While Vermont may be small, it boasts an attractive business landscape for entrepreneurs. Starting a business in this state can prove advantageous given its proximity to some of the world’s largest markets. Before you can launch your new venture, though, you’ll have to decide how to structure your business.
Choosing to be taxed as an S corporation (S corp) in Vermont can provide a number of benefits, including saving you a significant amount of money at tax time. Whether you plan to start a business in the state’s booming manufacturing or agriculture industries, run a small restaurant, or open a retail shop on one of Vermont’s quaint main streets, electing S corp status can benefit any type of business.
Read on to learn more about how to form your Vermont S corp as well as how to maintain it in good standing.
Not in Vermont? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Vermont
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Vermont S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
How to Form a Vermont S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Vermont
Starting a Vermont LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Vermont.
Be sure to choose a name that complies with Vermont naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Vermont LLC:
Your name must include the phrase “limited liability company” or “limited company” or one of their abbreviations (LLC, L.L.C., LC, or L.C.). The word "limited" may be abbreviated as "Ltd.," and "company" may be abbreviated as "Co."
The name of a low-profit limited liability company must contain the abbreviation “L3C.”
Your name cannot include words or phrases that, in context, falsely imply governmental affiliation.
Your name cannot include words or phrases that, in context, denigrate or defame people or groups based on race, color, religion, ancestry, national origin, sex, sexual orientation, gender identity, place of birth, age, or disability.
Your name cannot include words or phrases that, in context, depict or describe sexual or excretory organs or the activities or products thereof.
Your name cannot include words or phrases that, in context, appeal to the prurient interest; or depict, describe in terms patently offensive or threatening, or such words or phrases that imply such terms, regarding sexual conduct.
Restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual, such as a doctor or lawyer, to be part of your LLC.
Your name must be distinguishable from any existing business in the state. This includes Vermont reserved names.
You can also read the Vermont state statute about LLC naming guidelines for more information.
2. Is the name available in Vermont? You can use the business entity search on the Vermont Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Find a Domain Now
Step 2: Choose Your Vermont Registered Agent
You must elect a registered agent for your Vermont LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Vermont LLC Articles of Organization
The Vermont Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With the Vermont Secretary of State
- OR -
OPTION 2: File Form LLC-1(D) by Mail or In Person
State Filing Cost: $125, payable to the Secretary of State (Nonrefundable)
Vermont Secretary of State
128 State St.
Montpelier, VT 05633
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Vermont LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Vermont S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your Vermont S Corp Compliant
After you establish your business as an S corp, you must ensure it remains in good standing with Vermont’s guidelines and laws. This state will require you to not only file an annual report every year, but also stay up to date on your state and local taxes.
Vermont S Corp Annual Report
While your business may choose to be taxed as an S corp, the state of Vermont will still consider it an LLC and require it to follow all state guidelines.
Vermont requires all LLCs and corporations to file an annual report with the Vermont Secretary of State’s Business Services Division. (Nonprofits must file a biennial report.) These reports are due by April 1 each year regardless of a company’s fiscal year-end.
Visit our Vermont Annual Report guide for a step-by-step overview of the filing process.
Vermont S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Vermont S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Vermont Income Taxes
Vermont imposes a graduated income tax of 3.35% to 8.75%, depending on your income. This means business owners must pay a different tax rate based on their earnings. The less you make in a given tax year, for example, the lower percentage of income tax you’ll have to pay.
Vermont’s graduated income tax can benefit you as a business owner because you’ll have a lower tax burden in the years where your business generates less income. This can enable you to save more and reinvest in your business to help drive its growth.
Vermont Sales and Use Tax
The state of Vermont’s sales and use tax rate of 6% applies to all tangible goods and personal property unless they’re exempt. Municipalities within Vermont also have a local option tax of 1% that allows them to increase the sales tax to benefit these cities. To learn more, visit the state’s Department of Taxes.
Additional State Taxes
Vermont also has other state-specific taxes that your business may have to pay. Some examples of additional taxes that may apply to small businesses in this state include:
- Alcoholic Beverage Tax
- Cigarette and Tobacco Products Tax
- Wind-powered Electric Generating Facility Tax
- Fuel Tax
- Solid Waste Tax
Visit Vermont's Department of Taxes website for more information.
Vermont Local Taxes
In Vermont, cities can impose additional or specialty taxes on businesses. Check with your local government to ensure your business complies with local regulations and guidelines.
Start a Vermont S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Which Vermont businesses are S corps?
S corps can exist in many different industries across Vermont. For example, you can start a bed-and-breakfast, provide services for farmers, open a bakery, or even run an event planning business. As long as you meet all the requirements, you can elect S corp status for your business.
Is Vermont a good state for an S corporation?
Starting a business in the state where you plan to operate will always be the best location for you. With its graduated income tax and incredible location, Vermont offers a great environment for entrepreneurs. Starting your S corp in Vermont can save you money while giving you access to a talented workforce and a favorable business landscape.