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Editorial 9 MIN READ

Connecticut in December 2018: the state that wrote the first PTET

A $120 filing fee, an $80 annual report, a $250 biennial tax that still exists, and a May statute the rest of the country is now studying

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 6 sections
  1. The mechanics of forming
  2. Maintenance, and the $250 tax nobody mentions
  3. The individual rate, because most LLC members pay it
  4. The PTET, because this is the story of 2018
  5. Who Connecticut actually makes sense for in 2018
  6. Sources

Connecticut LLC costs $120 to form and $80 a year in annual report fees, and if no one has told you yet, it also owes a $250 Business Entity Tax every other year on top of that. Those three numbers are the recurring cost of a Connecticut LLC in 2018. Everything else, including the fact that Connecticut in May became the first state in the country to enact a pass-through entity tax, is context.

This is a guide for someone forming in Connecticut at the end of 2018, after Wayfair rewired nexus, after the §199A proposed regulations dropped in August, and after Hartford passed the statute most multistate tax practitioners are now reading on weekends.

The mechanics of forming

You file Articles of Organization with the Connecticut Secretary of the State, Commercial Recording Division. The statutory home is the Connecticut Uniform Limited Liability Company Act at Conn. Gen. Stat. chapter 613a, §§34-243 through 34-283d, which Connecticut adopted in 2016 (Public Act 16-97) and which took effect July 1, 2017. The 2017 revisions replaced Connecticut's older LLC chapter in full and aligned the statute with the Revised Uniform LLC Act.

The Articles form is short. It asks for the LLC's name, its principal office address, the name and Connecticut address of its registered agent, whether the LLC is to be manager-managed or member-managed, and an organizer signature. The filing can be done online through the concord-sots.ct.gov portal or on paper.

The standard filing fee is $120. Connecticut does not sell an expedited tier the way Delaware or California do; normal processing has historically run a few business days for online filings and longer for paper. If speed matters, file online and plan the cap table conversation for the following week, not the same day.

You will also need an EIN (the IRS issues one on Form SS-4 in the time it takes to load the page), an operating agreement (Connecticut expects one under §34-243d but does not require you to file it), and a decision about federal tax classification. Default treatment for a single-member Connecticut LLC is disregarded; for a multi-member LLC, partnership. An S election is made on Form 2553, and the Connecticut tax treatment follows the federal election. That federal election matters more in Connecticut than in most states in 2018, for reasons below.

Maintenance, and the $250 tax nobody mentions

Connecticut requires an Annual Report from every LLC registered in the state. The fee is $80. The report is due during the anniversary month of the LLC's formation each year; miss the window and the Secretary marks the entity delinquent, which shows up on a Certificate of Legal Existence request and will fail closing conditions in any transaction that requires one. There is no graduated late penalty stacked on top of the $80, but there is a fee to restore a forfeited entity if the delinquency runs long enough for administrative dissolution.

Separately, Connecticut assesses a Business Entity Tax of $250, payable every other year, on every LLC, LP, LLP, and S corporation formed or registered in Connecticut. The BET sits at Conn. Gen. Stat. §12-284b and has been biennial since Public Act 13-232 moved it off an annual cycle effective with tax periods beginning on or after January 1, 2013. A calendar-year LLC formed in odd-numbered years pays BET for the 2017-2018 biennium on or before April 15, 2018; the next $250 payment covers the 2019-2020 biennium and is due April 15, 2020. The tax is flat $250 regardless of revenue, income, or activity. An LLC that did nothing in 2018 still owes it.

The BET is the item most often missed by founders who form the LLC themselves, file the Annual Report on time, and then receive a Department of Revenue Services notice two years later asking for the tax plus interest. It is cheap enough that no one structures around it and expensive enough to resent when the notice arrives.

If the LLC has a C-corp federal election, it also owes Connecticut's Corporation Business Tax under chapter 208. The headline rate is 7.5 percent of net income, and a 10 percent corporation tax surtax applies for income years commencing on or after January 1, 2018 and prior to January 1, 2019 on companies with gross income of $100 million or more or that file combined or unitary returns. Most small LLCs electing C status will not hit the surtax. The Connecticut corporate minimum tax is $250, which runs parallel to the BET rather than replacing it.

The individual rate, because most LLC members pay it

For the owners of an LLC taxed as a partnership, disregarded entity, or S corporation, Connecticut's individual income tax does most of the work. Connecticut uses a seven-bracket structure under Conn. Gen. Stat. §12-700, ranging from 3 percent on the first $10,000 of taxable income for single filers (the bracket thresholds double for joint filers) up to 6.99 percent on income above $500,000 single / $1 million joint. There is no local income tax. A Connecticut resident pass-through owner reports distributive share income on Form CT-1040, and the federal flowthrough is a straight conformity pickup with adjustments for bonus depreciation and a handful of state-specific items.

The individual-level rate matters for the PTET math below, because the Connecticut pass-through entity tax is pegged to 6.99 percent, the top individual rate, and the individual credit is pegged to 93.01 percent of the tax paid at the entity level. Those two numbers are engineered to produce rough revenue neutrality at the state level for an owner in the top bracket.

The PTET, because this is the story of 2018

Senate Bill 11, signed into law as Public Act 18-49 on May 31, 2018, created the first true pass-through entity tax in the United States. The mechanic is codified at Conn. Gen. Stat. §§12-699 through 12-699a. Every partnership, S corporation, and LLC treated as a partnership or S corporation for federal purposes, with Connecticut-source income, is subject to a mandatory entity-level income tax at 6.99 percent on that income. The entity deducts the tax on its federal return as an ordinary trade-or-business tax, which places the deduction outside the individual SALT cap under IRC §164(b)(6). Individual Connecticut members then take a credit against their personal Connecticut income tax equal to 93.01 percent of their pro rata share of the PTET paid.

The deduction that moves from the individual federal return (where it is capped at $10,000) to the entity federal return (where it is not) is the entire point of the statute. For a Connecticut resident in the top bracket with significant pass-through income, the federal savings can meaningfully offset the state-level residual that the 93.01 percent credit does not wipe out. The gap between 100 percent and 93.01 percent is the administrative charge the state collects for running the mechanic. Published analyses during the legislative fight priced that gap at somewhere under 0.5 cents on the dollar for most top-bracket owners, and larger for members in lower brackets.

Three structural features matter for anyone forming a Connecticut LLC now. First, the tax is mandatory, not elective. There is no opt-out and no election form. An LLC with Connecticut-source income that files a federal partnership return is on the hook whether or not the workaround benefits its members. Second, the credit flows only against Connecticut personal income tax; a nonresident member cannot use the credit against home-state tax except to the extent that the home state's out-of-state tax credit rules recognize the Connecticut tax as creditable. A few states (Massachusetts and New York among them) have taken differing positions on that question, and the state of play is unsettled as of this quarter. Third, estimated payments are required at the entity level on the same quarterly cadence as individual estimates, which means a 2018 calendar-year LLC is already making payments against a first-time tax without final DRS form guidance in hand.

A longer piece from two weeks ago walked through why Treasury has not (yet) moved on PTETs the way it moved on charitable-fund workarounds in August. The short version: the PTET collects a real tax from a real taxpayer (the entity) on real income, which is structurally harder to attack than the charitable-fund variant Treasury closed in REG-112176-18.

Who Connecticut actually makes sense for in 2018

Three kinds of LLCs belong in Connecticut at the end of 2018.

The first is an operating business physically located in Connecticut with a few partners or S-corp shareholders who are Connecticut residents and who have real pass-through income. The PTET turns a federal SALT liability into a federal deduction, and the administrative cost of Connecticut maintenance ($80 annual report plus $125 per year of amortized BET) is well under the savings. For this profile the state is actively the right answer this year.

The second is a professional practice organized as an LLC or PLLC whose members are all Connecticut residents, all individually over the $10,000 SALT cap on their property and income taxes combined. The math is the same shape as the first case. Connecticut's PLLC rules sit alongside the general LLC chapter at §§34-265 through 34-283d and apply the familiar licensed-professional limitations; they do not disturb PTET eligibility.

The third is a holding or management entity whose operating subsidiaries are in Connecticut anyway. Forming the parent elsewhere and foreign- qualifying it in Connecticut has its own costs and does not escape the PTET, because the PTET reaches Connecticut-source income regardless of the entity's state of formation. An out-of-state LLC doing business in Connecticut is a foreign LLC that pays the foreign registration fee ($120), the annual report fee ($80), the BET ($250 biennial), and, if it has Connecticut-source income, the PTET. Connecticut formation for a Connecticut-operating entity is usually cheaper and simpler.

Connecticut does not make sense for an anonymous holding vehicle (pick Wyoming), a venture-backed C-corp headed for a priced round (pick Delaware), or a pure investment LLC whose members live elsewhere and whose income is not Connecticut-sourced. In those cases the PTET either does not apply or does not help, and the BET plus annual report are friction without offset.

The Wayfair decision in June rewired sales tax nexus for remote sellers, and Connecticut's economic nexus rules under Public Act 18-152 now reach sellers with at least 200 transactions and $250,000 in gross receipts into the state during the prior twelve-month period ending September 30. A Connecticut LLC that sells into other states now has to assume most of those states will reach back the same way. That is a sales tax issue, not a formation issue, but it is the other thing that changed about Connecticut's operating environment in 2018 and worth pricing into the decision to locate operations here.

If you are forming this month and the business is a Connecticut-sourced operating LLC with Connecticut-resident owners, file Articles of Organization online this week, calendar the April 15 BET deadline for 2020, calendar the anniversary month for the annual report, and start tracking 2019 PTET estimates. If the business is a holding vehicle with no Connecticut operations, Connecticut is probably not the right state; the PTET that makes this a 2018 story for Connecticut operating businesses does nothing for a holding vehicle that has no Connecticut- source income to begin with.

Sources

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