If you are looking to form an LLC (limited liability company) in Maryland, and don’t know how to, then you have come to the right place! There are a few notable steps for you to pay attention to which will cost you greatly if you fail to do so.
Things such as an operating agreement, registered agent service, an Employer Identification Number (EIN), and much more will be explained throughout this guide.
In layman terms, you will need to liaise with the Department of State of Maryland and Maryland Department of Taxation to legally form an LLC, and have a proper business structure beforehand. It is just as simple as that.
This guide will bring you through the different types of business structures and also the entire process of forming an LLC step-by-step. So let’s begin!
Types of Business Structures in Maryland
Sole proprietorships are the simplest type of all the business structures. Most of the time, an entrepreneur with a small business in Maryland will utilize this business structure before expanding or growing into other business structures, most commonly LLCs or partnerships.
Sole proprietorships are simple in the sense where they have less legal restrictions, while still retaining a profit. However, sole proprietorships also have unlimited personal liability when it comes to the debs and liabilities of the business, and termination of the business occurs upon the death of the sole proprietor.
General partnerships are formed after the agreement of each partner involved. The agreement should include contribution of each partner, the distributions of profits and losses as well as the terms of termination. If a written agreement is not drafted, all partners are presumed to have equal shares in the losses and profits of the business.
A general partnership has unlimited personal liabilities for the businesses debts and liabilities. A limited partnership is formed when there exist one or more limited partners in combination with one or more general partners. Limited partners have limited personal liability.
On the other hand, there are alternative forms of a general partnership known as the LLP and the LLLP which involves filing with the Bureau of Corporations and Charitable Organizations of the PA Secretary of State.
LLP and LLLP statuses impart general partners with limitations and additional protection for personal liabilities from the businesses debts and liabilities.
Corporations are the most complex business structure. It is highly advised that the paperwork for incorporation be viewed by a legal advisor. This is to ensure that all legal consequences are considered before starting a business.
Corporations limit the liability of the owners based on the shares held by individual owners. Death or transfer of shares do not affect the corporation, unlike other business structures. Corporations require detailed record-keeping and regulation as they have double taxation for profits. Dividends earned are tax on an individual level.
There exist two types of corporations in Maryland, namely C corporations and S corporations. Both of which have different rules, with C corporations allowing federal income tax rules for determining income and S corporations following Maryland income tax rules for determining income.
What is a Limited Liability Company?
An LLC is a non-business partnership with at least one person limitedly answerable for the business’ legally binding responsibilities and different types of liabilities. The structure of an LLC shows more similarity towards a corporation than to any other types of partnerships available.
An LLC can be formed with at least one owner, which allows them to operate as an LLC instead of a sole proprietor which limits the owner’s personal liability.
An LLC as compared to a corporation is very much different. An LLC will have managers who oversee all operations instead of having a board of directors and officers.
Furthermore, an LLC also has members instead of shareholders. These members are investors which can be considered as the owners of the company. These people can be individuals from various corporate bodies. These are the people who own a part of the company through the subscription of shares.
Limited liability companies are different in general. People who form an llc are owners of a sole proprietorship who wishes to grow and expand their business. Hence they convert their business model from sole proprietorship to a limited liability company. There are many benefits for the owner of a sole proprietorship who wishes to expand their business to convert it to a limited liability company.
Steps to form an LLC in Maryland
Step 1: Selecting a viable name for your LLC
The first step to forming an LLC is to select a viable name for the LLC itself.
The name selected for the Maryland LLC must be unique and distinguishable from existing registered businesses in Maryland. Be sure to choose a catchy name which complies with Maryland’s State of Department naming requirements. Having a catchy name for your LLC will also render it easier to remember and searchable by your future clients.
Selected LLC names may be checked for availability at the Maryland Department of State business name database. In compliance with Maryland law, the selected LLC name must contain the phrase or words “Limited Liability Company,” “Limited,” or “Company”. There are some acceptable abbreviations of the phrases or words (Ltd., Co. or L.L.C).
In contrast, the selected LLC name must not contain words or phrases that would confuse said LLC name with the name of a government agency (State Department, Treasury of State, FBI, Department of State etc.).
There are also restricted words such as “Bank” and “Attorney” which will require additional paperwork to be done if you are looking to have such words.
If the company name is available and a future LLC wishes to reserve a name after checking the availability of said name from the Maryland Business Express business entity search database, they may reserve the desired name with the Maryland Secretary of State.
Reserving a name can be done by filling a Name Reservation Form with the Maryland Department of State.
It is also advised to check if the selected LLC name has an available web URL in the event the LLC owner wishes to make a business website. This enables the Maryland LLC members to reserve the domain name to prevent it from being used by other entities.
Step 2: Choose a Resident Agent of your Choice
It is mandatory to nominate a Maryland resident agent for your Maryland LLC. In other states, a resident agent is known as a registered agent. Registered or resident agents are agents who act as an individual or business entity that handles important documents such as tax forms, lawsuits and government correspondence letters on the behalf of your LLC. A resident agent is your middleman contact between your Maryland LLC and the state.
A resident agent must be a resident above the age of 18 in Maryland. The resident agent could also be a corporation that provides resident or registered agent services. Registered agent services are corporations that provide a registered or resident agent for your LLC. They are also authorized to transact business in Maryland.
There are corporations such as ZenBusiness which provide these resident agent services at a very affordable price. We will get to more about ZenBusiness at the end of the article.
Step 3: Filing a Maryland LLC Articles of Organization
In order to register your LLC in Maryland, the next would be to file the Articles of Organization with the Maryland State Department of Assessments and Taxation. This can be done via an application online or by postal services. The Articles of Organizations is often referred to as the Certificate of Formation or Organization.
The articles of organization are important documents which must be handed up to the Maryland Department of Assessments and Taxation in order to legitimise the formation of LLC in Maryland.
The articles of organization must include the name of the LLC in Maryland, appointed resident agent, the names of all members, an effective date for which the Maryland LLC is formed and the list of services which your LLC will be providing.
It is worth mentioning that the Maryland Department of Assessments and Taxation has a filing fee for the articles of organization.The articles of organization filed to the Department of Assessments and Taxation must be accompanied with a docketing statement as well.
The accompanying docking statement should include the name of the Maryland LLC, the name of the individual responsible for initial tax reports, a description of the Maryland LLC’s business activity, the Federal Tax Identification Number (FEIN) / EIN and the LLC’s Fiscal Year End (FYE). An EIN is mandatory if you are planning to hire employees and open a business bank account.
Both the articles of organization and docketing statement can be sent to the Department of Assessments and Taxation of state via mail or online. The articles of organization and docketing statement is an important document to legitimise your LLC formation process. Filing the Articles of Organization document will take you from at least 4-8 days online and 4-6 weeks by mail.
Step 4: Write up an LLC Operating Agreement
Although it is not a requirement, it is highly advisable and a good practice that the Maryland LLC members draft an LLC operating agreement.
The agreement is solely an internal and legal document, meaning it does not require filing with the Maryland secretary of state or the Maryland department of state. The operating agreement of an Maryland LLC acts as a document to establish the power, duties, liabilities and obligations of each member of the LLC.
This document serves as an outline for the ownership and operating measures of an LLC. Members of an LLC do have the option of not drafting an agreement. LLCs which do not draft an agreement run the risk of being insufficiently equipped to reach any settlements regarding misunderstandings over management and finances.
A comprehensive and legitimate operating agreement ensures that business owners are all on the same side while also reducing the risk of overall future conflict.
The Maryland LLC would be required to follow Maryland’s default operating agreement if an operating agreement is not drafted among members. Hence it is strongly advised that the LLC organizers draft an operating agreement to ensure smooth operations.
Step 5: Getting an Employer Identification Number for your LLC
An EIN is short for Employer Identification Number. An EIN is a nine-digit number which is assigned to LLC owners to help identify the different types of businesses for tax purposes.
An EIN is used when you are opening a business bank account, filing and managing federal and state taxes.
You will also need an EIN when hiring employees, as stated above. If the owner of a sole proprietorship intends on expanding and growing their business by starting an LLC, they are required to obtain an entirely new and different EIN in compliance with the IRS requirements.
Maryland LLC owners can receive their EIN for free from the IRS. In order to obtain an EIN, this can be done via mail or online by the IRS. It is mandatory for all LLCs with employees to acquire an EIN. Maryland LLCs with more than one owner are required to have an EIN as well.
Step 6: Filing an Annual Report and Personal Property Tax
Every LLC in Maryland is required to file an annual report and personal property tax with the Maryland Assessments and Taxations Department. They are required to file the annual report to the Personal Property Division specifically.
The annual report may be filed online through Maryland Business Express or by postal services. The annual report and personal property tax is due on April 15 annually.
An extension for your annual report and personal property tax may be requested. The annual report and personal property tax filing fees are about $300 per year, excluding state tax.
Step 7: Maintaining the LLC
After filing the annual report and personal property tax, you may continue with maintaining the formed LLC in Maryland may be a tough job for most people.
Which is why in this guide we will also be covering the steps that are needed to maintain their Maryland LLC.
It is highly recommended that members of an LLC maintain a good standing and relationship with the state of Maryland for the entire duration of their business days, so remember to do
Members of an LLC have the ability to apply for a certificate of subsistence when the LLC is still in existence as a matter of record in the Office of Department of the Commonwealth. Information regarding steps on how to obtain the certificate of subsistence can be obtained from the Department of State’s website.
The members of the Maryland LLC are also advised to keep personal and business account finances separate as to avoid confusion during sorting of assets. By separating your accounts, you are ensuring that your employees and the owners will not be personally liable for any business debts and liabilities.
Furthermore, in order to maintain your Maryland LLC after you have successfully formed the LLC itself, you must separate your personal and business assets.
Separating your personal and business assets will ensure that your car and home is not at risk of being repossessed by the bank if your
Maryland LLC is being sued. If your personal bank account and business bank account is mixed, then you are at risk of losing all your assets, and this is classified as piercing the corporate veil in business law.
Steps on How to Maintain The Corporate Veil for Your Maryland LLC
Which leads us to our next section of the guide, how does one maintain the corporate veil? We will be covering on the steps which are mandatory to keep your Maryland LLC out of trouble.
The corporate veil is the general rule of thumb in business law which states that any business entity can protect their owners from incurring any sort of personal liability. This means that only the business assets will be repossessed by the bank in order to pay off certain debts in the event that your Maryland LLC is sued.
All the debts incurred from the owner’s LLC will not be transferred over to him personally. The corporate veil acts as a shield for small business owners who just formed their LLC which explains the importance of this protection.
Owners of a Maryland LLC, or business entrepreneurs who are looking to start up an LLC is not alone sufficient enough to ensure that you have the protection you need for your business. Creditors who are looking to sue may be able to pierce the corporate veil on the grounds under the court of law that the business have been found in one of the following scenarios:
- The company simply does not possess enough funds
- The company and the owners do not possess an entirely separate identity
- The company was found to have been involved in fraudulent activities
Therefore, it is important that the LLC has adequate start-up capital to cover all current and future liabilities so that creditors will not be allowed to sue you personally. Creditors who are looking to sue will always look for loopholes as such in order to retrieve their money.
Capital aside, during your business days, it is important that every single transaction is documented for future references. It is best to avoid signing agreements or documents without fully reading and understanding documents and agreements to avoid being conned.
By signing agreements which may or may not be harmful to the company, you are putting your Marland LLC at risk of unwanted legal issues.
Furthermore, dealings of the company should be carried out solely under the name of the company. Business owners are advised to refrain from using their personal name or identity to conduct business transactions.
Business owners who have done so are vulnerable to personal liabilities in the event that a lawsuit is brought to them.
Authorized members of the Maryland LLC must vary during the signing of any sort of document, and must further clarify that their personal assets are a separate entity from your business.
Last but not least, you should always stay away from fraudulent activities throughout your business days to ensure that your company is not in risk of being sued.
Companies who have been found to have been involved in fraudulent activities will find themselves more vulnerable towards lawsuits, or worse, a revocation of their license to run their business.
Alternative: Using LLC Formation Services in Maryland
If you are still confused over the whole process of forming the LLC, you have the option to hire someone in the state of Maryland to form your LLC for you.
If you are reluctant to go through the hassle of doing further research and filing up legal documents, LLC forming services are definitely a go to for you.
There are an abundant number of options when it comes to choosing which corporation to go for in order to fulfill your LLC start up needs, even if you just need someone to file your personal property tax for you.
Looking at the companies that are able to help with starting an LLC in Maryland would not limit our choices but it does give us some options to work with.
Among the most popular company forming services that help with starting up an LLC would include but is not limited to ZenBusiness, Incfile, LegalZoom and etc.
Why are LLC Formation Services Beneficial?
Among the benefits of using a company formation service, time conservation is one of the most important ones of all.
When starting an LLC entirely by yourself, it may seem like a hectic job as we would have to search for forms and legal documents to fill up. Even after doing extensive research, it is likely that we would miss out a form or two.
Missing one of these documents would cost us greatly. However, this can be easily prevented by using an LLC forming service.
LLC forming services often guide owners on how to go about settling their first annual requirements in order to help the owner to keep their business up and running.
Owners who depend on these services can rest easy throughout their business days and focus entirely on making their business successful in every way possible.
LLC forming services by ZenBusiness especially also includes a resident agent service for free for an overall affordable price.
Business owners can lay their worries to rest as they are not risking any sort of possibility of receiving a legal penalty for things like a late submission for a legal document. These corporations also teach business owners in order to maintain their business for future years.
There are no downsides of hiring a corporation for their LLC formation services. It is safe to say that opting to use an LLC forming service is the fastest and safest way to form an LLC in Maryland.
Choosing to use an LLC forming service also leaves more time and manpower to focus on the business instead of the logistics side of things when forming the LLC itself.
We highly recommend using ZenBusiness as your corporation of choice when looking for an LLC forming service provider. They have numerous benefits which will be displayed on their main website here.
Hopefully, this article has helped you in your pursuit of forming an LLC in Maryland.
Though the article has mentioned numerous key points that will help you along your journey to start your business in Maryland, it is recommended that you contact a legal advisor in Maryland on how to proceed with the legal work required in Maryland.
Contacting a legal advisor in Maryland will ensure that your business in Maryland is compliant with your current state laws as well as a hasty application process.
Starting a business correctly doesn’t have to be difficult. With over 15 years of experience consulting new businesses and start ups, Matthew is probably the best person to help you set a strong foundation for your business.