An Introduction to Doing Business in Vermont

Starting a business is one of the most important decisions a person can make in his or her life. The long hours, the financial rewards, and the satisfaction of being one's own boss are just some of the many reasons why people choose to start their own business. A fact of starting and running a business is that it involves legal issues. These pages are designed to help you with understanding some of the basic legal issues which a person must answer before starting a business.

In the end, each start-up business is unique so the answer to many questions will depend upon the particular facts and circumstances of your business. In this regard, there is no substitute for professional legal and accounting advice, but this guide should make it easier to understand the advice you receive.

DOING BUSINESS AS A CORPORATION

Most people are familiar with corporations through their everyday experience with commerce. Most of the major commercial and retail enterprises that we patronize are corporations, some of which are publicly owned by many shareholders whose shares are traded on stock exchanges. At the other end of the spectrum, far removed from Wall Street, there are the many small corporations which bring commerce to the Main Street of all of our Vermont communities.

A corporation is treated as a person under the law. Certainly not a human person, but a legal person nonetheless. By thinking of a corporation as a person, it is easier to understand why creating a corporation is a matter of legal forms and procedures. The corporation must be "born." This is done by filing articles of incorporation and a fee with the Corporations Division of the Secretary of State's Office. By filing the articles of incorporation, you are requesting that a certificate of incorporation be issued. When the Corporations Division issues the certificate of incorporation the corporation has a name, birth date, place of business, and the legal status to own property.

The greatest advantage to operating a business as a corporation is that the corporation, and not its shareholders, is liable for the debts and obligations of the corporation. While there are exceptions to this general rule, the basic operating principle is that the owners of a corporation cannot be held personally liable for corporate acts. This is the fundamental difference between operating as a corporation as compared to a sole proprietorship.

The "person" who is liable for the corporation's debts is the corporation itself, and if there are insufficient assets to pay off the corporation's debts, then the creditor can be left with an unpaid debt. This means that if the corporation rents office space and falls behind on the rent, and it goes out of business without paying the rent, then the landlord cannot sue the shareholders for the unpaid rent. If the corporation has no assets, then the landlord does not get paid. This can be important to those who, while starting their business, are concerned that not all of their assets be exposed to the risk of starting a business. Of course, creditors realize this and so many creditors of start-up corporate businesses will require that the shareholders personally guarantee the corporation's obligations. Nevertheless, the general rule is that shareholders are not liable for the corporation's obligations, unless they do something to make themselves responsible (like give a personal guarantee).

A second issue to consider is that forming a corporation involves formalities that include filing documents with the Secretary of State's Office, the federal Internal Revenue Service, the Vermont Department of Taxation, and the Vermont Department of Unemployment and Training. Knowing which documents to file and with whom can be a difficult task, and very often an attorney and an accountant are hired to help with this process. This means that there are additional costs associated with the start-up of the business, as well as on-going costs. While these costs are reasonable, they can add up and be of concern to a person who is starting a business on a limited budget.

There are a number of different types of for-profit corporations. In addition to several types of corporations, there are several different federal Internal Revenue Service tax status designations which may apply to a corporation. The different tax status designations pertain to federal tax law, and not laws administered by the Secretary of State's Office. In addition to the federal tax laws, there are Vermont state tax laws which also can affect how a business entity and its shareholders are taxed. All of these choices--what type of corporation, what tax status--are available because different types of businesses have different problems to contend with. While more choices means more work in deciding what choices are right for your business, the greater flexibility offered by these choices is worth the work.