Choice of entity refers to choosing the legal form for operating your business. A business may be operated as (1) a corporation; (2) a general partnership or limited partnership; (3) a limited liability company (LLC); or (4) a sole proprietorship. Each state has its own laws for the formation, operation, and maintenance of these business entities.

The primary considerations in choosing the best form for operating your business are (1) protecting your personal assets from the liabilities of the company; (2) tax strategies designed to deduct early losses, avoid double taxation, and convert ordinary income into long term capital gain at a lower tax rate; (3) an entity that will be attractive to potential investors and lenders; (4) an entity that allows you to offer equity incentives to employees (stock options); and (5) the cost of forming the entity and properly maintaining it—including filing the required documents with state agencies.

In Connecticut (CT), the choice of entity for operating a business is an important decision that affects legal liability, taxation, investment attractiveness, employee incentives, and administrative requirements. The options include corporations, general partnerships or limited partnerships, limited liability companies (LLCs), and sole proprietorships. Corporations offer limited liability protection but may lead to double taxation, whereas LLCs provide liability protection with pass-through taxation, avoiding the double tax. Partnerships can be general or limited, with the latter offering limited liability to some partners. Sole proprietorships are the simplest form with no separate legal entity from the owner, thus no liability protection. Connecticut law requires entities to file appropriate formation documents with the Secretary of State and adhere to state-specific regulations for operation and maintenance. Tax considerations, personal asset protection, attractiveness to investors and lenders, the ability to offer equity incentives, and the costs of formation and maintenance are critical factors when choosing the appropriate business entity in CT.