut, so you can make an informed decision about your business structure.
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What is an LLC in Connecticut?
A Limited Liability Company, or LLC, is a hybrid business model that offers some of the benefits typically associated with both sole proprietorships and corporations. A Limited Liability Company combines the personal tax benefits that come with sole proprietorships and the financial protections a corporation offers.
Further Reading - Amend Idaho Certificate Of Organization
In Connecticut, starting and running an LLC is relatively easy and straightforward. You can create one by simply filing Articles of Organization with the Secretary of State. According to the CT Secretary of State website, the requirements are minimal (www.sots.ct.gov). After your LLC is formed, you will be considered a completely separate business entity, which gives your personal finances a layer of protection if the company is sued.
What is an S-corp in Connecticut?
S-corporations are similar to C-corporations in that they offer limited liability protection for their shareholders, meaning that individual owners will not be personally liable for business debts. However, S-corps are taxed differently from C-corps.
There are certain requirements you need to meet in order to qualify as an S-corp, such as:
- The company must have 100 or fewer shareholders.
- The shareholders must be US citizens or residents.
- The business must have only one class of stock.
In addition to any federal S-corp requirements, you will need to meet certain state requirements in Connecticut. This includes filing an annual report and paying a fee.
Differences Between LLCs and S-corps in Connecticut
There are some key differences between LLCs and S-corps in Connecticut in terms of tax treatment, ownership structures, and filing requirements.
Ownership Structure
One of the key differences between LLCs and S-corps in Connecticut is the way they are owned. LLCs can have an unlimited number of owners, known as members. The members can be anyone - individuals, other LLCs, corporations, etc.
On the other hand, S-corps are more restrictive in their ownership structures. An S-corp can have no more than 100 shareholders, all of which must be US citizens or residents. Additionally, S-corps can only have one class of stock, which means that all shares have the same rights and privileges.
Tax Treatment
LLCs in Connecticut are typically taxed similarly to sole proprietorships or partnerships. What this means is that the LLC doesn't pay federal income tax like C-corps do. Instead, the LLC's profits and losses are passed through to the individual owners' tax returns. In Connecticut, you will be required to file an annual report to the CT Secretary of State and pay a fee.
As for S-corps, they also pass through income to shareholders. However, it is important to note that S-corp shareholders need to pay themselves a "reasonable compensation" salary out of taxable earnings and pay a proportional payroll tax. Additionally, there is a $800 annual franchise tax in Connecticut associated with S-corps.
Filing Requirements
Another difference between LLCs and S-corps in Connecticut is their filing requirements. LLCs are required to file an annual report and pay a $20 annual fee. But S-corps require more paperwork, because you need to file a separate tax return (Form 1120-S). Payroll processing will also be more complex, as you will need to process payroll for yourself as an employee, meaning withholding income tax, paying FICA, and more.
The Bottom Line
Decisions, decisions...The decision ultimately comes down to what you want for your business and your goals. Both LLC and S-corp businesses in Connecticut offer protection against personal liabilities and streamline the formal organization of employees or groups of individuals with assets.
Overall, LLCs are often simpler and cheaper to set up and maintain, and may be the better option for smaller businesses. On the other hand, S-corps may offer more tax savings for larger companies. Be sure to weigh the benefits, restrictions, and implications of each respective business entity before deciding your business structure in the Connecticut jurisdiction, speaking to a Certified Public Accountant (CPA ) and attorney to help assess and circle up every source of concern and tax curiosities beforehand could be of incredible use in aiding to your decision.
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