ATTORNEY AT LAW


ANTHONY R. PISARRA
ATTORNEY-AT-LAW

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Starting a Business in Maryland

Anthony R. Pisarra, Esq.
Rev: May 2005

Table of Contents

A. Choosing A Name
1. Form of Business
    1.1 Sole Proprietorships
    1.2 Partnerships
        1.2.1 General Partnership
        1.2.2 Limited Partnership
        1.2.3 Limited Liability Company
    1.3 Incorporation
        1.3.1 Corporations
        1.3.2 S-Corporations
2. Registering With the State
3. Registering With the IRS
4. Licenses
5. Additional Agreements
6. Conclusion
Appendix 1. Required Documents
Appendix 2. State & Federal Agencies

This note provides a brief overview of the issues, steps and filings required to start a new business in the State of Maryland. It is provided for informational purposes and not intended as legal advice.

Individuals can successfully form business entities in Maryland without the assistance of attorney.

However, there are issues beyond the initial formation of the business on which owners may require guidance (particularly if they anticipate that their business will be successful).

In addition, in the absence of a high level of financial and tax sophistication, business owners should seek the assistance of a qualified accountant sooner rather than later in order to meet certain ongoing state and federal tax requirements not covered in detail here (including, but not limited to: income tax- business and employee withholding; social security and federal unemployment insurance).

A. Choosing A Name

An important step in and of itself, selecting a name for your business is also a good place to start as you will need this information to complete most of the other steps in forming the business.

The actual name is, of course, a matter of taste. However, whatever the name, you should make sure it is available and clear of conflicts with existing names before proceeding.

  • For purposes of the State of Maryland, this requires that the name not be confusingly similar to a corporate or trade name currently registered with the State. Existing trade and corporate names can be searched in the Maryland State Department of Assessments & Taxation database at: Corporate Charter Search
  • For purposes of Federal Trademark law this requires that the name not be confusingly similar to a registered mark currently used in the same line of business. Existing trademark registrations can be searched in the U.S. Patent and Trademark Office database using the: Trademark Electronic Search System (Tess)
  • For purposes of domain name registration this requires that a variant of the name be available for registration and that the name not be confusingly similar to a previously registered name.

1. Forms of Doing Business

In addition to convenience, there are two basic considerations in selecting a form of doing business: (1) limited liability; and (2) federal tax treatment

Limited liability restricts the possible financial risk of owners of a business to the amounts invested in the enterprise. Some forms (corporations, limited liability companies and limited partnerships) provide limited liability for the owners. Some forms (sole proprietorships and general partnerships) do not.

For federal tax purposes, the income and losses of certain forms of doing business (corporations) are treated as the income and losses of a distinct person or entity. This can result in so-called double taxation in that profits may be taxed first when recognized by the corporation and again when distributed as income to the owners or shareholders.

In addition, net losses of the entity cannot be passed thru and applied to the income of the owners. This can particularly significant in the case of a new business that is likely to produce more expenses than income in its early years.

The income and losses of some forms of business: sole proprietorships, partnerships and limited liability companies, the income and losses of the venture are treated as the income and losses of the owners, members or partners.

This avoids double taxation and permits the owners to apply losses of the venture to their independent income.

Except for sole proprietorships, all ventures must separately report their results to the IRS regardless of treatment.

1.1 Sole Proprietorship:

Doing business as a sole proprietorship is simply a matter of naming your business and hanging out a shingle. It does not entail the creation of a distinct legal entity and provides no liability shield for the owner of the business.

For purposes of federal income tax, the income and losses of the business are considered the income and losses of the owner and are not separately reported (provided, a sole proprietorship that will pay wages to at least one person other than the owner must register with IRS for purposes of whithholding and payroll taxes).

While registration or filing of articles with the state is not required to do business as a sole proprietorship, registering your business's trade name with the State Department of Assessment & Taxation (SDAT) will make it simpler to do business under the trade name, identify conflicts with existing names as well as protect a unique name from use by another local business

1.2 Partnerships

Partnerships are businesses and ventures that are owned and managed by more that one person or entity.

Partnerships may be created through formal agreements among the parties. However, like a sole proprietorship, a partnership can be created simply as a result of operating a venture, in this case jointly.

For federal tax purposes, the income and losses of the venture are considered the (apportioned) income and losses of the partners. This can provide a substantial tax advantage over incorporating a joint enterprise, particularly in the early years of operation.

Unlike a sole proprietorship, partnerships are required to independently report income and losses.

    1.2.1 General Partnership: In the absence of additional agreements, a partnership -- like a sole proprietorship -- provides no liability shield to the owners.

This basic form is known as a General Partnership.

The absence of limited liability can prove particularly significant in the case of a partnership because the actions of one partner done in the name of the venture may result in binding the other partners to unanticipated, and potentially unlimited, obligations.

    1.2.2 Limited Partnerships: Partners may also choose, by agreement, to limit the liability of typically all but one partner (the General Partner) to the amount of their investment in the enterprise (the Limited Partners.)

This is known as a limited partnership.

Limited partnerships are formed by filing a Certificate of Limited Liability Partnership with the State. They frequently require the formation of a corporation to serve as the general partner and typically require the assistance of an experienced attorney to create and administer.

As a result of this complexity, with the advent of limited liability companies (see immediately below), limited partnerships, have largely fallen into disfavor.

    1.2.3 Limited Liability Companies In addition most states, including Maryland, provide for the creation of statutory limited liability companies (LLC).

Like a corporation, an LLC provides limited liability for the owners (members) while still receiving the pass-thru federal tax treatment afforded to general and limited partnerships.

In addition, like incorporation and unlike a limited partnership, a limited liability company can be created and legally administered using standard forms available through the State Department of Assessment and taxation without requiring the assistance of a lawyer.

Unlike a corporation, a limited liability company is managed (at least constructively) by its full membership. Further shares in the company can only be transferred with the express and unanimous consent of membership. These features, typical of a partnership, are necessary elements of an LLC's favorable tax treatment.

1.3 Incorporation

Incorporation is the formal filing and registration of a distinct legal entity through which to conduct a business or enterprise.

Owners of a corporation, like limited partners and members of an LLC, are protected by limited liability which, under most circumstances, limits their risk in the enterprise to value of their investment in the undertaking.

For federal tax purposes the income and losses of a corporation, with the exception of an S-Corporation, are treated as distinct from the income and losses of the owners

Unlike most other ventures, a corporation may, except as limited by agreement and subject state and federal regulations, issue freely transferable stock representing ownership of the company which may in turn be traded on public markets.

1.3.1 Corporation: A standard corporation (also called a C-Corporation) is formed by Articles of Incorporation (stock or non-stock) filed with the State. A standard corporation provides limited liability to its owners and shareholders and may, in the case of a stock corporation, except as limited by agreement and subject state and federal regulations, issue freely transferable stock representing ownership of the company.

As already noted, the income and losses of a C-Corporation are treated as the income of the losses of the corporation for federal tax purposes. Losses may not be passed through to the owners or shareholders and profits may taxed at both when recognized by the corporation and again when distributed as income to the owners.

1.3.2 S-Corporation: An S-Corporation like a general corporation is formed by filing Articles of Incorporation with the State. As with a C-Corporation an S-Corporation provides limited liability to its owners and shareholders.

However, by including certain statutorilly mandated features in the corporation's shareholder's agreement (see, below), primarily restrictions on the transfer of stock, the income and losses of the corporation may be passed through to the owners for federal tax purposes.

Similar to the structure and purpose of limited liability companies, S-Corporations have largely been replaced by LLCs which are both somewhat cheaper to form and administer as well as somewhat less restrictive in their technical operating requirements.

2. Registering Your Business With the State

Most business filings in Maryland are done through the State Department of Assessments and Taxation (SDAT) and not the Secretary of State's office as is common in other states.

Trade name registrations, articles of organization and incorporation as well as all subsequent amendments are all filed with the SDAT Corporate Charter Division:

  • Sole Proprietorships and General Partnerships may file trade name registrations with the SDAT Corporate Charter Division, and must register with the Comptroller of the Treasury if the enterprise will have employees or collect sales tax.
  • Limited Patnerships must file a Certificate of Limited Liability Partnership with the SDAT Corporate Charter Division.
  • Limited Liability Companies must file Articles of Organization with the SDAT Corporate Charter Division.
  • Corporations must file Articles of Incorporation (Stock, or Non-stock) with the SDAT Corporate Charter Division

3. Registering Your Business With the IRS

With the exception of sole proprietorships, all business entities are required to obtain a federal employer identification number (EIN) from the IRS in order to, among other things, open a bank account and make appropriate withholding and filings in the name of the business.

Unless, a sole proprietorship will have paid employess other than the owner, the sole proprietorship does business under the Social Security Number (SSN) of the business's owner.

If a sole proprietorship will have at least one paid employee other than the owner, the business must obtain and EIN.

Partnerships, limited liability companies, corporations and sole proprietorships that will pay wages can obtain an EIN by filing a form SS-4 with the IRS

4. Licenses

Licensing requirements in Maryland vary from business to business. However, all businesses that will sell goods or services from a fixed location must obtain a Maryland Business license from the Clerk at their local county Circuit Court

Other businesses and professional services may be subject to other specialized licensing requirements. Check here: Maryland's Business License Information System for information pertinent to your enterprise

5. Additional Mandatory Agreements

In additon to the articles and certificates sumbitted to the state at the time of formation, state and federal laws specify certain additional core organizational documents including, but not limited to: Shareholders Agreements (stock corporations), Membership Agreements (limited liability companies), Partnerhsip Agreements (limited and general partnerships) and Bylaws (non-stock corporations).

These agreements specify, among other things: voting rules, number and meetings of directors as well as allocation of income and, as appropriate, losses of the enterprise among the owners. These agreements must incorporate certain statutorilly mandated provisions and elections, but may also include a virtually unlimited range of optional features.

Samples, of variable quality, are available from a number of sources online. However, business owners should bear in mind that the statutorily mandated provisions of these agreements vary from jurisdiction to jurisdiction and basing your agreement on a sample from another jurisdiction may result in a defective agreement for purposes of Maryland governance.

Note that your organization may be technically deficient in the absence of an effective organizing agreement and/or be subject to certain harsh default tax accounting rules in the case of a subsequent audit.

6. Conclusion

This note has summarized the steps of beginning a new business in Maryland, the optional forms of doing business as well as a providing an inventory of the forms and agencies involved in formally organizing and registering your enterprise.

This note has alluded to but has not fully covered the rather substantial issues involved in complying with ongoing federal and state tax filings, income tax withholding, paryroll tax withholding, and sales and use tax collection obligations.

This note has not addressed the equally substantial issues involved in operating your business from day to day, including, but not limited to: general liability, employment agreements, sales agreements, financing intellectual property and more.

All of wich is to say that forming a business in Maryland can be a straightforward affair and one that can be accomplished, with sufficient attention to detail by an average person. However, business owners expecting to have substantial operations will greatly benefit from seeking professional legal and accounting advice sooner rather than later.

 

APPENDICES

 

Appendix 1. Required Documents

 

Appendix 2. State & Federal Agencies