You have weighed the pros and cons of chartering different entities. You do not plan to take your company public, but you like the personal asset protection a corporation provides its owners. You also like the idea that a limited liability company passes profits and losses to its owners, avoiding double taxation. Which way should you go?
You can have the best of two types of entities if you charter a corporation but elect the Internal Revenue Service designation as a Subchapter S. Although your company must meet some strict requirements, a Connecticut S-corporations lawyer could discuss if you meet the criteria. Speak with a diligent attorney at Sparks Law about why this subchapter might be right for you.
Corporations are legal entities with lives apart from those who own and manage them. They can sue and be sued by people and other corporations. They can enter into contracts, earn profits and go into debt, and pay taxes.
Although Subchapter C corporations pay federal and Connecticut state income taxes, Subchapter S corporations do not. They are considered pass-through entities (PE) that pass profits directly to shareholders, who declare them on their individual tax returns.
All domestic S-corporations and foreign S-corporations that transact business in the state must file Form OP-424, the Business Entity Tax (BET) Return, and pay the BET tax. Foreign S corporations are also required by the Secretary of State to obtain a certificate of authority.
All pass-through entities must file Form CT-1065/CT-1120SI, Connecticut Composite Income Tax Return, on a specific date after the close of their taxable year. S-corporations may have to submit a composite income tax payment on behalf of some nonresident members. A skilled local attorney could help with these filings for S-corporations.
S-corporation shareholders are allocated pass-through profits and losses depending on their percentage of the business. They can deduct losses on personal returns up to their cost basis, with some adjustments allowed. A Connecticut lawyer can advise an S-corporation shareholder about declaring profits and losses on personal income tax returns.
If a corporation files for bankruptcy, shareholders lose their initial investments, although none of their personal assets can be seized to satisfy corporate debt. Personal assets are involved when sole proprietorships and some partnerships fail.
When shareholders decide to incorporate as a Subchapter S, the incorporator must designate the choice and all shareholders must agree and submit documentation to the IRS. Not all corporations qualify. Some requirements Connecticut S-corporations must meet include the following:
Additional restrictions may apply. For instance, the type of business an S-corporation can engage in is limited. A Connecticut attorney could discuss a company’s goals to determine if they are a good candidate to become an S-corporation.
All corporations have similar duties as they operate into the future. Corporations adopt bylaws that memorialize how the company is managed. Shareholder and Board of Directors meetings are important, and the corporate secretary should record meeting minutes to be kept in the corporate records.
Corporations file annual reports to let Connecticut know of any changes to the registered agent or directors. Additional taxes, such as the BET, must be submitted. A dedicated lawyer can help an S-corporation stay on top of various filings to the Connecticut Secretary of State and the federal government.
Before you charter your company with the Connecticut Secretary of State, sit down with one of the skilled attorneys at Sparks Law about your entity choices. If you believe a corporation will suit your needs, you should understand your options for corporation designations.
A Connecticut S-corporations lawyer on our team can advise you of the advantages and restrictions associated with this IRS designation. Call for your initial consultation today.