How to Start a Business in Connecticut

Connecticut, nicknamed “The Constitution State,” has been experiencing healthy business growth, with 44,637 new businesses starting in 2022. It’s not just large corporations thriving either- small businesses make up 99.4% of all businesses in the state. As of 2022, 360,127 small businesses were operating that employed 741,920 people. Connecticut is a perfect place to start a business that targets high earners because it ranks 6th highest for median household income at $79,855, which ranks higher than New York and California. For example, Connecticut is home to two of the top 15 highest-income cities with populations over 50,000 in Greenwich (4th highest at over $180,000) and Fairfield (15th highest at $150,000).

The cost of starting a business in Connecticut for sole proprietors and general partnerships is low, as registering a DBA costs only $5-$18 (the price varies from town to town). For more protection, you can also start your business as an LLC in Connecticut, which has a reasonable filing fee of $120. If you want to learn what it takes to get a business off the ground in Connecticut, read our 12-step guide below.

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1. Research and Plan your Business

The process towards starting a business in Connecticut demands a well-thought-of initial business plan and thorough research of the business idea. Before actually launching a start-up, conducting due diligence becomes necessary. Comprehensive market research, including analysis of your competitors, becomes essential in determining the potential factors for your business to succeed. Your research should provide a clear understanding of your target customers, your competitors, and how your product or service offers a unique solution.

When you have done your preliminary research, you can use this information to develop an in-depth business plan. Crafting a business plan is an essential part of launching and growing your new business. Despite the general view of having a comprehensive understanding of your business as a reason to forego the business plan, statistics show otherwise. In fact, according to a study by the Harvard Business Review, businesses who created a formal business plan were 16% more likely to succeed than their contemporaries who didn’t have a business plan. Therefore, putting in the effort to create a professional business plan will increase the likelihood of a successful start-up.

Recommended:Learn How to Craft a Winning Business Plan

2. Choose a Business Structure

Now, it’s time to move on to the next crucial step: selecting a legal structure for your business. It is important to carefully evaluate the level of personal liability risk you are comfortable with, determine the desired tax status, and identify your source of capital. These considerations will help you choose from the four most common types of business structures.

• Limited Liability Company (LLC)
• Corporation
• Sole Proprietorship
• Partnership

Limited Liability Company (LLC)

Limited Liability Companies (LLCs) are the most commonly adopted formal business structures for small businesses. An LLC is a distinct entity from its owners (also known as members), providing them with personal liability protection. This means that the members can rest easy knowing that their personal assets are safe if the business is sued or has outstanding business debts.

LLCs have numerous benefits, including a preferred pass-through taxation standard. However, they also have the choice to adopt C-Corporation or S-Corporation taxation standards. This flexibility is highly beneficial and is one of the main reasons why so many small business owners opt for LLCs.

Additional Information:What is an LLC and How Does it Work?

Corporation

Corporations are another option for business owners who want to establish a separate legal entity. The shareholders own a corporation through a percentage of shares issued as stocks. While setting up a Corporation has benefits and disadvantages, it offers extra liability protection. However, one thing to remember is that Corporations often have higher tax rates as they must pay corporate taxes before the profits are distributed to shareholders. Overall, establishing a Corporation means taking on additional responsibilities and important decisions that can be challenging but enhance your business ventures.

Additional Information:What is a C-Corporation?

Sole Proprietorship

If you’re looking for the most straightforward business setup for a single-owner enterprise in Connecticut, consider a Sole proprietorship. Sole proprietorships require no formal paperwork or registration is outside of the required business licenses and permits. But it’s important to note that while it’s inexpensive to start, sole proprietorships don’t offer liability protection. In case of legal problems or accumulated business debts, creditors can go after the owner’s assets to cover the losses. It’s a good idea to weigh the pros and cons of this business structure before making a final decision.

Additional Information:What is a Sole Proprietorship and is it a good fit for your business?

Partnership

When two or more people co-own a business, the simplest structure is a general partnership. It’s like LLCs in that they benefit from pass-through taxation – this means they don’t pay taxes directly. Instead, they pass profits or losses on to their owners, who then pay taxes on them.

General partnerships are also an informal legal structure, just like sole proprietorships. This means the business isn’t seen as separate from its owners in the eyes of the law. However, this has a significant downside. Members of the partnership have unlimited personal liability for their actions, leaving them open to risks associated with the business.

Additional Information:Partnerships Defined

3. Choose your Business Name

Now that you’re well-informed about legal structures, it’s time to shift our focus to the next step: choosing a great name for your Connecticut business. While you may be tempted to go with the first thing that comes to mind, thinking that your product or service is what matters most, remember that the name is what initially grabs attention. In fact, the choice of name can significantly impact the success of your business, as it plays a crucial role in your marketing efforts once your business is established. Therefore, it’s worth taking the time to select a good name.

If you find yourself lacking creativity and struggling to come up with suitable names, consider the three essential ingredients of a great business name: creating an identity, being memorable and easy to recall, and being easy to search and find. For a comprehensive guide on creating a remarkable business name, be sure to check out our resource: How to Come up with a Business Name

4. Register your Business

Following the choice of business structure and name, you must now turn your attention to getting your business in Connecticut officially registered. The procedure for this varies based on the business structure, so let’s go over each briefly.

• Register a Connecticut LLC
• Register a Connecticut Corporation
• Register a Connecticut Sole Proprietorship
• Register a Connecticut Partnership

Register a Connecticut LLC

Connecticut LLCs are formed by filing a document known as Certificate of Organization with the Connecticut Secretary of State, which has a filing fee of 120. Before doing so, you must determine if the name you have chosen is not already in use. You can do this by completing a Connecticut business name availability search. Once verified, you can file the Certificate of Organization. The filing must include the LLC’s legal name, the owner(s) contact information, address, and a designated Connecticut registered agent. While not legally required, you will also want to create an operating agreement to establish the basic rules of how your LLC will function, list ownership percentages, and detail voting rights.

Register a Connecticut Corporation

To form a Corporation in Connecticut, you must file a document called Certificate of Incorporation with the Connecticut Secretary of State, which has a filing fee of 400. Additionally, you will need to appoint a registered agent who will be able to collect service of process documents. Designing the bylaws and internal rules for operations is a key way that you can make sure your organization is set up for success.

Register a Connecticut Sole Proprietorship

At the state level, no formal filings are necessary to start a Connecticut sole proprietorship. Sole proprietorship owners are required to include their name in the business name. If you wish to carry out your business under a name that does not include your last name, you will have to register a Connecticut DBA, formally known as a Trade Name, with the city/town.

Register a Connecticut Partnership

Similar to sole proprietorships, general partnerships do not require the filing of any official documents to be set up. Also, they must apply for a Trade Name if they plan on doing business under a name that does not include the partners’ names. It is also recommended that the partners create a partnership agreement as it settles many arguments before they arise and outlines a few technicalities such as power distribution and the decision-making process.

5. Get an EIN

Once you have taken the steps to legally form or establish your business, you want to get an EIN. An EIN (an acronym for Employer ID Number) is an IRS identification number for tax filing and employment purposes. You can think of an EIN as the business equivalent of a social security number. Any business formed as a Corporation, Partnership, or LLC is required to obtain an EIN. Even if your business is not required to get an EIN, it’s highly recommended that you apply for one. EINs are required for many business filings and can be used in place of providing your SSN, which can help protect against identity theft.

6. Register for Connecticut Sales and Use Tax

As a business owner selling taxable goods or services, you play a crucial role as an intermediary for the state of Connecticut. Your responsibilities include collecting taxes from purchasers and remitting them to the Department of Revenue Services (DRS), which oversees the administration of sales and use tax in Connecticut.

How to Know if you need to collect Sales Tax in Connecticut?

To conduct business in Connecticut, it is necessary to register with the Connecticut Department of Revenue Services for a Sales and Use Tax Permit. This requirement applies to individuals who meet the following criteria:

• Selling physical goods for storage, use, or other consumption within the state.
• Providing taxable services within the state.

Businesses without a physical presence in Connecticut can establish economic nexus by engaging in retail sales of tangible personal property or services to a destination within Connecticut. If over the 12-month period ending on the September 30th immediately preceding the monthly or quarterly period that tax liability is determined, they make:

• 200 or more retail sales in Connecticut and
• a minimum of $100,000 in gross sales receipts in Connecticut.

Out-state sellers who offer repair or maintenance services for goods sold in Connecticut, whether directly or through an agent, independent contractor, or subsidiary, must register with DRS and acquire a Sales and Use Tax Permit.

For more detailed information visit the Connecticut Department of Revenue Services: Sales and Use Tax Information page or contact a qualified Connecticut tax professional.

7. Apply for Connecticut Business Licenses and Permits

To ensure legal compliance with federal, state, and local laws, it is important for your business to obtain one or more business licenses and/or permits. The specific licenses and permits required will vary depending on various factors, such as the nature of your business, the products and services you offer, the data you collect, and your location. It is crucial to understand and adhere to these requirements to operate your business smoothly and within the bounds of the law.

Federal Licenses and Permits

Your business may need a license or permit to operate legally if your business is involved in an activity that is regulated at the federal level, such as:

• Agriculture
• Alcoholic beverages
• Aviation
• Firearms, ammunition, and explosives
• Fish and wildlife
• Commercial fisheries
• Maritime transportation
• Mining and drilling
• Nuclear energy
• Radio and television broadcasting
• Transportation and logistics

For more detailed information on federal business licenses and permits visit the Small Business Administration: Federal Licenses and Permits page.

State and Local Licenses and Permits

Connecticut does not have a general business license at the state level, but local licenses are often required.For more detailed information visit the Connecticut State Departent of Consumer Protection Business License page.

8. Open a Business Bank Account

It’s essential to separate your business transactions and personal transactions to protect your personal assets. Mixing your personal and business banking activity is known as “co-mingling funds” and can cause your business severe problems. Not only does this make bookkeeping and accounting much harder, but it can also result in losing your limited liability status if you’re an LLC or Corporation. If you mix your personal and business funds, you can put yourself at serious legal risk if your business is sued by piercing the corporate veil.

By opening a dedicated business bank account and use it strictly for business activity, you can avoid these risks. To learn more about opening a business bank account, visit our detailed how-to guide. Our guide “How to Open a Business Bank Account” goes over how to choose a bank account provider and the documents you’ll need to open your account.

9. Set Up Credit Card Processing

For most businesses, it’s vital to accept credit card and debit card payments. Credit and debit cards now represent around 60% of all transactions over $10. As a result, accepting card payments is basically a requirement to stay competitive in the modern business environment.

For more information, see our guide, How to Accept Credit Card Payments

10. Establish an Accounting System

Setting up an accounting system allows a business to track business expenditures and create reports to gain insight into your business’ performance. By establishing an accounting system, you can quickly and easily create budgets, manage cash flow and generate the required financial reports to know how your business is doing.

For a more in-depth breakdown, visit our Small Business Accounting 101 guide. Covered in the guide are the steps to do small business accounting, including how to choose between cash basis and accrual basis accounting methods.

11. Get Business Insurance

One of the most overlooked aspects of starting a new business in Connecticut is obtaining business insurance. Having the proper business insurance coverage helps to mitigate your risk so that you’re covered in the event of an accident, natural disaster, or lawsuit.

In our Small Business Insurance Guide, we go over the six types of business insurance so that you can make sure you’re covered.

12. Hire Employees and Set Up Payroll

If you want help running your business, you’ll want to consider hiring employees and setting up a payroll. Employers are responsible for reporting new hires and verifying their employment status.

There are two items that employers must complete to be federally compliant when hiring new employees. You must verify that any employee is eligible for employment in the US and obtain a signed IRS Form W-4 to ensure you are withholding the correct amount for federal taxes. For more detailed information, visit the IRS page for Businesses with Employees.

Since Connecticut has a state level income tax, you’ll need to withhold taxes from your employees and remit them to the state. In addition to this you’ll also need to register for unemployment insurance. Luckily in Connecticut both of these registrations are done with the Connecticut Department of Revenue Services. For more specific information about your requirements as an employer in Connecticut visit the Reporting new employees in Connecticut page for more info.