Key Takeaways

  • To start an S corp in Connecticut, you must first form a C corporation under state law, then file IRS Form 2553 to elect S corp status.
  • Connecticut requires specific documents like the Certificate of Incorporation, corporate bylaws, and annual reports to maintain good standing.
  • Naming rules, registered agent requirements, and EIN registration are all mandatory parts of the process.
  • S corps in Connecticut benefit from pass-through taxation but must still comply with the state’s business tax laws.
  • Connecticut has ongoing requirements such as franchise tax payments and annual filings.
  • There are limitations on shareholder types, stock classes, and business activities for S corporations.

A Connecticut S corporation is seen by the law as an individual entity and separate from its shareholders. In Connecticut, an S corporation must be 75 or fewer shareholders. The shareholders must file IRS Form 2553 with the Internal Revenue Service to select and receive this special tax designation. This happens after all official documents have been filed with the state.

Although the S corporation status results in a different taxation structure, they have shareholders, directors, officers, and follow the typical corporate structure. This includes meeting all state rules, designating a registered agent, filing annual reports, and maintaining a good standing with Connecticut.

S Corporation Formation

The State of Connecticut limits certain types of businesses from obtaining S corporation statuses including financial institutions and insurance companies. In addition, there are formalities that must be followed.

  • All shareholders must agree unanimously to the election for it to be valid.
  • Electing to be an S corporation remains effective for the entirety of the corporation's existence.
  • Documentation and meeting minutes must be kept for all board of directors and stockholder meetings.
  • All IRS requirements must be fulfilled and maintained for the length of time the corporation exists.

Step-by-Step Guide to Starting an S Corp in Connecticut

Forming an S corporation in Connecticut involves both state and federal steps. To ensure your business is compliant and eligible for S corp status, follow these core steps:

  1. Choose a Business Name
    Your name must include "Corporation," "Incorporated," "Company," "Limited," or their abbreviations. It must also be distinguishable from other businesses registered in Connecticut. You can check name availability and reserve a name for 120 days through the Secretary of the State for a $60 fee.
  2. Designate a Registered Agent
    You must appoint a registered agent with a physical address in Connecticut (not a P.O. Box). This can be a person or a registered business authorized to operate in the state.
  3. File a Certificate of Incorporation
    File online or by mail with the Connecticut Secretary of the State. You'll need to provide:
    • Business name and address
    • Registered agent information
    • Number and class of authorized shares
    • Incorporator’s name and signature
    • Email address and NAICS code
      The fee is $250 for up to 20,000 shares; additional fees apply for more shares.
  4. Create Corporate Bylaws
    These internal rules govern how your corporation will operate, including management structure, meeting procedures, and stock issuance. While not filed with the state, bylaws are crucial for corporate legitimacy and compliance.
  5. Appoint Directors and Hold an Initial Meeting
    Directors adopt the bylaws, appoint officers, authorize stock issuance, and take initial corporate actions. Document decisions in meeting minutes and store them in the corporate records book.
  6. Issue Stock to Shareholders
    Record contributions and issue stock certificates. Maintain a stock ledger and consider having a shareholder agreement outlining rights and obligations.
  7. Obtain an EIN from the IRS
    Required for tax filing and opening business bank accounts. You can apply online for free via the IRS website.
  8. File IRS Form 2553 for S Corp Election
    After incorporation, file Form 2553 within 75 days of formation or the start of the tax year. All shareholders must consent. This form designates your business as an S corporation for federal tax purposes.

Advantages of S Corporations

There are many advantages of S corporations. The top reason is the ability to avoid double taxation. This is achieved by passing income through to the shareholders. Other advantages include:

  • The corporation can continue fairly unaffected if a shareholder dies or is seen as incapacitated.
  • Shareholders have a limited liability for any debts, obligations, or legal judgments made against the corporation.
  • Shareholders, in most scenarios, will not lose more than they have invested in the corporation.
  • Shareholders are not liable for debts after bankruptcy.
  • Fractional ownership is more attainable at the initial stock offering.
  • The ability to gift, purchase, or sell stock resulting in a change of ownership won't negatively impact the corporation's ability to operate.
  • Income taxes are not paid by the corporation, instead, they are passed through to the shareholders.
  • Shareholders report any income and losses on their personal tax returns which allows for an offset of other income.
  • Any income or losses are based on ownership percentage.
  • Shareholders also eliminate risk and have a simplified overall experience due to the corporate shield provided.
  • Annual meetings maintain open communication and provide guidance between shareholders and management.

Corporations are perceived by the public as more secure than a sole proprietorship or partnerships. Employees benefit from stock options or bonuses, while owners who are also employees can access group insurance plans, retirement and profit sharing plans, and any bonus plans or tax-favored stock options. Connecticut S corporations are also audited less than sole proprietorships or partnerships.

Who Can Start an S Corp in Connecticut?

To qualify for S corporation status in Connecticut, your business must meet IRS eligibility criteria:

  • Must be a domestic corporation
  • May have no more than 100 shareholders
  • Shareholders must be individuals (not partnerships or corporations), certain trusts, or estates
  • Must have only one class of stock
  • Cannot be a bank, insurance company, or international sales corporation

Additionally, shareholders must be U.S. citizens or permanent residents. All shareholders must consent to the S corp election by signing IRS Form 2553.

Disadvantages of S Corporations

S Corporations do have disadvantages to consider:

  • If credit is needed, lenders may require personal guarantees which removes the protection of limited liability.
  • Shareholder disagreements may immobilize the corporation's ability to make decisions.
  • Corporation bylaws may include restrictions of the sale of stock or buy-back agreements that result in minority shareholders' inability to recoup their investment.
  • Stock ownership received through an inheritance or a gift may result in ownership that does not support the objectives and decisions of managing stockholders.
  • The corporation, over time, may be unable to pay stockholder-employee benefits that have increased in cost.
  • Life insurance, health insurance, housing costs, and other employee benefits are taxable income to any stockholder or employees related to stockholders who own 2 percent or more of corporation stock.
  • Upon dissolution of the corporation, stockholders will be liable for the income taxes on any asset that has appreciated in value over time.

Connecticut Taxation Requirements and Ongoing Fees

The taxation requirements and ongoing fees in Connecticut include:

  • The franchise tax fee which must be paid on the last day of the incorporation month and an annual report must also be filed at this time.
  • The franchise tax fee is $150 and is due at the time of incorporation and at any point when authorized corporations shares are increased through an amendment, merger, or similar actions.

For complete details on state taxes, visit the State of Connecticut's website. An Employee Identification Number (EIN) is required if the corporation has employees. The EIN is also necessary to open a business bank account in most cases. However, Connecticut does not require a state tax identification number.

Connecticut Business Tax Obligations for S Corporations

While S corporations benefit from pass-through taxation at the federal level, Connecticut imposes its own state-level business taxes:

  • Corporation Business Tax
    S corporations may still owe a state business tax, particularly if they have Connecticut-source income not attributable to shareholders individually. The minimum tax applies even with no income. Connecticut also has a temporary 10% surtax on certain corporations, depending on gross income and tax liability.
  • Annual Report Filing
    Due within 90 days of incorporation and annually thereafter. The $150 filing fee is paid to the Secretary of the State. The report includes business information such as the names of directors and officers, and the business’s principal office and registered agent details.
  • Sales and Use Tax Registration
    If your S corporation sells goods or taxable services in Connecticut, it must register with the Department of Revenue Services via myconneCT.
  • Employment Taxes
    If hiring employees, you must register for unemployment and withholding taxes. Filing is done through the DRS and Department of Labor.

Frequently Asked Questions

  1. What forms are required to start an S corp in Connecticut?
    You must file a Certificate of Incorporation with the Connecticut Secretary of the State and IRS Form 2553 to elect S corp status.
  2. How much does it cost to start an S corp in Connecticut?
    The Certificate of Incorporation costs $250 for up to 20,000 shares. Name reservation ($60) and annual report fees ($150) are additional.
  3. Do I need a lawyer to form an S corp in Connecticut?
    While not legally required, consulting an attorney can ensure compliance with both IRS and Connecticut regulations, especially for bylaws and stock issuance.
  4. How long does it take to form an S corporation?
    Online filings with the Connecticut Secretary of the State are typically processed within a few business days. IRS Form 2553 should be submitted within 75 days of formation.
  5. Can a single person start an S corp in Connecticut?
    Yes, a single individual can start an S corporation, as long as all IRS requirements for S corp eligibility are met.

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