When you start a company, you can choose between several general types of companies. Four of the most common are a sole proprietorship, partnership, limited liability company, and corporation. This article will help you understand what a Limited Liability Company (LLC) is and why it may be a good option for you. A step-by-step guide to starting an LLC in Maryland is provided, including the cost. This article does not, however, cover the many Maryland laws that you must follow in order to run a business and it does not cover the advantages, disadvantages, or requirements for other types of companies.
One or more people may form an LLC. This article will be most helpful to a single owner, also called a “member,” who wants to form an LLC. If there is more than one member then it is strongly recommended that all of the members sign an Operating Agreement, as discussed briefly at the end of this article.
What is a Limited Liability Company (LLC)?
An LLC is distinct from other types of companies. In Maryland, detailed requirements for creating or forming an LLC are in the Maryland LLC Act (Md. Corporations and Associations Code Ann., Limited Liability Company Act, Title 4A). An LLC may conduct activities related to any lawful business, purpose, investment, or activity, whether for profit or not for profit, except the business of acting as an insurer. The law also contains some requirements for operating an existing LLC in Maryland. However, the law is very flexible about an LLC’s powers, meaning the actions it can take. An LLC can be set up to exist indefinitely or to cease its activities after a certain time, and it can enter contracts or carry on other business as determined by its members. LLC members generally have great freedom to set up the company in the way that works best for them. Read the law: Maryland Code, Corporations and Associations, Sections 4A-102 and 4A-203
Should my company be formed as an LLC?
Whether to sell your goods or services through an LLC depends on a number of factors. You should consider:
- Limited Personal Liability. Members are usually not held personally liable for the acts and business debts of the LLC. This means that if the LLC is sued in court, your money and other assets that you own personally, such as your home and savings accounts, are generally protected from being used to satisfy a judgment against the LLC (there are various important exceptions to this, including when there has been fraud). Read the law: Maryland Code, Corporations and Associations, Section 4A-301
- Credibility. It is difficult to measure this benefit. In order to successfully sell some goods or services, potential customers might be more inclined to do business with you because you have taken formal steps to file with the State. Formation of an LLC with the State can thus establish a perception of credibility that sole proprietorships and partnerships may not have.
- Paying Taxes. Members are taxed only at the personal level, and not also at the business level. In other words, the income earned by the LLC is considered to be income earned by the member(s) and is only taxed on the member’s personal income tax filing. This is different from the general rules for a corporation. A corporation generally pays taxes on its income, and then the owners also pay taxes on any dividends or other profits that are distributed to them from the corporation. You should discuss tax issues in advance with a tax professional.
- Flexibility. The law gives the members of an LLC broad flexibility to decide how the LLC will operate and suggests a number of provisions that members might want to consider. A written agreement about operating procedures is not required, although as stated previously, it is very useful for LLCs that have more than one member. Read the law: Maryland Code, Corporations and Associations, Section 4A-402
- Legal Requirements and Paperwork. Unlike a corporation, an LLC is not required by law to establish a separate Board of Directors to make important business decisions or officers to manage daily operations. LLC members may make the important business decisions and manage the LLC’s daily operation. Also, the record keeping requirements are relaxed for an LLC. While a corporation must maintain records of accounts and transactions and minutes of its stockholder and board meetings, LLCs are not legally required to keep such records (although it makes good legal and business sense to do to). The law does require an LLC, however, to file articles of organization. Also, the law requires LLC’s and corporations alike to make annual filings, such as the Personal Property Return, which discloses to the State gross sales and anything else the LLC owns. The 2017 Report and Personal Property Return form can be found at: http://dat.maryland.gov/SDAT%20Forms/pp1_2017.pdf, and instructions can be found here: http://dat.maryland.gov/SDAT%20Forms/pp_Form1instructions_2017.pdf
How do I form an LLC?
What follows is a general guideline for forming an LLC in Maryland. This guideline is not a substitute for seeking expert legal advice, especially in the areas of taxation, drafting the Operating Agreement, and confirming when your personal assets might be at risk.
Step 1: Choose a name for your LLC. The name must include the words “limited liability company.” The name can be spelled out or abbreviated as LLC or L.L.C. The name of the LLC must be different from that of other Maryland LLCs, corporations and other Maryland businesses. You can use the database of business names on the State Department of Assessments and Taxation’s (SDAT) website to see if your name is similar to another. https://egov.maryland.gov/BusinessExpress/EntitySearch.
Step 2: Select a resident agent – someone who will receive legal papers on behalf of the business if the LLC must go to court. The resident agent must be a Maryland citizen over the age of 18, a Maryland corporation or another Maryland LLC. This can be the same person starting the LLC.
Step 3: Complete the articles of organization and submit them to SDAT. The articles of organization form and instructions can be found online at http://www.dat.maryland.gov/SDAT%20Forms/artorgan.pdf.
The following must be included in the articles of organization:
- The name of the LLC.
- The purpose of the LLC. The purpose is as simple as what the business will be doing. For example, a mechanic shop’s purpose could be as simple as, “To service and repair motor vehicles.”
- The address of the LLC. This is where the business will be based.
- The name and address of the resident agent. The resident agent’s address cannot be a Post Office Box.
- The signature of the person forming the LLC.
- The signature of the resident agent.
- A return address.
Costs and Time Frame
By Mail: It will take SDAT four to six weeks to process the Articles of Organization by mail and it will cost $100.00. If you want to speed up the process, consider filing online (details below) or you can file in-person for same day service and pay an additional $50.00 fee. Hand-delivered documents in limited quantities receive same day expedited service between 8:30 a.m. and 4:30 p.m., Monday through Friday. You must be in line no later than 4:15 p.m. in order to receive service that same day.
Online: You can complete business registration and document filing online via the Maryland EGov Business portal at https://egov.maryland.gov/businessexpress. The cost is $100.00, and all online filed documents are considered expedited and will be processed within 7 business days.
If SDAT approves the Articles of Organization, you will receive a Certificate of Organization. The Certificate of Organization is a document from the state establishing that Maryland recognizes the LLC and has approved the Articles of Organization. You may need a Certificate of Organization to start your business. For example, outside vendors and customers may not want to do business with you until you show them, through a Certificate of Organization, that your LLC is officially established. There is an additional $20.00 cost to receive a certified copy of the document and an additional $1.00 cost per page. In order to receive a Certificate of Status, which proves that the business is currently in good standing with the state (this is different from the Certificate of Organization) an additional cost of $20.00 is required, however this is not required at the time of filing.
The address of SDAT is:
State Department of Assessments and Taxation
301 W. Preston Street; 8th Floor
Baltimore, MD 21201
What do I have to do after I file?
The points made throughout this article should serve as a guide but do not cover the many Maryland laws about running a business such as taxes, and business regulations:
- File annual Personal Property Return every year. This is to be filed with SDAT Personal Property Division by April 15th. There is a $300 filing fee. If you do not file this form, you may be fined, or your business could be turned over to the State. The form is available here: http://dat.maryland.gov/SDAT%20Forms/pp1_2017.pdf, and can also be filed online at https://egov.maryland.gov/businessexpress.
- The Personal Property Return is state specific and there is no comparable Federal filing. Your income tax earned from the LLC, however, is payable to the State and to the Federal government. Consult a tax professional to learn more.
- You may wish to construct a written Operating Agreement, especially if you have more than one member. This agreement will help define the different roles in the company and the rules that members are to follow. The website below will help explain what should be in an Operating Agreement. However, the information does not specifically address Maryland law, so it should be used as a general starting point only.
- Obtain an EIN, Employer Identification Number. An EIN is like a social security number for a business. The EIN is how the Internal Revenue Service (IRS) identifies your business. The website below will help you obtain an EIN.
- Open a bank account for the LLC. In order to do this, you need an EIN.
- This website provides more information generally about starting up a business: