How to Start a Sole Proprietorship in Vermont
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Starting a sole proprietorship in Vermont is a straightforward process that allows individuals to operate their businesses without significant setup or fees. While this business structure’s simplicity is appealing, additional steps can benefit sole proprietors and enhance their business operations. This comprehensive guide will walk you through starting a sole proprietorship in Vermont, from choosing a business name to maintaining detailed records. We will also explore the differences between a sole proprietorship and an LLC, providing you with the necessary information to make an informed decision for your business.
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What is a sole proprietorship?
A sole proprietorship is an informal business structure where an individual operates a business as the sole owner. It is the simplest and most common form of business ownership, popular with startups and entrepreneurs.
Sole proprietorships are characterized by their ease of setup and minimal legal requirements. As a sole proprietor, you have full control and decision-making authority over your business, but you are personally liable for any debts it incurs.
A step-by-step guide to starting your Vermont sole proprietorship
Choose a business name
As a sole proprietor, by default, your business name must match your legal name. If you wish to operate under a different name, you must file a “doing business as” (DBA). DBAs, also known as trade names, assumed business names, or fictitious names, essentially mean the same thing. Using a name other than your own can make you seem more professional and serve as an early marketing tool.
Here are the steps to registering your name:
- Choose a business name: Select a name that represents your business and aligns with your brand. Consider uniqueness, memorability, and relevance to your industry. A memorable name can go some way in establishing your business and drawing in new customers.
- Check availability: After brainstorming a few creative and memorable names, you must confirm they are available in Vermont.
There are two key resources to check:
- Visit the Vermont Corporation Division Business Name Search and search for your proposed name to confirm it isn’t already in use.
- Check the United States Patent and Trademark Office’s Electronic Search System to ensure you are not infringing on trademarks or intellectual property.
- Check online availability: Maintaining consistency between your website and social media handles is important. This helps enhance your business’s professionalism and makes it more accessible to potential clients and customers. You can start by checking if a .com domain is available for your business and also explore the availability of relevant social media usernames.
- Register the business name: Once you have confirmed that your chosen business name is available, you can register it with the Vermont Secretary of State. This can be done through the Corporations Division online business filings system or by requesting forms via emailing the Secretary of State. You must include a filing fee when you file for your new name.
Obtain an (Employer Identification Number) EIN
Sole proprietors without staff can use their Social Security Number (SSN) for federal tax purposes rather than registering for an EIN.
However, there are several advantages to proactively obtaining an EIN from the IRS as a sole proprietor:
- Opens up business banking opportunities: An EIN facilitates the opening dedicated business bank accounts, credit cards, and loans to keep finances separate from your funds.
- Helps establish business credit: Applying for credit under your new EIN rather than SSN allows you to build credit tied to your company’s financial profile.
- Eases hiring process: Obtaining an EIN is beneficial for adding employees in the future, as it distinguishes your business from your personal tax documents.
- Enhances business privacy: Your EIN replaces using your SSN on business paperwork, protecting your identity and personal information.
- Prepares for business growth: An established EIN can streamline transitions if you incorporate or change structure as your business grows.
You can apply for your EIN here.
Obtain Vermont business licenses, permits, and zoning clearances
There is no general business license requirement for sole proprietors in Vermont.
- While you do not need a general business license, you will probably need to apply for additional licenses and permits.
- The Vermont Secretary of State’s Business Startup Tool page has a useful page on Business Licenses that can point you in the right direction if you need extra licenses.
- The Vermont Office of Professional Regulation issues professional licenses.
- In addition to federal and state requirements, you may need to obtain local licenses or permits based on your business location. Each city or county in Vermont may have its licensing requirements.
- Some business activities (e.g., alcohol, firearms) may mandate particular permits or licenses from federal agencies. The Small Business Administration provides resources to identify federal licenses you may require.
Register for taxes
As a sole proprietor in Vermont, you are personally responsible for reporting and paying taxes on your business income. Unlike other business entities, sole proprietorships do not pay separate business entity taxes. Instead, your business income or losses are attached (Schedule C) to your income tax return (Form 1040).
You’ll also owe self-employment taxes, which you calculate and pay using Schedule SE when you file.
Access the information on how to fill in and the most current versions of Form 1040, Schedule C, and Schedule SE on the Internal Revenue Services (IRS) website.
Additional state and local taxes
- In addition to federal taxes, you may have to pay additional business taxes in Vermont. Consult the Vermont Department of Taxes for specific information on state tax requirements and filing procedures.
- The myVtax portal will allow you to register and pay for state taxes (such as sales tax) online.
- Depending on the nature of your business, you may be subject to additional state or local taxes. Research and understand any specific tax obligations to your sole proprietorship to ensure compliance.
Additional steps
After securing your EIN, signing up for federal taxes, and getting the necessary licenses, you’ve crossed off all the big tasks required to launch your sole proprietorship.
Next, we’ll share some additional steps to help keep your new business aligned with rules and organized.
Open business bank accounts
Keeping your personal assets safe and creating segregation with your business finances is vital. Opening a dedicated business bank account will help you move towards this:
Setting up a business bank account comes with a host of benefits, such as:
- Simplified bookkeeping and record-keeping: When your personal and business finances don’t mix, keeping track of what you earn and spend is much simpler.
- Facilitates accurate tax reporting: If you have a bank account just for your business, spotting and reporting business transactions on your tax filings becomes much easier.
- Demonstrates professionalism: A business-only bank account gives your business a professional look and feel, boosting your credibility with customers, suppliers, and banks.
Get liability insurance
Being a sole proprietor means that you alone are responsible for any business debts, which makes insurance a key piece of your business strategy. This can help guard you against unexpected claims or incidents. Here’s what we suggest you consider:
- General business liability insurance: This policy takes care of claims related to damage to property, physical injury, or personal harm that might be connected to your business.
- Professional liability insurance: This type of insurance is vital if your business provides services. It helps protect you from alleged negligence, errors, or oversights in your services.
Maintain business records
Keeping records is important for tax filing and managing your sole proprietorship’s financial affairs. You should make an effort to precisely track the following:
- Income
- Expenses
- Assets and liabilities
- Inventory
- Billing documents
Using bookkeeping software and spreadsheets or setting up a systematic method can help handle documents. Being as organized as possible will prove helpful when it’s time to file taxes, and it promotes the overall financial health of your business.
Sole proprietorship vs. LLC
While a sole proprietorship might seem appealing due to its simplicity and few legal needs, it’s vital to consider possible downsides and look into other types of business structures, like a Limited Liability Company (LLC).
Here are some things to think about when choosing between a sole proprietorship and an LLC:
- Protection from debt: One big plus of starting an LLC is its protection from debt. As a sole proprietor, you are responsible for any money owed or legal claims against your business, which could put your assets at risk. On the other hand, an LLC gives a clear divide between your personal and business assets, keeping your personal belongings safe from business debts.
- Looking professional: An LLC could make you look more professional in customers’ eyes. Starting an LLC shows more dedication to your business.
- Potential to grow: If you plan to make your business bigger or attract outside funding, an LLC gives you more room to grow than a sole proprietorship.
- Flexibility with taxes: One plus of a sole proprietorship is how simple it is when it comes to taxes. You usually report money made and money spent by your business on your personal tax return with a Schedule C. An LLC also offers flexibility with taxes, as it can be treated like a sole proprietorship, a general partnership, or a corporation for tax reasons.
It’s important to remember that starting an LLC involves more steps and legal needs, like filing Articles of Organization and paying filing fees.
FAQs
What is better, an LLC or a sole proprietorship?
While a sole proprietorship offers simplicity but does not protect against personal liability, your assets may be at risk if your business is sued. Forming an LLC offers personal asset protection, making it a better choice for mitigating risk and protecting your personal assets.
How do I make myself a sole proprietorship?
To become a sole proprietor, you must engage in business activities to make a profit. There is no formal filing or setup process required. However, depending on your business activities, you may need to obtain licenses, permits, and DBA registration.
Are sole proprietorships required to register in the state of Vermont?
Sole proprietorships do not have a formal registration process in Vermont. Once you engage in business activities, you are considered a sole proprietor. However, you may need to register a DBA name or obtain licenses and permits.
Can I have employees as a sole proprietor in Vermont?
Yes, as a sole proprietor, you can hire employees. However, obtaining an EIN for tax and administrative purposes is crucial.
Do I need a registered agent for my sole proprietorship?
No, there is no need for sole proprietorships to have registered agents. However, it is mandated for all Vermont LLCs to have registered agents.
What is the difference between a single-member LLC and a sole proprietorship?
A single-member LLC and a sole proprietorship both represent one-owner businesses. However, a single-member LLC is a separate legal entity that offers personal liability protection for its owner, shielding personal assets from business debts. A sole proprietorship, on the other hand, doesn’t provide this separation, leaving the owner personally liable for business obligations.
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