A limited liability company (“LLC”) is a specific type of business entity. According to United States business law, if someone files a lawsuit against a corporation and the suit is successful, the corporation pays money out of the corporation’s assets. This means that individual members’ and owners’ own assets are not accessed, and they are not personally liable for the corporation’s debts. They are also not responsible for any damages awarded against it in a lawsuit.
One of the disadvantages could be double taxation, which means that corporate profits are first taxed to the corporation as they are earned. These profits are then taxed to shareholders as capital gains income when the shareholders receive their dividends. Another example of a disadvantage would be that the liability of LLC structures is such that owners can be sued for their own negligence.
However, like partnerships, LLCs are not taxed at the entity level. This means that unlike corporations, they do not pay taxes as an LLC; the only taxes are paid by individual members who have earned profit.
To reiterate, limited liability companies differ from corporations in terms of ownership structure. LLCs are owned by individuals, while corporations are owned by shareholders. Additionally, LLC owners generally are not personally liable for liabilities or debts incurred by the LLC. This fact allows LLC owners to manage their business without concerns associated with losing their own assets.
Who Should Form An LLC?
In terms of who should consider forming an LLC, people who want to own a small business should consider forming an LLC. Doing so protects individual assets by limiting liability to the LLC’s own resources. Thus, if they are sued, the small business owner will not have to pay out of personal assets.
Those interested in forming a business with minimal paperwork and costs should also consider forming an LLC. This is because LLC formation only requires filing articles of organization, and paying a fee with the state. This fee is generally less expensive than the required fee for forming a corporation.
Additionally, keeping track of LLC income and expenses is considerably easy. This is due to the fact that under an LLC, separate tax return filing is not required; rather, members and managers report all income and expenses on an individual tax return.
LLC management can also be simple, as an LLC with two or more individuals can develop an operating agreement. In this agreement, the members will provide details regarding how the LLC is governed, how profits will be allocated, and what members’ votes are needed for which specific actions.
Additionally, an operating agreement can address how the LLC may be dissolved or shut down. The operating agreement may also provide rules as to how disputes among LLC members are to be resolved, and address what happens if an LLC member dies or becomes incapacitated.
How Do I Form An LLC In Maryland?
Each state has its own set of requirements in terms of how to form an LLC. Maryland specifically has several requirements for an LLC to be formed, such as:
- Naming The LLC: The LLC must have the words “LLC,” or some variation of it, in the company name. This is so that the public will know that the company is held as an LLC. The name must be completely unique in order to avoid confusing the public. There are also restrictions placed on specific words, such as bank, doctor, and engineer. Some words are forbidden from use, such as FBI and Treasury. This is also done in order to avoid confusing the public;
- Registered Agent: The LLC must provide the name and address of a registered agent in the state. They may receive paperwork or notices on behalf of the LLC in Maryland;
- EIN: The LLC must obtain an “EIN,” or Employer Identification Number, for tax purposes. They will also need this number in order to hire employees;
- Articles of Organization: An LLC will need to file an Articles of Organization with the Secretary of State; and
- Operating Agreement (Optional): While an Operating Agreement is not required to form an LLC in Maryland, it is recommended that every LLC has one to ensure smooth operations and avoid potential disputes.
To form an LLC in Maryland, the only paperwork that is required would be the Articles of Organization. This must be submitted to Maryland’s Secretary of State, and can be found on their website. The Articles of Organization require the following:
- Name of the LLC;
- Purpose of the LLC;
- Address of the LLC in Maryland; and
- Name and address of the registered agent in Maryland
The Articles can be filed either online or in person, both of which require a filing fee and may take some time to process.
What Are The Advantages And Disadvantages Of Forming An LLC In Maryland?
Maryland offers limited liability to owners and members of LLCs. What this means is that you cannot be held personally responsible for the actions and debts of your Maryland LLC. Additionally, Maryland allows LLC members to vote or hold meetings remotely and online. Members may also vote by proxy, meaning that members can send a representative to vote for them instead of appearing in person.
Maryland is considered unique among US states in that any earnings made by the LLC, going to a member who is not a resident of Maryland, will be taxed before they are sent to the member.
According to Maryland’s Limited Liability Company Act, as of 2012, creditors can now receive distributions from an LLC if a member is in debt. This means that they can also vote, inspect books, and even act as an agent of the LLC. This largely removes the security of an LLC. While creditors cannot access the profits of the other members, it can take the place of a member in debt and make serious changes to the LLC simply for the purpose of paying off debt.
How Should I Choose A Business Management Structure?
Some of the factors that a new business owner should consider when selecting a business management structure include:
- The number of owners that are forming the business, such as a single proprietor, multiple members, etc.;
- Whether they want the ability to issue stocks and raise money from investors;
- Considering both federal and state tax laws to evaluate the tax incentives that each business management structure offers;
- How much control the owner wishes to have over company decisions and assets;
- The amount of money that the owner is willing to spend to register their business; or
- The potential risks and liabilities that they are willing to incur both personally and professionally. An example of this would be how a person who wants to protect their personal assets from creditors should choose to form an LLC.
New business owners should also consider:
- Wind-up or termination procedures;
- The rights that they want to possess if they decide to sell or expand on the business; and
- Their comfort level in having company details exposed to the general public.
Do I Need A Lawyer To Form An LLC In Maryland?
If you want to form an LLC in Maryland, you should contact an experienced Maryland corporate lawyer. An attorney can help you navigate the LLC formation process, and will also be able to represent you in court, as needed, should any legal issues arise.