In Vermont, 99% of the businesses are small businesses, making them a crucial part of the state’s economy. If you are thinking of joining this group and starting a business, you will need to make a number of decisions, including what type of business structure you will set up. Many people opt for a sole proprietorship, as it is a simple and inexpensive way to start a business.
However, there are other considerations to make when choosing a business structure. If you are considering a sole proprietorship, read on for everything you need to know.
What is a sole proprietorship?
A sole proprietorship is a business entity that refers to an unincorporated business with a single owner. This is the simplest possible structure to set up a business. While there can only be one owner, a sole proprietorship can have employees and obtain an Employer Identification Number (EIN).
As a sole proprietor, your business profits are taxed as a part of your personal income. This makes the process simple, but can also expose you to personal liability in some cases.
Who is a sole proprietorship best for?
A sole proprietorship makes sense if you:
- Plan to start a business where only you are in charge and intend for that to be the case going forward.
- Want to call your business something other than your legal name.
- Plan to hire employees
- Want to set up a business quickly
How to set up a sole proprietorship in Vermont
1. Choose your business name
Vermont law allows you to operate a sole proprietorship under a name other than your own. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the Vermont Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In Vermont, a business name must not:
- Match any other business name in the state
- Be misleading
- Use any certain government agency terms or abbreviations like FBI or EPA
2. File a trade name
Vermont requires you to register your business name, even if you will be operating under your own name. However, many people choose to operate under a different name. To do this, you will have to use the Assumed Name Registration process through the state. You can fill out and submit this form online and pay a $15 registration fee in order to secure your assumed name or fictitious name. These names cannot imply government affiliation, use discriminatory language, or use any indecent or obscene language.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your business, you may need to obtain a variety of business licenses or permits. This is managed by the Vermont Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
You should also explore local regulations like building permits and zoning clearances where appropriate.
There is no requirement from Vermont to obtain a general business license, but many businesses will need to obtain licenses and permits in order to operate compliant businesses in certain industries. The Licenses and Permits section of the state website lays out all requirements, including those that may go through other departments.
The city or county where your business is located may also have business license requirements. It is important to look at all local offices to ensure you are in compliance with their regulations. You will also need to look at local zoning regulations to ensure the area is able to accommodate your specific type of business.
4. Obtain an Employer Identification Number (EIN)
If you’re planning a new hire, you need to obtain an EIN. This nine-digit number is issued by the IRS and used for tax purposes when you need to report wages. You can file for an EIN online through the IRS website.
If you do not have employees, you can use your Social Security Number to file taxes and are not required to have an EIN. However, some banks will require small business owners to have an EIN to open a new business bank account, so you may want one anyway.
Once you have set up this form of business, you’re ready to operate! You can begin thinking about things like marketing materials, landing your first clients, and how you want to grow over time.
How is a sole proprietorship different from an LLC or freelancing?
A Vermont LLC is a limited liability company that can be formed by one or multiple people. The primary difference in an LLC is that it is a separate legal entity from the owner. In other words, your business and your personal assets are separate. With an LLC, taxes are filed separately and the business’ liability does not translate to the owner.
Setting up a sole proprietorship is simpler than setting up an LLC because it does not have the same business tax implications.
If you’re freelancing, you might wonder if you need to set up a sole prop. If you plan to hire freelancers, then yes. To hire others, you need a business structure like a sole proprietorship.
If you don’t plan to hire anyone, you can continue to freelance and pay taxes on the income without setting up a sole prop.
What are the advantages of a sole proprietorship in Vermont?
Simple way to start a business
Vermont sole proprietorships are incredibly easy to set up and do not require any filing process or fees at the outset. In fact, if you have done any freelance work or made money through a side hustle, you are technically operating a sole proprietorship. The simple and inexpensive start means you can quickly legitimize any business you are doing by opening a bank account and distributing formal marketing materials.
Your business remains yours
As the owner of a sole proprietorship, you have complete control of your business. Decisions will not need to take into account legal partners, shareholders, or partners, giving you the freedom to change your course or adjust as you learn about your business.
Easy transition to a corporation
Starting a business as a sole proprietor does not mean you will have to operate that way through the life of your business. At any time, you can convert a business to an LLC, corporation, or general partnership with the right paperwork and process. This allows you to feel out your business and settle on a model before you move to a corporate structure.
What are the cons of a sole proprietorship?
No personal asset protection
In a sole proprietorship, you are considered the same entity as your business, which means you are liable for any financial aspects of your business. If the business has a financial obligation that can’t be met, your personal money and property can be used to meet that obligation.
Less access to funding
A sole proprietorship may not be given the same access to business accounts and lines of credit as an LLC or a corporation. Government grants and funds awarded to small businesses are usually not available for sole proprietorships. You may also experience problems raising capital in the beginning since a sole proprietorship doesn’t carry the same credibility as an LLC or corporation.
Harder to sell your business
If your business grows to a place where you are profitable and have others interested in taking ownership, being structured as a sole proprietorship can present challenges. You would be subject to capital gains tax as part of the transaction, and any buyer would also be assuming liability for business debts.
How are sole proprietors taxed in Vermont?
With this type of business, taxes are a part of the personal tax return of each owner. Business profit is calculated and reported on a Schedule C form which is for Profit or Loss from Small Business.
A Schedule C will calculate the income of the startup, including all income and expenses, along with the costs of goods sold and costs for home-based businesses. The rest of the calculation is the net income, which is the amount of taxable business income.
This net income is entered on the Schedule C and included with other income and losses the owner (and their spouse) reports for the purpose of income taxes.
The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year. You can also pay estimated taxes quarterly.
Vermont has a progressive state income tax, with 5 bands of income set up. The personal tax rate ranges from 3.55% to 9.4% depending on income. In the case of a sole proprietorship, all business income will be treated as personal income in order to determine what band of taxes an owner falls into.
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietorship must pay Social Security and Medicare taxes. If the business operates at a loss, the tax is not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and property taxes that are applicable. Vermont has the fifth highest property taxes in the United States, with an average effective rate of 1.86%.
Most businesses will be subject to a Vermont Sales Tax at the state rate of 6%. The same rate is applied to a Use tax. Certain businesses, like those that sell food or alcohol, may be subject to additional taxes in the state.
If your sole proprietorship has any employees, you will also have to pay Vermont’s state payroll taxes, unemployment tax, and other taxes associated with employment. These are at the state level and you will not have any local employment taxes.
Most items and services sold in Vermont are subject to a 6% sales and use tax. Tangible personal property, including clothing and hygiene products, are included. Exempt items include clothing, over-the-counter drugs, feminine hygiene products, medical equipment and supplies, and food and beverages (excluding soft drinks). Most services are exempt, but not all.
Because the sole proprietor and the business are considered a single entity in Vermont, they are able to sign all contracts using their personal name. This is considered legally binding and the owner would absorb all liability associated with the contract they have signed, including the business’s debts, should they be incurred.
Similarly, customers and clients could write a check to the business by using the sole proprietor’s personal name or even transferring their funds.
In order to register an assumed name, you must first look at the Vermont registry to ensure no one else has the same name for their business. Once you have had your name approved and registered, no one else will be able to use the same name as their business name or assumed name. However, this will apply only in Vermont- businesses in other states could operate under that same name. A trademark will be applied nationally if you would like further protection.
A sole proprietorship is able to have employees as long as they are properly registered. This includes obtaining an Employer Identification Number from the IRS, a Withholding Account Number from the Vermont Department of Taxes, and an Employer Registration with the Vermont Department of Labor. This will allow them to report all employees and withhold taxes properly.
Any business in Vermont must register for a sales tax permit if they have a physical presence in the state and sell products and taxable services. Online vendors who sell items in Vermont or a business that has employees in Vermont are also required to register. For remote sellers, they must register if over $100,000 or 200 transactions are sold within Vermont annually.Income tax returns are not connected to sales tax.
Most services in Vermont are exempt from sales and use tax, with some exceptions. Short term lodging, admissions to a place of amusement, and any fabrication (such as printing, engraving, or taxidermy) are all subject to taxation.