A Connecticut LLC is a business entity that is taxable to both the state and the federal government. This means that LLCs owe taxes on their profits and losses as well as the income that the business earns. This is unlike a partnership or sole proprietorship that is exempt from taxes.
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Pass-through entity
Most LLCs are pass-through entities, meaning that federal income tax obligations fall solely on the LLC members. The state of Connecticut, however, imposes a separate Business Entity Tax. This tax is $250 per year and must be paid to the Department of Revenue Services by April 15 each odd-numbered year. The form to submit is available online.
The Connecticut pass-through entity tax has been implemented in response to the federal government's enactment of the Tax Cuts and Jobs Act of 2017. The Tax Cuts and Jobs Act (TCJA) limits state and local tax deductions to $10,000. As a result, the Connecticut legislature adopted a 6.99% tax on each entity conducting business in the state. The state coupled this new tax with a Connecticut income tax credit for owners, allowing them to deduct a portion of the tax.
Connecticut also enacted the Pass-through Entity Tax Exemption, which offers a work-around for SALT limitations. The PTET will provide a benefit to business owners by allowing them to deduct all state and local taxes, and it will be neutral for Connecticut's state tax purpose. However, out-of-state investors may not benefit from the PTTE exemption.
S corporation
There are specific rules for S corporations, including those related to taxes. The state also limits certain types of businesses from obtaining S corporation status, including insurance companies and financial institutions. In order to elect to become an S corporation, all shareholders must agree, and the election remains in effect for the life of the corporation. In addition, a corporation must keep records of all stockholder and board meetings, and must follow all IRS requirements. Another difference between an S corporation and an LLC is the amount of liability that shareholders bear.
If you do not intend to take your company public, you may want to consider a limited liability company. This type of entity passes profits directly to its owners, thus avoiding double taxation. If you have decided on a limited liability company, you may want to charter it as a corporation. This will require you to comply with IRS requirements, so it is recommended that you consult with a lawyer before choosing either type of entity.
Partnership
Connecticut has no state-level tax on partnerships, but it does require a partnership to register with the Department of Revenue Services for tax purposes. While Connecticut does not tax partnerships at the entity level, it does tax the income and expenses that they generate and pass along to the partners. If the partnership has nonresident partners, it may also have to file a composite income tax return.
If you have employees, you must also register with the state for unemployment and workers' compensation taxes. Additionally, since 2017, Connecticut has required pass-through entities to file income taxes. This includes LLCs, limited liability companies, and partnerships that elect to pay tax as a partnership. In addition, partnerships must register for Connecticut business taxes if they have five or more members.
Connecticut also offers an alternative method for calculating the PET. This method is intended to benefit businesses that generate significant amounts of intangible income and have a large percentage of individual Connecticut resident partners. It works by calculating the source income of each individual owner, while leaving out corporate owners and adding back the individual partners' share of intangible income.
Limited liability company
If you're forming an LLC in Connecticut, you should know that there are a few requirements. The state requires that your LLC have one or more managers or members and a physical address. In addition to the owners, you should list a registered agent as well. During business hours, this agent must be present at the address and be willing to answer questions on behalf of the LLC.
An annual report is also required by the state of Connecticut for every LLC. This report is a form that confirms foundational information about your LLC, such as the name, registered agent, and other basic details. The information you include in the annual report must be the same as the information on your Certificate of Organization.
If your LLC has more than one member, it will need to obtain an EIN. The EIN is important because it is often required for you to open a bank account or to register for certain taxes, such as sales tax. Additionally, if you have employees, you will need to register for withholding taxes. While you can obtain this number from the IRS website, it's best to consult with an attorney if you have questions or need assistance.
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