Small businesses are doing well in Connecticut. Legal tools like the LLC and S-corp can help entrepreneurs succeed in this market.

Small business owners are finding success in Connecticut. According to the United States Small Business Administration's Office of Advocacy, there are 342,443 small businesses in Connecticut. This makes up 99.4 percent of businesses in the state. The agency also found that business owners who choose to incorporate their business were generally more successful than those that did not. A self-employed business owner with an incorporated business had a median income of $61,776 in 2016. This is much higher than the median income for a business owner of an unincorporated business during the same time period at $30,812.

Entrepreneurs that are considering incorporating their business have many options to choose from. These options can lead to many questions, including a request for the distinction between an LLC and S-corp. The following provides some guidance on this matter.

LLC and small business

A limited liability company (LLC) is a business structure that allows basic separation between the business owner's assets and the assets of the business itself. This shields the owner's personal assets from the business' liabilities. A second benefit is the relative ease when it comes to taxation of this structure. The taxes flow through to the business owner's personal tax return. This reduces the risk of double taxation that can occur with other business structures like corporations.

This formation option is of particular interest to business owners that earn $157,500 or less if filing a single return or $315,000 or less if filing a married tax return. This is because the new tax law will likely allow these business owners to qualify for a 20 percent deduction on business income.

S-corp and small business

Unlike the LLC, an S corporation (S-corp) is not a business structure. Instead, this designation refers to how the Internal Revenue Service (IRS) treats the business for tax purposes. Thus, an entrepreneur could set up an LLC with an S-corp designation for tax purposes.

A business owner may choose this designation to reduce tax obligations for Social Security or Medicare. This is because an S-corp designation results in the payment of Social Security and Medicare taxes on their own salary - the business profit is removed. This is a key distinction. The IRS expects the owner of an LLC that is designated as a sole proprietorship to count their salary as well as business profits in the Social Security and Medicare tax calculation.

Which is right for my business?

Entrepreneurs are wise to carefully consider each option before making a choice. It is important to note that there is often a time limit. A failure to make a designation within the given time can diminish your options. An attorney can discuss this and other implications to consider when choosing the right business formation for your interests.