How to Start a Sole Proprietorship in Connecticut

While obtaining an Employer Identification Number (EIN) is not mandatory for sole proprietors without employees, it is recommended.

An EIN is a nine-digit number issued by the Internal Revenue Service (IRS). It serves as a unique identifier for your business and can provide several benefits:

• Opens up business banking opportunities: Having an EIN allows you to open a business bank account separate from your accounts. This separation helps you maintain clear financial records and simplifies tax filing.
• Helps establish business credit: With an EIN, you can start building a separate credit history for your business, which may be beneficial when applying for loans or lines of credit.
• Eases the hiring process: If you plan to expand your sole proprietorship and hire employees, having an EIN is necessary for payroll tax reporting and other employment-related requirements.
• Enhances business privacy: Using an EIN instead of your Social Security Number (SSN) on invoices and contracts adds an extra layer of privacy and identity protection.
• Prepares for business growth: If you have plans to grow your business and potentially convert it into a different business entity, such as a Limited Liability Company (LLC) or a corporation, having an EIN is a crucial step in the transition process.

Depending on the nature of your business, you may need to obtain specific licenses, permits, and zoning clearances at the local, state, or federal level.

• Connecticut doesn’t require a general state-level business license. However, any business with a physical presence in the state that sells, rents, or provides a taxable service must register for a sales and use tax permit. You can register for the permit using the myconneCT portal.
• Depending on your business type, you may have to apply for additional industry-specific licenses. For example, alcohol and aviation are regulated by the federal government, and additional licenses are needed. You can find more information on the Small Business Administration website.
• The Connecticut Department of Consumer Protection website is a valuable resource for working out what necessary licenses and permits you may need.
• The CT license and permit center provides a digital assistant to help find the most common licenses required in your industry.
• Certain Connecticut counties may have their own local licensing requirements. Check your county and city website to see if there are any local regulations to be aware of.

Additional state and local taxes

• In addition to federal taxes, Connecticut imposes certain state and local business taxes on businesses.
• The most common state tax for sole proprietors is the Connecticut business entity tax, which applies to corporations and sole proprietorships. The amount of the tax varies based on the business’s annual gross receipts.
• Depending on your business activities, you may also be subject to sales tax and use tax.
• Consult the Connecticut Department of Revenue Services to understand and fulfill your tax obligations.
• The newly launched myconneCT website is a helpful online tool that can help determine which taxes your business owes and you can automatically register to pay these.

Keeping your business and personal finances separated is key for accurate recordkeeping and protecting your assets. Think about opening:

• Business bank account: A dedicated business account to manage income, expenses, and transactions maintains clear separation from your funds. This also lends credibility when working with vendors or applying for financing.
• Business credit card: Opening a card in your business’s name further segments spending and builds credit history specific to your company’s financial profile.

Sole proprietors carry unlimited liability for business obligations, so insurance is critical. Policies can shield against unexpected claims or events. Consider:

• General business liability insurance: Covers claims of property damage, bodily harm, or personal injury resulting from your operations.
• Professional liability insurance: For service providers, it protects against alleged negligence, errors, or omissions in delivering your services.

Maintaining detailed records is key to optimizing tax deductions and keeping your sole proprietorship’s finances in order. You should aim to accurately record:

• Earnings
• Costs
• Assets and debts
• Stock
• Invoices

Using bookkeeping software, spreadsheets, or implementing a structured system can help manage documents. This will be beneficial for tax submission and maintaining the overall financial well-being of your business.

For certain small business owners and startups, forming a limited liability company (LLC) may be better than operating as a sole proprietorship. LLCs have some key advantages:

• Liability protection: LLCs legally separate your personal and business assets, which sole proprietorships do not.
• Credibility: The formal LLC structure appears more professional to customers.
• Growth potential: LLCs are well-suited if you aim to expand your business over time.
• Tax flexibility: LLCs allow you to choose how your business income is taxed.

However, LLCs also have some downsides:

• Complexity: LLCs require you to fill in articles of organization and draft an operating agreement and annual reporting. Sole proprietorships involve less paperwork.
• Cost: Forming and maintaining an LLC has higher upfront and ongoing costs than a sole proprietorship.

• Connecticut Secretary of State’s website
• Connecticut business name search
• US Patent and Trademark Office’s trademark database
• Connecticut Town Clerks Association website
• Form 1040
• Schedule C
• Schedule SE
• IRS website
• myconneCT portal
• Small Business Administration website
• Connecticut Department of Consumer Protection website
• CT license and permit center
• Connecticut Department of Revenue Services