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Vermont S Corporation
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An "S Corporation" is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (enacted in 1958 and periodically amended) and receives IRS approval of its request for Subchapter S status. As a legal entity (an artificial person), the S Corporation is separate and distinct from the corporation's owners (the stockholders).
Vermont S Corporation: Advantages and Disadvantages
Advantages of the S Corporation:- The independent life of the corporation makes possible its continuation, and the relatively undisturbed continued operation of the business regardless of incapacity or death of one or more stockholders.
- Fractional ownership shares are easily accommodated in the initial offering of stock.
- The purchase, sale, and gifting of stock make it possible to have changes in ownership without disturbing the corporation's ability to conduct business.
- The requirement that the corporation's finances and records be separate from the finances and records of stockholders reduces the risk of unrecognized equity liquidations.
- With only a few exceptions, under the Subchapter S election for taxation as a partnership the S corporation pays no income taxes and corporation income or loss is passed through direct to the stockholders.
- To the extent the corporate shield is maintained and other investments and savings of the stockholders are not at risk, the personal life of stockholders is simplified.
- The annual meetings of stockholders and consultations with legal counsel can provide stimulus for improved communication within the stockholder group (often a family group) and can provide more comprehensive guidance for management.
- Depending on the corporation's business record and the policies and practices of prospective lenders, access to credit and the ability to secure needed resources may be improved.
- Earnings representing "return on investment" (interest, rental payments, etc.) are not subject to self-employment tax as long as stockholder-employees receive adequate compensation for labor and management of the business.
Disadvantages of the S Corporation:
- Lenders may require personal guarantees from corporate officers as a condition of supplying credit, thus negating the limitation of liability.
- Conflicts or disagreements among the stockholders may immobilize decision making.
- Restrictions on the sale of stock and/or buy-back agreements included in the bylaws may prevent minority stockholders from being able to recover the value of their investment in the corporation.
- Through the processes of gifting and inheritance, stock ownership can become divided among many persons who are not active in the business and they may become a voting block that does not support needs and decisions believed desirable by managing stockholders.
- Over time, corporation paid benefits for stockholder-employees may become costly and exceed the ability of the business to pay.
- Employment benefits such as life insurance, health insurance, and housing costs are taxable income to stockholder employees with 2 percent or more stock ownership and to employees who are directly related to persons owning 2 percent or more of the corporation stock.
- If appreciated assets are owned by the corporation and the corporation is dissolved, significant income taxes on the appreciation amount will be generated.
Vermont’s Business Tax Climate Ranks 45th
Vermont ranks 45th in the State Business Tax Climate Index, which measures the impact on business of five major elements of the tax system: the percentage of income taken by all taxes, the individual income tax rates, the corporate income taxes, the sales tax rate, and the complexity of the tax system. Ranks of neighboring states are as follows: New Hampshire (5th), New York (49th) and Massachusetts (33rd).Vermont’s State/Local Tax Burden is Slightly Above the National Average
In 1990 Vermont had a significantly above-average tax burden (11.6% compared to a national average of 10.3%). Since then, individual incomes have risen faster than state/local tax collections. Yet, estimated now at 10.4% of income, Vermont’s state/local taxes are still higher than the national average of 10.0%.
Vermont has one of the Most Expensive Individual Income Tax Systems
Vermont’s income tax system is composed of five brackets with a top rate of 9.5% kicking in at $307,050. For families earning between $67,700 and $307,050, only Montana, Iowa, Oregon, and California have higher rates, while for incomes over $307,050, only Montana’s rate is higher. Vermont's 2002 individual income tax collections were $662 per person (22nd highest nationally).
Vermont’s Corporate Income Tax Rate is Among the Highest in the Nation
Structured with four brackets and a top rate of 9.75%, Vermont’s corporate tax structure is among the priciest in the nation. Only Iowa and Pennsylvania have a higher top corporate tax rate than Vermont. Despite the high rates, Vermont’s corporate income tax collections are among the lowest in the nation. In 2002, corporate tax collections in Vermont totaled $72.47 per capita.
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