Maryland law provides for how to properly form a Maryland LLC. Title 4A of the Maryland Corporations and Associations Act governs the formation and operation of limited liability companies (“LLC”) registered in Maryland. A Maryland LLC, when properly formed, provides limited liability for all members of the LLC for debts incurred by the LLC during normal operations. For example, if a member of a properly formed LLC opens a business credit card in the name of the LLC (and does not otherwise personally guarantee the debts of the LLC), the members are, generally, not personally liable for paying the credit card bill. This is also true for other contracts entered into between another party and the LLC. If the LLC or a person working for the LLC fails to perform under the contract, the LLC and not its members would be liable to the other party.
Owners of the LLC are referred to as “members” and own an interest in the LLC, generally proportionate to their capital contributions to the LLC. Members can contribute cash or equivalent to the LLC as a capital contribution, or members can contribute services in lieu of cash. For example, an accountant could contribute his time in his professional capacity in lieu of actually writing a check to the LLC, and the members could agree to value his time as a capital contribution to the entity. In addition, through the operating agreement, members of an LLC can agree to a different interest distribution from the proportion each invests in the LLC through capital contributions. This is common in smaller LLCs where the owners wish to remain equal owners, but one of the members contributes more money or time to the effort than the other members.
Step 1: Articles of Organizations
To register an LLC, a person files Articles of Organization with SDAT, and pays a registration fee. SDAT’s web site provides a form that can be used to file Articles of Organization. SDAT will accept Articles of Organization for filing by mail, in person, or by fax. SDAT charges additional fees for expedited registration of an LLC (and it also charges higher fees for faxed Articles).
By law, an LLC must have a name that is distinguishable from other entities already registered with the Maryland Department of Assessments and Taxation (“SDAT”), including names that have been reserved with SDAT, and assumed names of foreign entities. In addition, the name of the LLC must have the words “limited liability company,” “LLC,”, “L.L.C.,” “LC,” or “L.C.” within the name registered with SDAT. SDAT may refuse to register an LLC that does not comply with the naming requirements.
Step 2: Written Operating Agreement
Once SDAT has accepted the Articles of Organization, the LLC is formed under Maryland law. Title 4A does not require that an LLC’s members enter into a written operating agreement. However, a written agreement can help to organize the company and ensure that all of the members have similar expectations about how the company will be operated, who will provide what money or services to the company, and how decisions about the company will be made. If an operating agreement is not entered into by the members, Title 4A provides the legal defaults for rights and remedies of the members of the LLC.
Step 3: Register for Federal Employer Identification Number (FEIN)
Once the LLC is formed, it exists under Maryland law as a business entity. However, the LLC is also governed by the federal tax code, and is subject to taxation by the Internal Revenue Service. Generally, LLCs provide owners with pass-through taxation, which means that the profits of the LLC are distributed to each member of the LLC according to their proportionate share of the LLC, and the individual members then pay taxes on that profit as a part of their personal tax liability.
An LLC, however, must still report its earnings to the IRS on an appropriate tax form (usually form 1065 for partnerships), and will file Schedule K’s for each member indicating their proportionate share of the profit or loss of the LLC. To do so, the LLC must have an FEIN. To register for a FEIN requires completion and filing of form SS4, which is available on the IRS website.
Step 4: Open an LLC Bank Account
Most LLCs will require a way to receive money and make payments in order to operate. Members of the LLC should therefore establish a business banking account in the name of the LLC. Your bank will generally require that a member come in and provide a copy of the Articles of Organization and Operating Agreement of the LLC in order to establish an account.
Step 5: Establish an Accounting System
To operate, most LLCs will need to keep track of profits and expenses, along with capital contributions made by the members. Doing so by computer helps the LLC file its tax returns promptly, and also helps the members to manage the company’s finances. If none of the members are able to handle the financial bookkeeping, the LLC may consider hiring a bookkeeper or accountant to help the LLC in this area. Strong fiscal management is not required by law but is an essential ingredient to the success of any business.
Step 6: Establish Maryland Tax Accounts
The LLC may need to establish one or more tax accounts with the State of Maryland, including a sales and use tax account, an employer withholding account, an unemployment insurance account, and other accounts, depending on the nature of the LLC. In addition, each of these tax accounts requires regular reporting to the responsible state agency, and payment of tax monies on a regular basis determined by the responsible agency.
Maryland law also requires that LLC’s file a personal property tax return annually, and pay property taxes owed to the State and county in which the LLC is operated. A failure to do this may cause a forfeiture of the LLC’s charter, which essentially prevents the LLC from operating in Maryland or seeking redress in a Maryland court.
For more information, see the MarylandTaxes.com website.
Step 7: Establish a Principal Office
The LLC needs to operate from a physical location which is zoned by the county for the activity to be engaged in by the LLC.
Step 8: Other Licensing
If the LLC needs a business or trader’s license (generally for the sale of goods), the county in which the LLC does business will determine which Circuit Court Clerk will issue the license. Professionals, like accountants and lawyers, also must maintain a license to practice their profession which is issued by a state agency. See the Maryland Business and Occupations Article, and see the Maryland Judiciary website for more information.
There may be other considerations for forming an LLC in Maryland. If you have questions about the process, seek the advice of an attorney admitted to practice in your state, or contact us for Maryland legal questions.