Start an S Corporation in Vermont

As part of forming a small business in Vermont, you need to decide on its business entity status. This decision affects many things, from how the IRS treats your business to the process you must complete to form the company.

This article dives into what you must do if you decide to form an S corporation in Vermont. It covers the steps for creating this business tax structure and compares this entity to a limited liability company (LLC).

S Corporation in Vermont: Key Points

• An S corp is a tax classification that allows a business to pass its income, deductions, losses, and credits through its shareholders.

• An S corp is similar to an LLC but offers more freedom for ownership transfers and better self-employment tax benefits.

• Business owners must form a C corporation or LLC before electing for S corp status with the IRS.

What Is an S Corporation?

The Internal Revenue Service (IRS) defines an S corporation (S corp) as a business entity that elects to pass its income, deductions, losses, and credits through its shareholders.[1]

An S corp does this for tax purposes, allowing each shareholder to report flow-through profits and losses on their personal tax returns. This flow-through taxation allows the shareholders to avoid double taxation in a C corporation (C corp) setup. However, it also opens up the shareholder to potential personal liability.

Given these restrictions, you may wonder why you’d choose an S corp for your business ahead of a limited liability company (LLC) structure. This article delves into the reasons later. However, S corps offer more freedom for ownership transfers and better self-employment tax benefits.

It’s crucial to note that S corp isn’t a business structure. Instead, an S corp is a tax classification designed to allow shareholders more control over their personal taxes.

Tax Considerations for an S Corporation in Vermont

Given an S corporation’s existence as a tax classification, the first thing you need to know about forming an S corp in Vermont is how the state handles S corp taxes. Let’s dive into the tax benefits and differences that S corp status offers in the state of Vermont.

Vermont Tax Treatment of S Corporations

Vermont treats S corps as pass-through taxable entities, similarly to how it treats LLCs and partnerships. This designation means taxable income and losses pass through the S corp to the company’s shareholders.

Each shareholder must submit a Vermont Income Tax return declaring the income, losses, and anything else passed through from the S corp to their personal account. Furthermore, the S corp must file a Business Entity Income Tax Return with the state to confirm its S corp status.[2]

Vermont Franchise Tax for S Corporations

Franchise tax in Vermont falls under the state’s standard corporation tax laws. If you have a franchise with an S corp structure, the franchise will likely need to submit Form BI-471, Business Income Tax Return, with a minimum tax of $250.[3]

However, if your business is solely owned by Vermont residents, you can complete BI-471, Business Income Tax Return (For Resident Only). Again, the minimum tax paid is $250 per year.[4]

Beyond that, all franchise shareholders must submit personal tax returns declaring the income and losses passed through to them via the franchise.

Pass-Through Taxation

A pass-through entity is an S corp, sole proprietorship, or partnership that isn’t subject to corporate income tax. Instead, the business reports income on its owners’ or shareholders’ individual tax returns.

This setup is easiest to demonstrate in a sole proprietorship. If you have this entity and are self-employed, the money you earn through the business goes onto your personal tax return. As a result, you essentially pay a self-employment tax for the pass-through tax treatment. But in practice, you’re simply paying tax on your income.

Things get more complicated with the S corp structure because multiple shareholders are involved. Each shareholder owns a portion of the business, with each divvying up the company’s income and losses based on these ownership stakes.

Nevertheless, Vermont’s tax treatment of each shareholder is the same. Each has to declare income and losses on their personal tax returns.

The plus side is that the business itself doesn’t have to pay an entity-level tax, such as corporation tax.[5] As a result, the shareholders only pay tax on income once, rather than losing money to corporation tax and then paying tax again on their personal income.

Requirements for Forming an S Corporation in Vermont

To achieve S corp status in Vermont, a corporation must meet the following criteria:

• Have 100 shareholders or less

• Be a domestic corporation based in the United States

• Have qualifying shareholders, such as individuals, estates, and some types of trusts

• Have a single class of stock

• Not fall under the IRS’s ineligible corporations umbrella, which includes insurance companies, some financial institutions, and domestic international sales corporations

As such, not all businesses can qualify for S corp status. For example, a large corporation with multiple classes of stock and thousands of shareholders can’t apply for S corp status.

Furthermore, the qualifying shareholders aspect can be a challenge. Non-resident aliens can’t be S corp shareholders. The same applies to corporations and partnerships.

As such, you must examine your business structure before deciding whether to apply for S corp status or form a limited liability company. At Swyft Filings, our online filing service ensures you meet all the requirements for an S corp.

Filing as an S Corp in Vermont

If you’re considering setting up an S corporation in Vermont, you need to understand the steps involved. Swyft Filings’ six-step process ensures you achieve S-corp status as quickly as possible.

Step 1: Choose a Business Name

Before you can form a business, you need to come up with a name. You’ll use this business name when completing your Articles or Organization and in your application to become an S corporation in Vermont.

The state has several restrictions for choosing a business name, including the following:[6]

• Can not contain discriminatory language, which the state defines as any language that the average person could construe as derogatory (i.e., you can’t base your name on race, religion, sexual orientation, or anything similar)

• Can not use obscene language, such as curse words

• Can not include indecent language, which covers words related to sexual organs or any non-curse words that may be offensive

Assuming your business name avoids these issues, finding out if it’s available is your next step. Our free business name search makes it easy to see if your chosen name is available.

Note that you can’t use the name if it’s in the Vermont database and has one of the following designations attached to it:

• Active

• Expiration Pending

• Terminated

• Reserved

• Registered

• Hold

You can use the name if it has one of these designations:

• Converted

• Merged

• Dissolved

• Inactive Expired

• Canceled

• Withdrawn

Name reservation in the state is optional, but you should decide on a name before submitting your Articles of Organization.

Step 2: Appoint Directors and a Registered Agent

As an S corp is a corporate structure, you must appoint directors to the company’s board. This process differs from forming an LLC, which only requires you to have members of the organization.

S corp directors help to run the corporation on behalf of themselves and the S corporation shareholders. They also handle the following duties:

• Establish the company’s mission and vision

• Handle all financial needs, such as business loans

• Set corporate policies

• Create and amend the corporation’s bylaws

• Approve decisions related to stocks and dividends

With your board of directors appointed, you must hire a registered agent for your S corp. A Vermont registered agent can be an individual, business, or nonprofit organization willing to handle service of process on your company’s behalf.[7] A registered agent must also do the following:

• Maintain a physical address where they can receive mail (can not be a mailing service or P.O. Box)

• Operate during normal business hours

Any owner or employee of a business can serve as their own registered agent. However, this comes with issues, including being forced to keep normal business hours and the time required for the role.

A third-party registered agent service is often a better choice for your small business. Swyft Filings’ registered agent service ensures you always have somebody on hand to receive legal documents and notices from the Vermont Secretary of State. 

Step 3: File Articles of Organization

With your registered agent assigned, your next step is to complete the formation documents for your company. If you’re forming an LLC, you must complete Vermont’s Articles of Organization. However, those forming a corporation fill out the Articles of Incorporation form.

You can do this online via the Vermont Secretary of State website. The process typically takes one business day, though this increases to seven to 10 days if you file via mail. You must also pay a filing fee of $125 as part of this process.[8]

Upon a successful application, your business receives a Certificate of Formation. It also must maintain good standing in the state, which means you must file an annual report each year. This report renews your business license.

Step 4: Create an S Corp Operating Agreement

The state of Vermont doesn’t require business owners to submit an S corp operating agreement to take advantage of this tax structure. That said, creating one may still be beneficial to your business.

An operating agreement defines how your business operates and how it’s structured. An agreement allows you to avoid internal debate because you have a document defining the S corporation’s rules. You can also use an operating agreement to override any external rules that would apply to your business without an agreement.

Ensure the following elements are in your operating agreement:

• Basic information about the company, including the identity of the shareholders

• Statements of management and voting rights

• A list of people who’ve made capital contributions to the company

• Rules for how you’ll handle distributions of income, losses, and dividends

• A process for handling membership or ownership changes

• A process for handling the company’s dissolution

• Any pertinent business bylaws you wish to apply to the S corp

Step 5: Apply for an Employer Identification Number

An Employer Identification Number (EIN) is like a Social Security Number (SSN) for your business. You’ll need one if your S corp has any employees because the IRS uses it to examine your employment taxes. Plus, most banks won’t allow you to open a business banking or checking account without an EIN.

Thankfully, the application process is simple. You can apply for an EIN via the IRS website if you’ve nominated an appropriate responsible party.[9] We can also handle the paperwork and obtain an EIN to help you complete this process quickly.

Note that an EIN doesn’t affect your personal income tax return.

Step 6: File Form 2553 for S Corporation Election

After completing the above steps, you’ve formed your business entity and can transact in Vermont. But there’s one more step before you achieve S corp status — file Form 2553, Election by a Small Business Corporation.

Form 2553 allows you to elect to form an S corp instead of a C corp when creating your business. It’s a crucial form to submit because the IRS assumes all companies registered as corporations are C corps by default. You’ll use Form 2553 for the S corporation election, allowing you to avoid the double taxation issue that affects C corps.[10]

You can submit Form 2553 at any point during the tax year prior to the tax year in which the S corp election will take place. Otherwise, you must submit the form up to two months and 15 days after the beginning of the tax year when the S corp election will take effect.

As a side note, LLC owners may have to complete an additional step. If it’s past the deadline for Form 2553 submission, you must file Form 8832, Entity Classification Election, to state you wish the LLC to be taxed as a corporation. Submit this form alongside 2553 to get S corp status.[11]

Vermont S Corp vs. Vermont LLC

While it’s clear that the S corp status bestows advantages for tax purposes compared to the C corp status, it’s less clear how it compares to a limited liability company structure.

This section weighs the pros and cons of a Vermont LLC against a Vermont S corp to help you decide.

Advantages of Starting an LLC in Vermont

• Protect your personal assets, such as your home, from creditors

• Gain pass-through tax treatment on your profits

• Contribute to the organization’s management without becoming a member of a board

• Start and maintain an LLC easily

Disadvantages of Starting an LLC in Vermont

• Limited liability doesn’t mean complete liability coverage (i.e., a judge may rule that an LLC structure doesn’t protect your personal assets, which they can’t do with an S corp)

• IRS classes LLCs as partnerships when handling tax, meaning you’ll pay self-employment tax

• Business may face dissolution when a member leaves

Advantages of Forming an S Corporation in Vermont

• Pay no federal taxes at the corporate level thanks to pass-through taxation

• Lower your self-employment tax burden

• Get a higher level of personal asset protection than LLCs

• Don’t worry about dissolution if a shareholder or LLC member leaves 

• Transfer ownership easily in the S corp structure 

• Gain more flexibility in terms of how you handle your taxes

Disadvantages of Forming an S Corporation in Vermont

• Must abide by corporate rules, such as maintaining a board of directors

• May have the IRS keeping a keener eye on your business, particularly in terms of ensuring each shareholder has a reasonable salary

• Must comply with the restrictions for S corp formation and maintenance, such as having no more than 100 shareholders

Ready to File for S Corp Status in Vermont?

Whether you form an LLC or corporate entity, Swyft Filings can help you. Our team has worked with over 250,000 businesses since 2015, ensuring each files documentation quickly and easily. Our experienced staff walks you through the necessary steps for filing for an S corp, in addition to completing much of the process on your behalf.

Would you like to learn more? Discover how Swyft Filings can help you form an LLC with S corp status or to incorporate under S corp status online.

Frequently Asked Questions

What is an S corporation in Vermont?

An S corporation is any business that has S corp status. This status allows for pass-through taxation in corporate entities.

Does Vermont recognize S corporations?

Yes, Vermont recognizes established S corps.

What is the turnaround time for filing for S corp status with the IRS?

The IRS can take up to 60 days to send your S corp determination result.

What is the difference between an S corp and an LLC?

Though both are pass-through tax entities, an LLC has members, whereas an S corp has shareholders and a board of directors.

What are the requirements for an S corporation in Vermont?

To achieve S corp status in Vermont, a corporation must meet the following criteria:

• Have 100 shareholders or less

• Be a domestic corporation based in the United States

• Have qualifying shareholders, such as individuals, estates, and some types of trusts

• Have a single class of stock

• Not fall under the IRS’s ineligible corporations umbrella, which includes insurance companies, some financial institutions, and domestic international sales corporations

Are taxes for LLCs and S corps the same?

No, they’re not the same. For example, LLC owners may have to pay a higher self-employment tax rate.

What is the S corp tax rate?

The tax you pay as a shareholder in an S corp depends on how much you pay on your personal income. You may pay a maximum federal income tax rate of 39.6%, in addition to state and local taxes between 0 and 13.3%.

How do I dissolve an S corporation in Vermont?

You must file Articles of Dissolution with the Vermont Secretary of State.

Bibliography

1. Internal Revenue Service. “S Corporations.” Accessed March 6, 2023.

2. Agency of Administration Department of Taxes. “Business Entity Income Tax.” Accessed March 6, 2023.

3. Vermont Department of Taxes. “Form B1-471, Vermont Business Income Tax Return.” Accessed March 6, 2023.

4. Vermont Department of Taxes. “Form B1-471, Vermont Business Income Tax Return (For Residents Only).” Accessed March 6, 2023.

5. Vermont Legislative Joint Fiscal Office. “Vermont Tax Structure Commission.” Accessed March 6, 2023.

6. Vermont Secretary of State. “Business Name Rules & Availability.” Accessed March 6, 2023.

7. Vermont Secretary of State. “Registered Agent Changes & Resignations.” Accessed March 6, 2023. 

8. Vermont Secretary of State. “Business Services Division.” Accessed March 6, 2023.

9. Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online.” Accessed March 6, 2023.

10. Internal Revenue Service. “About Form 2553, Election by a Small Business corporation.” Accessed March 6, 2023.

11. Internal Revenue Service. “About Form 8832, Entity Classification Election. “ Accessed March 6, 2023.