How to Start an S-Corp in Vermont

S corporations (S corps) in Vermont are a tax filing option that you can take when start your business. S corps offer the benefit of reducing tax liabilities through pass-through taxation. Pass through taxation is a special status recognized by IRS.

When companies choose this status, they don’t pay corporate income taxes. Instead, business profits are passed through on the owners according to the ownership percentages and are reported on their personal tax returns. However, in order to take advantage of this option, you first need to know fundamentally what an S corporation is. We’ll explain what it is and then how to file for an S corp in Vermont.

If you want an S Corp in Vermont, you first need to start a standard Vermont business. Fortunately, you don’t have to do it on your own. We can make business formation easy with our Vermont LLC Formation Service and our Vermont Corporation Formation Service. And once your business is up and ready to make an impact on the market, we can help keep your business successful and legally compliant with our extensive set of business development and compliance services.

Setting up an S Corporation in Vermont

To begin, an S Corporation is not a stand-alone entity like a C corporation (C Corp) or limited liability company (LLC). Rather, it is a federal tax election under the IRS, which confers the above-mentioned pass-through tax treatment on its shareholders. Now that you have a better idea, here’s how you create a business and then elect is as an S corp.

Step 1: Choose a name

How important is the name you choose for your Vermont S Corporation? It’s very important. Your business’s name is often the first introduction potential patrons have to your business. You also have to include your business’s name on your filings with the state and federal governments. You have a lot of latitude when choosing your business’s name, but you need to comply with the following guidelines: 

  • Include appropriate words or abbreviations that identify what kind of state business entity you’re running (e.g., “LLC,” “corp.,” etc.)
  • Exclude words that are unauthorized or imply an impermissible business purpose (for corporations)
  • Make sure your name is distinguishable from other names on record with the SOS (there are some exceptions to this rule)

Step 2: Appoint a Registered Agent

Your Registered Agent serves the very important purpose of receiving government and legal correspondence for your business. You can’t start an LLC or a corporation without a Registered Agent. Our Registered Agent Service can help you locate an agent to suit your business’s needs and help keep your business compliant with Vermont law. 

Step 3: Elect Directors or Managers

What’s a business without leadership? Probably not successful. In general, you need to choose leadership for your S Corp when you form it. A Vermont corporation needs to elect a Board of Directors to manage its affairs, and a Vermont LLC needs to decide whether its members or other managers will manage its affairs. 

Step 4: File Articles of Incorporation/Organization with the Vermont Secretary of State

Your Articles of Incorporation or Articles of Organization give the state important information about your business, including its contact information and key stock characteristics. We can handle this step for you.

Step 5: File Form 2553 to apply for S Corp status

Once you have your Vermont business formation filings out of the way, you can elect to make your business an S Corp. Depending on the state business entity you start, you might have multiple Vermont S Corp filing requirements.

Vermont LLCs and corporations can elect to be S Corporations by filing Form 2553 with the IRS. If you want your LLC to be an S Corp, you need to change your LLC’s tax designation to a corporation first by filing Form 8832. 

S Corporation Requirements and Limitations

Electing S Corporation status for your business can come with many benefits, but you normally don’t get those benefits without certain constraints. Before you can turn your business into an S Corp, the IRS requires that your business: 

  • Be a domestic business entity
  • Have only permissible corporation shareholders, including estates, individuals, and certain trusts — but excluding partnerships, non-resident immigrants, or corporations
  • Not have more than 100 corporation shareholders 
  • Have only one class of stock
  • Not be an ineligible corporation, such as an insurance company, a domestic international sales corporation, or a certain kind of financial institution

It’s easier for some businesses to comply with these rules compared to others. Even if it’s easy for you to operate your business within these parameters, it’s best to speak to legal and financial professionals about whether an S Corporation status fits with your needs and goals. 

Pros and Cons of creating a Vermont S Corporation

While it’s a good idea to speak to financial and legal professionals before making your final decision, a list of pros and cons can help you determine if running an S Corporation is right for you. We can help you with this list below. 

Pros

There are many benefits of an S Corp election, including:

  • More favorable characterization of income for taxes 
  • Asset protection
  • Pass-through taxation
  • The option to use cash method accounting

These benefits may or may not be worth it to you, especially if the cons of running an S Corp would impose too hefty a burden. 

Cons

S Corporation election can include some disadvantages, such as:

  • Restrictions on stock ownership
  • Heightened scrutiny from the IRS
  • Additional formation and maintenance requirements
  • Tighter tax qualification obligations

There might be other disadvantages that are unique to your business and probably need to be reviewed by a tax or legal professional. 

What to know before creating an S Corp in Vermont

Running an S Corp can be a great option for many, but that doesn’t mean it’s the best decision for everyone. It’s important that you review your business needs with financial and legal professionals to determine if running an S Corp is your best choice. If an S Corp election is the right choice for your Vermont business corporation, remember that your corporation is a C Corporation by default until you comply with the right rules to make it an S Corp. 

What is an S Corporation? 

An S Corporation is a small business corporation that enjoys certain “flow-through” tax benefits that aren’t available for all businesses. An S Corp has limited shareholders but isn’t subject to the double taxation imposed on other corporations. 

What’s the difference between an S Corp and a C Corp? 

C Corporations can have more shareholders and more business structure options than S Corporations. However, the difference that is probably most notable between S and C Corps is the tax liabilities.

C Corporations are normally subject to double taxation. This means that a C Corporation usually has to pay income taxes at the corporate level, and its shareholders have to pay taxes on their distributions from the corporate income. S Corporations can enjoy pass-through taxation.

This means the S Corp pays no federal income taxes at the corporate level, but the shareholders pay federal taxes on their shares of the corporate income. 

What are the requirements to create an S Corporation?

If you want to form an S Corp, you need to form a state business that complies with the rules we listed above and file Form 2553 with the IRS.

Can LLCs choose an S Corporation election?

Yes! LLCs can choose to be S Corporations. Just remember, LLCs have the additional filing requirement of electing to be a corporation before filing Form 2553. Many LLC owners choose to be S Corporations because there are additional tax benefits, such as more favorable self-employment tax obligations. Learn more about LLC tax obligations on our Tax Information for LLCs page.

We can help

You can reach your business goals much faster when you have help. We’re glad you’re on our page because we can really deliver assistance when you need it. We can help you become an S Corp owner quickly and properly with our S Corporation Formation Service. We’re here to support business owners every step of the way. Our many services can help you with the formation, compliance, and maintenance needs of your new venture.

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Vermont S Corp FAQs

  • Creating an S Corporation can give you the option to raise business capital through shareholders while enjoying asset protection and avoiding burdensome double taxation obligations.

  • The name you choose for your S Corporation really anything you want it to be, with a few qualifications.

    You generally have only a handful of rules to follow, including using words that identify what kind of state business you formed, excluding unauthorized words, excluding words that suggest an impermissible purpose.

    create a name that is distinguishable from other names on record with the SOS.

  • You can identify your LLC as an S Corporation by filing Forms 8832 and 2553 with the IRS.

  • A tax professional can best calculate the appropriate S Corp tax rate and tax obligations for your business.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Elect S Corp Status in Vermont