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.

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.

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.

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