A sole proprietorship is owned and operated by one individual (the sole proprietor). Income earned by a sole proprietorship is reported on the sole proprietor’s individual income tax return. Because sole proprietors are not employees of their businesses and income taxes are not withheld from their income, estimated income tax payments may be required. Use the forms listed below to report income from a sole proprietorship.

• Advantages
  
  • Low start-up costs
  • Greatest control by owner
  • Minimum working capital requirements
  • Tax advantage to small owner
  • All profits to owner
• Disadvantages
  
  • Unlimited personal liability
  • Lack of Continuity
  • More difficult to raise capital

Form CT-1040ES: Estimated Connecticut Income Tax Payment Coupon for Individuals:

If you expect to owe $1,000 or more in Connecticut income tax for the year in addition to any Connecticut income tax withheld from earnings at another job or from a pension, you should make estimated payments. In general, four equal installments are due April 15, June 15, September 15, and January 15. This requirement applies to residents and also applies to part-year residents and nonresidents who have income derived from or connected with Connecticut sources. Income derived from or connected with Connecticut sources includes income from a business, trade, profession, or occupation carried on in Connecticut and income from any interest in real estate or personal property located in Connecticut or from intangible personal property to the extent it is used in a business, trade, profession, or occupation carried on in Connecticut. If your income fluctuates throughout the year, you may benefit from using the annualized income installment method. If you use this method, the size of the installments may vary depending upon the amount of income earned during each quarter.

See Informational Publication 2006(24), A Guide to Estimated Connecticut Income Taxes.

If you need information about the annualized income installment method, see Informational Publication 2006(25), A Guide to Calculating Your Annualized Estimated Income Tax Installments and Worksheet CT-1040 AES.

Both publications are available on the DRS website at w ww.ct.gov/DRS or from the DRS Forms Unit.

Form CT-1040: Connecticut Income Tax Return,
Form CT-1040NR/PY: Non-Resident/ Part-Time Resident - Guide / Form,
or Form CT-1040EZ:

After your taxable year ends, you must file a Connecticut income tax return on or before the fifteenth day of the fourth month following the close of your taxable year. Connecticut residents report their income on Form CT-1040 or Form CT-1040EZ. Nonresidents and part-year residents use Form CT-1040NR/PY. For most taxpayers, the income tax return is due on or before April 15. Most Connecticut residents may use the new Taxpayer Service Center (TSC) to WebFile their Connecticut income tax return. You may WebFile your Connecticut income tax return through the TSC if all of the following are true:

• You filed a Connecticut income tax return in the prior year;
• Your filing status is the same as the prior year;
• You are not filing Form CT-8379: Nonobligated Spouse Claim, with your return;
• You are not filing Form CT-1040CRC: Claim of Right Credit;
• You have no more than ten W-2 or 1099 forms showing Connecticut income tax withheld; and
• You are not claiming a credit for income taxes paid to more than two qualifying jurisdictions

A partnership is the formal relationship between two or more persons who join together to carry on a trade or business. The terms of the partnership are generally spelled out in a formal partnership agreement.

• Advantages
  
  • Ease of formation
  • Low start-up costs
  • Additional sources of venture capital
  • Broader management
  • Limited outside regulation
• Disadvantages
  
  • Unlimited personal liability
  • Lack of continuity
  • Divided authority
  • Difficulty in raising additional capital
  • Hard to find suitable partners

Partnerships are not subject to an entity-level tax and their items of income and deductions pass through to their partners. Partnerships may, in certain circumstances, be required to make composite income tax payments on behalf of their partners who or which are either nonresident noncorporate members or pass-through entities. nonresident noncorporate members or pass-through entities.

See Informational Publication 2006(22), Connecticut Income Tax Changes Affecting Pass-Through Entities, for more information.

A partnership must apply for a Federal Employer Identification Number (FEIN) from the IRS and register as a partnership with DRS for Connecticut tax purposes. An association of two or more people not required to apply for an FEIN and, with no partnership agreement, should not register as a partnership for Connecticut tax purposes. For example: persons who are mere co-owners of property that is maintained, kept in repair, and rented have not created a partnership for federal tax purposes and should not register as a partnership for Connecticut tax purposes.

A partnership with income from Connecticut sources must file Form CT-1065/CT-1120SI: Connecticut Composite Income Tax Return. Income derived from or connected with Connecticut sources includes income from a business, trade, profession, or occupation carried on in Connecticut and income from any interest in real estate or personal property located in Connecticut or from intangible personal property to the extent it is used in a business, trade, profession, or occupation carried on in Connecticut.

Where spouses are in an unincorporated business together, the business may, depending on the circumstances, be treated either as a partnership or a sole proprietorship for federal income tax purposes.

Treatment as a partnership: If spouses carry on the unincorporated business together, with each spouse having an equal say in the affairs of the business, providing substantially equal services to the business, and sharing in the profits and losses, the spouses will most likely be treated as partners in a partnership for federal income tax purposes whether or not they have a formal partnership agreement. “If spouses carry on a business together and share in the profits and losses, they may be partners whether or not they have a formal partnership agreement. If so, they should report income or loss from the business on Form 1065. They should not report the income on a Schedule C (Form 1040) in the name of one spouse as a sole proprietor.” IRS Publication 541, Partnerships. There are similar instructions in IRS Publication 334, Tax Guide for Small Business.

Treatment as a sole proprietorship: If one spouse is an employee of (and not the partner of) the other spouse, the unincorporated business will most likely be treated as a sole proprietorship for federal income tax purposes. “The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes …” IRS Publication 15 (Circular E), Employer's Tax Guide.

The proper federal tax classification of an unincorporated business (as either a partnership or a sole proprietorship) dictates how the business should register for Connecticut tax purposes.

A partnership may register in Connecticut as a limited liability partnership (LLP). A partner of an LLP is generally not liable for any debts or obligations of the partnership or another partner or partners. An LLP is treated like a general partnership for federal purposes, and an individual partner’s share of partnership debts and obligations relating to the everyday operations of the organization is not limited. LLPs may also be subject to the business entity tax.

See Form OP-424: Business Entity Tax Return

A limited liability company (LLC), including a single member limited liability company (SMLLC), is another entity created under state law with a legal existence separate and apart from its members.

• Advantages
  
  • Limited liability
  • Flexible management structure and ownership
  • Continuous existence
  • Legal entity
  • Easier to raise capital
• Disadvantages
  
  • More expensive to organize than a proprietorship or partnership
  • More regulations than a proprietorship or partnership

If you intend to form an LLC or if your out-of-state LLC intends to transact business in Connecticut, you should contact the Connecticut SOTS. Refer to link below and scroll to Chapter 9.

Getting Started in Business

The Connecticut tax treatment of an SMLLC and of an LLC with two or more members is the same as its federal tax treatment. Thus, if an LLC with two or more members is classified as a partnership for federal income tax purposes, it will be treated as a partnership for Connecticut income tax purposes. If an LLC with two or more members is classified as a C corporation for federal income tax purposes, it is treated as a C corporation for Connecticut corporation business tax purposes. LLCs treated as partnerships for federal income tax purposes that have income, gain, loss, or deductions derived from or connected with Connecticut sources during the year, must file Form CT-1065/CT-1120SI. LLCs may, in some circumstances, be required to make composite income tax payments on behalf of their members who are either nonresident noncorporate members or P/Es.

Similarly, if an SMLLC is disregarded as an entity separate from its owner for federal income tax purposes, it is disregarded for Connecticut income tax purposes and it is treated as a sole proprietorship, branch, or division of the owner. If an SMLLC is classified as a C corporation for federal income tax purposes, it is treated as a C corporation for Connecticut corporation business tax purposes. See Informational Publication 2006(22), Connecticut Income Tax Changes Affecting Pass-Through Entities. SMLLCs that elect to be treated as a sole proprietorship, branch, or division are not required to file Form CT-1065/CT-1120SI. LLCs may also be subject to the business entity tax.

See Form OP-424: Business Entity Tax Return

A corporation is an entity created under state law with a legal existence separate and apart from its shareholders.

• Advantages
  
  • Limited liability
  • Specialized management
  • Ownership is transferable
  • Continuous existence
  • Legal entity
  • Easier to raise capital
  • Unity of action account having centralized authority in board of directors
• Disadvantages
  
  • Closely regulated
  • Lack of Continuity
  • Charter restrictions
  • Extensive record-keeping necessary
  • Double taxation, except when organized as an S Corporation
  • Difficult to liquidate investment

If you intend to form a corporation or if your out-of-state corporation intends to transact business in Connecticut, you should also contact the Connecticut Office of the Secretary of the State (SOTS). Refer to link below and scroll to Chapter 9.

Getting Started in Business

C corporations pay the corporation business tax for the privilege of conducting business in a corporate capacity in Connecticut. A C corporation is a corporation that has not made an election to be an S corporation for federal income tax purposes. If your corporation is a C corporation, use Form REG-1, Business Taxes Registration Application, to register for the corporation business tax. Click the link “Getting Started in Business” and refer to “See Register With DRS” on Page 7.

Corporations calculate their tax under two alternative methods, tax measured by net income and the minimum tax, and remit the higher tax. The tax measured by net income: Federal net income is modified by certain additions and subtractions to compute Connecticut net income. Multistate corporations multiply their Connecticut net income by the appropriate apportionment fraction.

The Connecticut net income or apportioned Connecticut net income for multistate corporations is taxed at 7.5%.

The minimum tax: The Connecticut minimum tax base is the average value of issued and outstanding capital stock, surplus, and undivided profits and surplus reserves reduced by the average value of any deficit carried on the balance sheet and holdings of stock of private (non-governmental) corporations including treasury stock.

Multistate corporations multiply their Connecticut minimum tax base by an apportionment fraction based on the percentage of their intangible personal property and tangible personal property in the state. The Connecticut minimum tax base or apportioned Connecticut minimum tax base for multistate corporations is taxed at a rate of 3.1 mils ($0.0031) per dollar. The minimum tax cannot be more than $1,000,000 or less than $250.

Every C corporation and every other entity taxed as a C corporation for federal income tax purposes must file a corporation business tax return with the DRS on or before the first day of the month following the due date of the company’s corresponding federal income tax return for the income year (April 1 for calendar year taxpayers). In the case of any company that is not required to file a federal income tax return for the income year, the Connecticut corporation business tax return is due on or before the first day of the fourth month following the end of the income year.

A corporation whose estimated current year’s tax exceeds $1,000 must make estimated tax payments. The chart below shows the required estimated payments for all filers and the due dates for calendar year filers.

• 1st installment — March 15 30% of the required annual payment
• 2nd installment — June 15 70% of the required annual payment
• 3rd installment — September 15 80% of the required annual payment
• 4th installment — December 15 100% of the required annual payment

The required annual payment is 100% of the tax shown on the prior year’s return without regard to any credit, or 90% of the tax shown on the current year’s return, whichever is less. For more information regarding estimated business tax payments, see Informational Publication 2014(14), Q & A on Estimated Corporation Business Tax and Worksheet CT_1120AE.

Corporation business tax credits are available to new and existing businesses. See the Connecticut Business Tax Credits page on the DRS website. You may not use a tax credit to reduce a corporation’s tax liability below $250. In addition, the amount of tax credits otherwise allowable against the corporation business tax for any income year may not exceed 70% of the amount of tax due from the taxpayer prior to the application of the tax credits.

Every domestic S corporation is subject to the business entity tax and must file Form OP-424: Business Entity Tax Return. A foreign S corporation is subject to the business entity tax and must file Form OP-424 if it is transacting business in Connecticut and is required to obtain a certificate of authority from the Connecticut SOTS. See Chapter 9 of Getting Started in Business and Business Entity Tax (Form OP-424) on Page 36. S corporations are not subject to the corporation business tax. For federal and Connecticut tax purposes, S corporations are treated as pass-through entities.

Every domestic S corporation is subject to the business entity tax and must file Form OP-424: Business Entity Tax Return. A foreign S corporation is subject to the business entity tax and must file Form OP-424 if it is transacting business in Connecticut and is required to obtain a certificate of authority from the Connecticut SOTS. See Chapter 9 of Getting Started in Business and Business Entity Tax (Form OP-424) on Page 36. S corporations are not subject to the corporation business tax. For federal and Connecticut tax purposes, S corporations are treated as pass-through entities.

Except as noted below, S corporation shareholders who are individuals, estates, or trusts report their pro rata share of S corporation income on Form CT-1040, Form CT-1040NR/PY: Non-Resident/ Part-Time Resident - Guide / Form, or Form CT-1041: Connecticut Income Tax Return for Trusts and Estates - Guide / Form.

Additionally, pass-through entities must file Form CT-1065/CT-1120SI on or before the fifteenth day of the fourth month after the close of its taxable year. S corporations and other pass-through entities may be required to make a composite income tax payment on behalf of their nonresident noncorporate members or their members that are pass-through entities. See Informational Publication 2006(22), Connecticut Income Tax Changes Affecting Pass-Through Entities.

Benefit Corporation, known as a B-Corporation is a new type of business form in the United States that achieves two goals:

1. Produces money for its shareholders
2. Benefits society

Directors of a B-Corporation have to look out for the good of not only the shareholders, but the workers, community, and the environment when considering the effects of a decision. The organization should determine what kind of business decisions will positively impact society and the shareholders can justify if the b-corp is or not. Become Certified B Corporations if you meet the requirements of the nonprofit organization B Lab.