How to Incorporate in Maryland vs. How to Start a Maryland LLC

LLCs and corporations both provide liability protection for their owners. This means that each business entity acts as a shield between the human element and the physical business, so that if a lawsuit was to be filed, or a bankruptcy was to occur, the owners of the business are not likely to see their personal assets (cars, homes, savings, investments, etc..) to be used to pay debts. But beyond that, most people don’t entirely understand the differences between LLCs and corporations. Active Filings is about to drop some knowledge. Let’s take a quick look at some of the structural differences between corporations and LLCs. People looking to start a business often ask whether they should set up an LLC or incorporate for their new venture. Like everything else in life, the answer depends. Below you’ll find the three factors we think will help you make an informed decision.

• Ease of maintenance
  LLCs have the appeal of providing entrepreneurs lower overall annual maintenance and paperwork, creating a big selling point for the LLC structure. Corporations require annual meetings, directors meetings, recorded meeting minutes, and a notable amount of paperwork, while LLCs have little to no maintenance of this type. LLCs not only require less resolutions, but can make executive decisions without the need to hold an official meeting.
• Desired tax structure
  Unlike a corporation, which must pay its own taxes, LLCs are known as pass-through entities, meaning their tax structure is designed to have its profits, losses, credits, and expenses pass directly through to the owners, who report them on their personal income tax returns (similar to if the owners had a partnership or sole proprietorship). Corporations have a default tax structure known as the C corporation. This structure imposes a double-taxation, where the net income is initially taxed, and then taxed a second time as personal income after the profits and losses are distributed to the shareholders. At first glance, double taxation may seem like a downside, but for the right business it can provide advantages, such as reinvesting profits into the business.
• Investors
  Investors and shareholders often prefer doing business with corporations. The structure of a corporation is reputable and familiar. Investors know exactly where their time and money will be going with a corporation. LLCs can still be divided into percentages for members, but there is more trust behind the prominence of investing in stock within a corporation. Consider a corporation if you are serious about attracting investors.

Attention should also be paid to the idea of prestige, and how the name and makeup of corporations affords them a certain aura of importance. While the small business owner with an LLC is the backbone of America, corporations are what you see on TV and read about in newspapers. Walmart, Nike, and Amazon all share the corporate structure. People at work talk about owning shares of Tesla. If prestige is what you want, the “LLC,” while an excellent choice for small to medium sized businesses, can’t hold a candle to the “Inc.”

Note that whether you form an LLC or a corporation, you’ll need to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) once your company is officially formed with the state of Maryland. This report provides the federal government with identifying information about your company and those with the most control over profits and business operations. However, unlike state filings, the information shared in your report does not go on the public record and there is no filing fee. (Though if you don’t want to file this on your own, we offer BOI filing service for just $25.)

• Tax Incentives
  Maryland offers a variety of tax incentives for businesses, and with a flat corporate tax rate of 8.25% Maryland compares favorably to other states, with a lower top rate than California, Illinois, Delaware, New Jersey and Pennsylvania. The state also offers a ton of exemptions, including no gross receipts tax on manufacturers, no corporate franchise tax, no unitary tax on profits, no income tax on foreign dividends (if the corporation owns 50% or more of the subsidiary), and no tax on intangible property.
• Flat Corporate Tax
  Maryland’s flat corporate tax of 8.25% isn’t the lowest tax of the 50-states, but the fact that it is a flat tax can often reduce business costs and eliminates confusion. You can almost math the equation in your head. My corporation has $100,000 in taxable income. Guess I owe $8,250. Obviously it won’t be such a simple number, but the point is that a flat tax can make tax preparers obsolete, especially for the smaller corporations who really have to watch every penny.
• Different Counties Different Income Tax Rates
  All 24 Maryland counties levy income taxes on residents and nonresidents. Tax rates range from 1.25% in Worcester County to 3.05% in Baltimore to a high of 3.20% in Howard, Montgomery, and Prince Georges Counties. Additionally, there is a statewide income tax in Maryland, with a top rate of 5.75%. So if you’re a top income earner in the wrong county, you’re looking at paying almost 9% in taxes. Ouch.
• Veteran Friendly
  Maryland offers a lot of benefits for veterans. The state offers a “Hire our Veterans” tax credit, which provides an income tax credit to small businesses for hiring qualified veterans based on wages paid to those veteran employees. There is also the state’s “Military Personnel and Veteran-Owned Small Business Loan Program,” which provides no interest loans for businesses owned by military reservists, veterans, National Guard personnel and for small businesses that employ or are owned by such persons.

Maryland LLC or Maryland Corporation? Final Answer.
Both corporations and LLCs offer excellent liability protection, but when you factor in an LLC’s ease of maintenance, desired tax structure, and not having to go out and woo business suit-wearing investors, the Maryland LLC is pretty awesome for a small to medium sized business that’s just looking to make some money, not file a ton of paperwork, and shield it’s owners from potential liability.

Starting a corporation in Maryland is pretty straightforward. Just file the Articles of Incorporation with the State Department of Assessments and Taxation (SDAT). The Articles of Incorporation cost $176 to file, and you can file online or by mail. As you look over the incorporation paperwork, you’ll probably notice that the state wants a lot of names and addresses so that Maryland can send important and legal documents to your business. Nothing wrong with that, but this does mean that these important tidbits of info become public record. Hire Active Filings and use our information instead. Just because you’re starting a business doesn’t mean you don’t deserve some privacy.

It costs $100 to start an LLC in Maryland. Just fill out the Articles of Organization with the Department of Assessments & Taxation and pay the filing fee. You can file the document online, by mail or in person. Not sure you know what you’re doing? Hire Active Filings and we do the filing for you.

Maryland’s Department of Assessments and Taxation (SDAT) makes each business doing business within state boundaries, file an annual report. The report updates the state with any changes your business may have made during the previous fiscal year.

How much does the Annual Report cost?
There is a $300 fee associated with filing the report. This is a flat fee, standard for all companies. Maryland now allows you to file online, but they charge a $9 fee. Nonprofit organizations do not have to pay anything when filing their report with the state’s Department of Assessments and Taxation.

How do I file?
You can file online (the state ads a $9 charge) at a cost of $309, or you can go to the SDAT page, print, and fill out the form by hand.

Mail your report to:

State Department of Assessments and Taxation
Charter Division
301 W. Preston Street; 8th Floor
Baltimore, MD 21201-2395

When is my report due?
Maryland annual personal property returns are filed with the SDAT by April 15 each year. You just need to have it post marked by the due date. If you mess up and have to file your report late, Maryland charges you a late fee based on the value of the property you own and the state’s assessment of said property. If you don’t own any property, then you’re off the hook for late fees, but the state can still revoke your ability to do business. If you hire Active Filings you’ll never miss a notification from SDAT, which makes it less likely you’ll forget to file your annual report!

No one likes taxes. America was built on not liking to pay taxes. Nevertheless properly paying your taxes is an important part of running a small business. While we’re not tax professionals, Active Filings hopes to give you a simple and informative overview of the way your LLC or corporation may be taxed.

How will my corporation be taxed?
Corporations face “double taxation.” First they pay taxes on net profits from the business, and then get hit a second time when taxed on the dividends they receive from those earnings. Dividends are taxed at the shareholder’s personal tax rate. An LLC doesn’t have this problem, which means anyone looking to form a corporation should take note of a state’s corporate income tax and personal income tax. One way of avoiding double taxation may be to elect for your corporation to be taxed as an S Corp. By filing IRS Form 2553 (Election by a Small Business Corporation), a corporation with 100 or fewer shareholders can elect to be taxed as an S Corp. Of course, if a corporation chooses S Corp status, they’ll have to jump through a few extra hoops and meet certain requirements required by the IRS.

How will my LLC be taxed?
Single member LLCs, meaning it’s just you running your business, are treated like sole proprietorships by the IRS. This means that any profits or losses your LLC experiences, will pass-through to you as the single owner. All you have to do is file a Schedule C, which reports profits or loss from your business, with your personal tax return (IRS Form 1040). It should be noted that an LLC can elect to be taxed as a corporation under Subchapter C, by filing IRS Form 8832 (Entity Classification Election), or as a corporation under Subchapter S by filing IRS Form 2553 (Election by a Small Business Corporation).

What if my LLC has more than one member?
As with a single member LLC, the IRS will view your multi-member LLC as a partnership. The LLC will retain it’s pass-through tax status, with a few wrinkles with regards to paperwork. Instead of one member filing a 1040, instead each member will have to file a Return of Partnership Income form (IRS Form 1065). This document lets the IRS check and make sure each owner is reporting their income properly. Beyond that, each LLC owner will attach a Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) to their Form 1040. This form shows the IRS each member’s share of the LLC’s profits and losses.

Here’s a tip: If your LLC is going to have more than one member, it would be a good idea to draw up a simple operating agreement. Most states don’t require an LLC to have one, but with so many cooks in the kitchen, you’ll want clear documentation with regards to ownership percentage, voting rights, distribution of profits and losses, as well as rules for buying out a member. You won’t be require to file the agreement, but it should be signed by each member and kept with the LLC’s important documents.

Beyond the basic information you’ll also need:
• payroll documents
• bank and credit card statements
• accounting documents
• partnership agreements
• depreciation schedules
• gross receipts
• checking and savings account interest

What tax forms do I need to file?
Corporations: Form 500
Partnerships: Form 510 , plus Schedule K-1
LLCs: Form 502

What is the corporate tax rate in Maryland?
8.25%

What is the personal income tax in Maryland?
$0 – $1,000                        2%
$1,001 – $2,000                3%
$2,001 – $3,000                4%
3,001 – $100,000              4.75%
$100,001 – $125,000       5%
$125,001 – $150,000       5.25%
$150,001 – $250,000       5.5%
$250,001 – gazillion        5.75%

When are my tax returns due?
State tax returns are due by April 15th, or by 15th day of the 4th month following the end of the taxable year (for fiscal year filers). Example: your LLC’s fiscal year runs April 2019 to March 2020. Your return would be due July 15th in this case.

Can I get an extension to file my taxes?
Maryland offers a 6-month extension, which moves the filing deadline from April 15th to October 15th (for calendar year filers). If you have an approved Federal tax extension (IRS Form 4868), you will automatically receive a Maryland tax extension.