LLC vs S-Corp — Connecticut

Connecticut has a personal income tax with a graduated rate structure and a corporate business tax with a minimum tax component. The Connecticut Secretary of the State handles entity formation. The IRS handles federal tax classification via Form 8832 and Form 2553. A Connecticut LLC can elect to be taxed as an S corporation for federal purposes. Connecticut LLC basics. - Certificate of Organization filed with the Connecticut Secretary of the State, under the Connecticut Uniform Limited Liability Company Act (C.G.S. Chapter 613a). - Formation filing fee is $120. Source: Connecticut Secretary of the State (https://business.ct.gov/). - Connecticut LLCs must file an Annual Report with the Secretary of the State each year; the annual report fee is currently $80. - Single-member LLCs default to disregarded entity for federal tax. Multi-member LLCs default to partnership tax. Either can elect S corp treatment with IRS Form 2553. Connecticut state tax treatment. - Pass-through entities (LLCs taxed as partnerships, S corporations) are subject to Connecticut's Pass-Through Entity Tax (PET) under C.G.S. §12-699, an entity-level tax mandatory for most pass-throughs. The PET pays Connecticut income tax at the entity level and members receive a credit for their share; the structure was designed to work around the federal SALT cap. Rate and computation rules are set annually by Connecticut Department of Revenue Services (DRS). Verify the current PET rate and computation on the DRS page. Source: Connecticut DRS, Pass-Through Entity Tax (https://portal.ct.gov/DRS/Taxes/Pass-Through-Entity-Tax/Pass-Through-Entity-Tax). - Connecticut's Corporation Business Tax applies to C corporations at 7.5% of taxable income plus a capital-base component and a $250 minimum tax. Federal S corp election is respected for Connecticut purposes; S corporations are subject to PET rather than the Corporation Business Tax on pass-through income. Source: Connecticut DRS, Business Taxes (https://portal.ct.gov/DRS/Taxes/Corporation-Tax). Connecticut S corp basics. - Federal S corp election flows through to federal income tax only. Connecticut follows the federal S election by default. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. Connecticut has paid family and medical leave (CT Paid Leave) and unemployment insurance obligations through the Connecticut Department of Labor in addition to federal Social Security, Medicare, and federal unemployment tax. Why a Connecticut trades shop might elect S corp. Primarily for federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids federal self-employment tax. Both entity types are generally subject to Connecticut's PET on pass-through income, and both incur the same annual $80 report fee for LLCs (or $50 for stock corporations), so the federal payroll-tax math typically drives the decision. Rule of thumb. Start as a Connecticut LLC. Run the federal payroll-tax math against the cost of payroll, retirement plan, and accounting with a CPA. Evaluate the PET computation under your specific situation. Connecticut's mandatory PET changes the federal SALT-cap analysis and is worth reviewing annually.