Thinking about starting a company? There are many kinds of business entities from which to choose. When structuring a business it is important to choose the right entity for your needs because legal responsibilities and protections will differ based on the type of business entity chosen. Four common business entities are: sole proprietorships, partnerships, limited liability companies, and corporations. This article focuses on how to form a stock corporation in Maryland.
What is a corporation?
A corporation is a business entity having legal authority to act as a single person, distinct from the stockholders (in Maryland shareholders are referred to as stockholders) who own it, and having rights to issue stock and exist indefinitely. Maryland corporations are governed by the Code of Maryland – Corporations and Associations, Titles 1-7.
Issues to consider when forming a corporation
- corporation owners (stockholders) are usually not personally liable for business debts (limited liability)
- corporations continue to exist even if the owners die or sell their interest (unlimited life)
- corporate ownership can often easily be transferred
- incorporating can give your business more credibility
- after forming a corporation there are ongoing fees and record-keeping requirements
- the corporate structure has more mandates and is less flexible than other business entities
- corporations are usually taxed twice: at the corporate level and at the stockholder level
The process of forming a corporation
These steps serve as a general guideline for the process of incorporating in Maryland. You can find a checklist for new businesses on the State Department of Assessments and Taxation (SDAT) website. You may also be able to register and establish your corporation, make annual filings, and request document copies on the SDAT "Maryland Business Express" website. Seeking an attorney for consultation can help you avoid pitfalls if you have concerns.
- Step 1: Choose a name for your corporation. The name must have a corporate ending, such as Corp., Inc., or Incorporated, and must be recognizably different than any Maryland corporation already registered. You can search the database of business entity names on the SDAT website. You need to register the corporation's name with the SDAT.
- Step 2: Appoint a registered agent in the state. A registered agent is an individual who agrees to accept legal papers on the corporation’s behalf in case it is summoned to court for any reason. The agent can either be an adult citizen of Maryland or another existing Maryland corporation or limited liability company.
- Step 3: Choose the initial member(s) of the board of directors. The incorporator must appoint at least one initial director to serve on the board until the first stockholder meeting. The director can be the same person as the incorporator.
- Step 4: Prepare and submit the articles of incorporation to the SDAT. The SDAT provides a form to assist with preparing articles of incorporation, which is listed on this page, under "Create or Start a Business in Maryland."
The following must be included in the articles of incorporation:
- The name of each incorporator and a statement that the incorporator is 18 years old or older and forming a corporation under the general laws of the State of Maryland.
- The name of the corporation.
- The purpose of the corporation.
- The street address of the corporation’s principal office in Maryland.
- The name and address of the resident agent in Maryland.
- The par value (nominal value) and number of shares of stock the corporation is authorized to issue.
- The number and names of the individuals who serve as the initial directors. Read the Law: Md. Code Ann. Corporations & Associations § 2-104
It will take the SDAT four to six weeks to process your request to incorporate if you file the articles of incorporation by mail. If you want the documents to be processed sooner, you can visit the SDAT office between 8:30 a.m. - 4:15 p.m., Monday through Friday, to submit your filing to get same-day service.
The costs involved with incorporating in Maryland are: $100 SDAT filing fee, $20 organization and capitalization fee (although it may be more if the aggregate par value of the stock exceeds $100,000), and a $5 document return fee.
The address of the SDAT is:
State Department of Assessments and Taxation
301 W. Preston Street; 8th Floor
Baltimore, MD 21201
Fax: (410) 333-7097
What do I have to do after I file?
- Draft corporate bylaws, which set out the basic rules for operating your corporation. The bylaws are like a constitution for your corporation (sample form of corporate bylaws).
- Hold your first organizational meeting where the initial member(s) of the board of directors adopt the bylaws and appoint officers. You should take minutes at director and stockholder meetings.
- Set up a corporate record book and a stock ledger, which keeps track of stock issuances. It is important to keep all of the corporation’s documents organized.
- Issue stock to stockholders. The board of directors must first adopt resolutions to authorize the issuance of the stock and to set a minimum cost for the stock or a formula to calculate the minimum cost. (The cost can be money or services to the corporation.) A corporation does not need to issue paper stock certificates; it only needs to keep track of stock ownership in its stock ledger.
- Make sure the corporation complies with ongoing tax, securities, statutory, and regulatory requirements, such as the annual filing fee to remain in good standing. Check with your local authorities to confirm whether the corporation needs any permits or licenses to operate.
- Visit the State's "Start Your Business" website for more information about what you need to do to obtain tax information, permits, licenes, and insurance for the corporation.