Once you have decided to embark on the adventure of starting your own business, there are going to be a number of legal questions that arise in the beginning and throughout the entire incorporation process. I have over 30 years of corporate law experience and would be happy to provide you with the legal representation you will undoubtedly need but, in the meantime, below is some information to get you started:
Sole proprietorships are not incorporated, which means nothing is filed with the State and has just one member. All profits and losses are part of your personal income tax return and there is no liability protection.
There are several types of partnerships, some of which do not require filing any paperwork. Generally, there is no personal protection against liability in partnerships unless you file for a limited partnership in Maryland. General partners will have their profits and losses pass through their personal return unless you take the appropriate steps to set up and file through the Maryland statues for partnership.
Limited Liability Company (LLC)
You must file Articles of Organization with the State Department of Assessment and Taxation (SDAT) to become registered as a legal entity in Maryland. LLCs are afforded liability protection, which means each member’s liability is limited to the extent of the company’s assets or as otherwise provided for in the Operating Agreement. In terms of taxes, an LLC is treated as a separate entity which means all taxes are passed through to members by the issuance of K-1’s. Profits and losses are not included as part of your personal tax return which means only one level of taxation. Each person in an LLC is called a member.
A corporation does not have members; instead they are called shareholders who are all protected from liability and may have a board of directors, a management team, or be just one person. Corporations have more formal rules, such as the need for meetings, the keeping of minutes, and regular filings to shareholders. The exception to this rule is that a family or sole shareholder corporation typically does not have to follow these formal rules. Some companies, if not set up properly, may be double taxed on their corporate gains but this can be avoided by electing to become a Subchapter S Corporation (see below).
Subchapter S Corporation
Subchapter S Corporation is strictly a tax election. It overrides the normal tax consequences of a corporation and allows shareholders to pass profits and losses directly to their personal tax return. It also removes the corporate tax level so there is only one level of taxation. To elect for Subchapter S status, you cannot be foreign owned, must have fewer than 100 members, and have only one classification of stock. It is typically more suited for family or small business owners.