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Last Updated: 3/19/24

Thinking about starting an S corporation in Vermont? This tax status could be a game-changer for your business, especially when it comes to managing your taxes more efficiently. An S corp is not a type of business structure, but rather a tax option that businesses can choose to reduce their tax burden.

This is especially beneficial for owners of a limited liability company (LLC) in Vermont. Normally, all income an LLC makes would face self-employment taxes. However, if your LLC is taxed as an S corp, you can draw a salary from your business. The advantage? You’ll pay self-employment taxes only on the salary you give yourself. The rest of your income, taken as dividends, won’t be subject to these taxes, potentially saving you a significant amount.

This guide is here to walk you through how to start an S corp in Vermont, outlining the process to tap into these tax savings while helping ensure you comply with all the necessary regulations.

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. 

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’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.

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 as an LLC or corporation and then elect S corp status.

S-Corp Election Steps for LLCs

For detailed formation steps, see our Vermont LLC formation guide.

  • Step 1 – Choose a name
  • Step 2 – Appoint a Registered Agent
  • Step 3 – Elect Directors or Managers
  • Step 4 – File Articles of Incorporation/Organization with the Vermont Secretary of State
  • Step 5 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our Vermont Corporation formation guide.

  • Step 1 – Name Your Vermont Corporation
  • Step 2 – Appoint Directors
  • Step 3 – Choose an Vermont Registered Agent
  • Step 4 – File the Vermont Articles of Incorporation
  • Step 5 – Create Corporate Bylaws
  • Step 6 – Draft a Shareholder Agreement
  • Step 7 – Issue Shares of Stock
  • Step 8 – Apply for Necessary Business Permits or Licenses
  • Step 9 – File for an EIN and Review Tax Requirements
  • Step 10 – Submit Your Corporation’s First Report
  • Step 11 – Apply for S Corp status with IRS Form 2553

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. 

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. 

Get help establishing a Vermont LLC with S corp tax election

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

  • 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. 

  • 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.

  • 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.rnrnYou 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.rnrncreate 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.rn

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.

Elect S Corp Status in Vermont