Table of Contents
A limited liability company (LLC) is a legal structure for a business that protects the company’s owners from the liabilities of the company. LLCs are a great fit for founders that want legal protection and a more informal structure than a corporation. Any income earned by the business is passed to the company’s owners and taxed as personal income. This is different from a corporation where income is typically taxed twice: corporate income and personal income when it gets to the owners.
- Pick a name that is distinguishable and available. While the meaning of “distinguishable” varies by state, it typically means a name should be different enough from an existing business name to avoid confusing a consumer. Here’s an example:
-“Delicious Cookies” and “The Delicious Cookie” are not different enough.
-“The Most Delicious Cookie” and “Delicious Cookies” are different enough to pass the test.
- Available means no one else claimed the business name in the state.
- Every LLC has to use a corporate suffix to indicate the company is a LLC. This means the last word in the name must be: “Limited Liability Company” “Limited Company” “L.L.C.” “LLC” “L.C.” “LC” “Limited” “Ltd.” “Company” “Co.”
LLCs cannot use a prohibited word. While this list is made for Michigan, the rules apply to most other states. These words are reserved for companies with specific permissions to operate as a doctor, banker, or other profession listed.
What is a Fictitious Name? How do I register a Fictitious Name in Maryland?
Fictitious names, also called DBAs/Trade Names/Assumed Names/Alternate Names, are made-up names that you can use to market your business.
Fictitious names are used for three reasons:
- Companies want to market their company in multiple different ways. Imagine Coca-Cola Company vs. Coke.
- There is a large company that owns multiple smaller companies with distinct brands. Imagine Alphabet, Inc. vs. Google.
- A company registered in one state cannot use their original name in a new state because the original name isn't available. They need a fictitious name.
If you'd like to file a fictitious name in Maryland, you can register for it online on the Maryland Secretary of State website or use WizForm.
Article of Organization is the document that every domestic LLC in Maryland has to file to register their company with the state of Maryland.
The Article of Organization includes topics such as business name, mailing address, and LLC members (someone with an ownership interest in the LLC). You can file the Article of Organization on the Maryland Secretary of State website.
You might be wondering: Why would I use a service like WizForm to do this if I can just do it myself? You could do it by yourself but there are several benefits to using services like WizForm.
1. Protecting your privacy. When you file the Article of Organization, all the information on the document is public (your name, your address, email, phone number). Anyone can look it up and use that information to send you mail/email/phone calls. If you use WizForm, we will incorporate on behalf of you and protect your privacy by using our name, address, email, and phone number.
- 2. Filling out the form correctly. While most of the sections are self-explanatory, there are some key sections that can be confusing. These include the company's duration, if the company should be run by a member or manager, the effective date of the company, and picking the right name. Additionally, you want to be careful that you don't over-disclose on the filing if your business needs to evolve in the future.
- 3. Using a Registered Agent. See the section below for more on registered agents and why you should use one.
- 4. Setting up an operating agreement. Operating agreements are the rules that govern how a business is run. You need to make sure that your operating agreement covers situations like how to dissolve the company, transferable interests (if someone dies or gets divorced), rights of members, and voting procedures.
A registered agent is a person or company acting as your company’s contact when the government needs to reach you about a legal matter. This person is the person that is “served” a lawsuit. It’s smart to use a registered agent to protect your privacy and to ensure your company is reachable if a legal matter arises. If you appoint yourself as a registered agent and aren’t around when someone tries to serve you a lawsuit, the court can enter a default judgment for the other side (which is expensive).
Most states require you to have an operating agreement for your LLC. These rules range from how profits are distributed to dissolving the company. All LLCs need an operating agreement because the government will control how you run your company without one.
Each state varies in what a business is allowed to put in its operating agreement. If you want to write an operating agreement yourself (we do not advise this), you should look for these things in the state law:
- Does the state limit indemnification?
- Voting Rights of Members
- Appraiser and Dissenter Rights
- Transfer Rights and how divorces/deaths affect the rights of members
- Profit Distribution
- To set up a bank account and get paid by other vendors, you will need an Employer Identification Number (EIN). The IRS provides EINs for free.
- You will use your EIN to pay taxes with the federal government.
Every business has to pay local, state, and federal taxes. LLCs are unique in that they aren't technically a federal tax classification like a corporation. The default tax status of an LLC is a sole proprietorship or a partnership. This means that all business income is passed to the business owners and taxed as personal income.
LLCs have the choice to elect a different tax status such as a C-Corporation or a S-Corporation. See the S-Corporation section below if you are curious about electing to be a S-Corporation to save money on taxes.
Maryland Specific Taxes
- If your business sells items that require sales tax, you need to register with the Maryland Department of Revenue to set up a sales tax account.
- If you have employees that earn wages, you need to register with the Maryland Department of Revenue to set up wage withholding, worker's compensation, and unemployment insurance.
- Maryland imposes a personal property tax on any furniture, fixtures, office and industrial equipment, machinery, tools, supplies, and inventory. You can register and find out more info here.
Maryland has a personal income tax and all profits passed to the founders of the LLC will be taxed as personal income.
You are required to file federal income tax on any profits that are made by your business.
S-Corporations are a type of Corporation that allow for more beneficial tax treatment but come with certain restrictions.
LLCs can elect to be taxed as a S-Corporation (less taxes) while keeping the structure of a LLC (more informal than a Corporation).
The main benefit of combining a LLC and S-Corporation is how your profits are taxed. Let's look at an example.
- Company A has $100,000 in profits. Let's say that the personal income tax rate is 35%. A standard LLC (without S-Corp status) would have 100% of the profits passed to the founders, and 35% of that money would go to taxes. The founders would give $35,000 to the government and keep $65,000.
- Company B has $100,000 in profits. Let's say that the personal income tax rate is 35%, and the long-term capital gains tax rate is 20%. An LLC with S-Corp status would allocate 60% of the profits to "reasonable salaries" and 40% to dividends. The 60% (or $60,000) would be taxed at 35%, and the founders would have to pay $21,000 to the government. The 40% (or $40,000) would be taxed at 20%, and the founders would have to pay $8,000 to the government. The result is that the founders would pay $29,000 to the government and keep $71,000. The founders would save $6,000 a year on taxes compared to the company with normal LLC status.
In order to file for S-Corporation status, you need to first register as an LLC and then file a Form 2553 with the IRS. You also need to ensure that your operating agreement is not in conflict with specific IRS requirements.
Maryland respects the federal S-Corp election and doesn't require a separate state filing.
State governments refer to out of state companies as "foreign." This term includes out of state and out of country.
States require you to register as a business if you "do business in a state." This term isn't super clear as each court will evaluate a business on a case by case basis. In general, you should register your business if you do any of the following:
- You have contracts with people or companies in the state.
- You have employees or offices in the state (this includes the founders)
- You have bank accounts in the state.
- You are paying local taxes or sales taxes in the state.
- You use wholesalers or affiliates in the state to sell your product.
The key is if you are doing business consistently or in a 1-time transaction. If you are consistently doing business in a state, you need to register there.
To register in Maryland as a foreign LLC, you need to:
- Obtain a Certificate of Existence from the first state you incorporated in.
- File an Application for Authority with the Maryland Secretary of State.
- Need to adhere to all tax requirements and annual filing requirements like domestic LLCs.
All LLCs must file an annual report by April 15th.
Annual report filings are included in your yearly subscription when you file with WizForm.