In Connecticut, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations. A 7.5 percent corporation business tax for the privilege of doing business in Connecticut is imposed on companies carrying on, or authorized to carry on, business in the state.

Connecticut also has a capital stock tax that has to be paid by qualified corporations if the capital stock tax exceeds the net income tax described above. (Capital stock is the total amount of stock authorized for issue by a corporation.) For qualified companies, the tax is 3.1 mills per dollar of the sum of capital stock and surplus reserves, less average value of deficits and stockholdings of private corporations. The maximum of the capital stock tax is $1 million and the minimum is $250.

S corporations. For 2001 and later years, Connecticut S corporations are no longer subject to the corporation business income tax. This means that an S corporation does not have to pay state tax on a corporate level.

Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Connecticut taxable adjusted gross income their distributive share of partnership income.

Limited liability companies (LLCs). Connecticut law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Connecticut are treated in the same manner as under the federal income tax law (either taxed at individual tax rates or at corporate tax rates). Accordingly, your LLC will not be taxed on its net income if it is treated as a partnership. Instead, members must include in their Connecticut taxable adjusted gross income their distributive share of LLC income.