When setting out to create your first business, deciding on a business structure is one of the initial steps. A business structure determines how your company operates, how it is taxed, and the level of liability you, as the owner, will shoulder. Making the correct choice of business structure is essential before moving on to other steps in the startup process.
The sole proprietorship is a widely chosen business structure in Vermont, and this article seeks to clarify why that is. Understanding what sole proprietorship entails, its benefits and potential drawbacks will arm you with the knowledge to determine if this particular structure is suitable for your business.
Related: Vermont Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is a type of business structure where a single individual owns and operates the business. This structure has no legal distinction between the owner and the business. This means the owner is personally responsible for all the business’s debts and liabilities, and all profits are directly tied to the owner’s personal income. It’s the simplest form of small business ownership, often chosen for its ease of setup and minimal requirements.
Other business structures include:
- General partnership: Like a sole proprietorship, except two or more persons share profits, losses, and control of a business.
- Corporation: This legal entity separates the owners’ personal assets from the company assets.
- Limited Liability Company (LLC): This structure provides the liability protection of corporations but is easier to administer.
Related: Comparison of Business Structures
Sole Proprietorship Advantages
Sole proprietorship represents a lot of Vermont businesses. Let’s look at why that might be.
- Ease of setup: In Vermont, you don’t need official registration to start a sole proprietorship with the state unless you wish to operate under a different name. This simplicity frees you to focus on your business.
- Lowest startup costs: This is the most budget-friendly option, as there are no heavy fees for setting up.
- Tax simplicity: Business income and losses flow directly onto the business owner’s personal tax return. While taxes still need to be filed properly, there are no separate business filings.
Sole Proprietorship Disadvantages
Like anything else, the sole proprietorship has its drawbacks.
- Unlimited personal liability: The major disadvantage is personal liability, as there’s no legal line between you and your business. You’re the boss and the business, all in one. Your personal assets could be claimed in case your business faces legal issues or debt.
- Potential tax disadvantages: Sole proprietors pay taxes on all business income at their personal income tax rate. Depending on income level, this may result in higher overall taxes than other business structures.
- Difficulty raising capital: As you can’t sell company shares as you could with a corporation or an LLC, it might be trickier to raise capital.
While sole proprietorships are simple and straightforward, they do have risks, especially when it comes to protecting personal assets. Unlike a sole proprietorship, an LLC provides limited liability, protecting personal assets from business-related debts or lawsuits.
Related: How To Start A Vermont LLC
Steps to Start a Sole Proprietorship in Vermont
Starting a sole proprietorship in Vermont is relatively simple. However, it’s important to understand all the steps to ensure your business is legally set up.
Step 1: Come Up with a Business Name
In Vermont, you can operate your sole proprietorship under your full name. However, if you prefer a distinct business name, you’ll need to register it. For instance, let’s say Sarah Johnson wants to start a maple syrup business. Instead of operating under her own name, she decides to use “Green Mountain Syrup.” In this scenario, Sarah would register “Green Mountain Syrup” as her Doing Business As (DBA) name. This process is governed by Vermont law, 11 V.S.A. § 1621, which outlines the requirements for registering an Assumed Business Name.1
Step 2: Verify Name Availability
Before registering your business name, make sure it’s unique in Vermont. Check existing names on the Vermont Secretary of State’s Corporation Division website to avoid conflicts or legal issues.
Related: How To Search Business Name Availability In Vermont
Step 3: File the Assumed Name Form
Once you’ve found a name that is available to use, to officially register your chosen business name, you’ll need to complete the Assumed Name form available on the Secretary of State’s website. Keep in mind that registering an assumed name in Vermont doesn’t prevent others from using it. If you want exclusive rights to the name, consider applying for a trademark through the U.S. Patent & Trademark Office (USPTO).
Related: How To Register a Vermont Assumed Name
Step 4: Research Business License Requirements
Before you start selling products or providing services, you’ll need to do a quick check on the specific licenses, permits, or registrations your business might need. This requirement is the same across business structures, but varies based on your business activity and location.
- Local business license: While Vermont doesn’t have a state business license, your city or county might require one. Check with local officials or your local economic development office to see what is needed.
- Business tax account: Most businesses in Vermont will need to register for a Vermont Business Tax Account through the Vermont Department of Taxes. This account allows businesses to register for a Vermont sales tax permit (or sales tax license), meals and room tax, and employer withholding tax.
- Professional licensing: Some professions are regulated by the state and require registration. For instance, barbers, athletic trainers, tattoo artists, and many others must have licenses. The Vermont Office of Professional Regulation’s website has more details, fees, and licensing requirements.
- Employer Identification Number (EIN): The Internal Revenue Service (IRS) requires an EIN for some businesses, including sole proprietorships that hire employees. Some banks also require an EIN to open a business bank account. If you don’t need an EIN, you will use your Social Security number when registering your business.
Related: Guide To Registering A Business In Vermont
Sources
- Vermont Statutes 11 V.S.A. § 1621 ↩︎
