In Vermont, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
Corporations. Domestic corporations (corporations organized in Vermont) and foreign corporations (corporations organized in a state other than Vermont) are subject to a Vermont income tax. The regular corporate income tax for 2009 is the greater of $250 ($75 for small farm corporations) or the following:
| Taxable Net Income |
Tax |
| $0 to $10,000 |
6.0% |
| $10,001 to $25,000 |
$600 plus 7.0% of excess over $10,000 |
| $25,001 and up |
$1,615 plus 8.5% of excess over $25,000 |
S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.
In Vermont, the law extends this favorable tax treatment to state corporate income tax liability, and S corporations will not be subject to the corporate income tax. However, S corporations must pay an annual $150 minimum tax, and must also pay tax on income distributed to or allocable to nonresident shareholders.
Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Vermont taxable adjusted gross income their distributive share of partnership income.
Limited liability companies (LLCs). Vermont law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Vermont are classified as either partnerships or corporations for Vermont tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership on the federal level, then it will not be taxed on its net income. Instead, members must include in their Vermont taxable adjusted gross income their distributive share of LLC income.
If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Vermont tax purposes.