CHOICE OF ENTITY

Generally

The State of Maryland offers numerous business forms under which to organize a business. Personal liability of owners, taxation, management requirements, and lender and investor preferences are among the principle considerations in choosing an entity form.

Forms

Corporation

Before the advent of limited liability companies, corporations were THE choice of entity for owners (shareholders) who wanted nearly a bullet-proof shield from liability for the decisions or acts of the corporation. Perhaps the biggest complaint with the form is that the money that ultimately flows to the shareholders as dividends is taxed twice -- initially at the corporate level (the business entity itself is taxed on income), and then at the shareholder level when distributions are made (dividends are subject to personal income tax). Although an "S-Corp" election can be made with the IRS that permits single taxation of a corporation -- where the income of the corporation flows through to the individual shareholders -- there are numerous rules that apply, including, but not limited to, limitation on the number and type of shareholder. One or more other tax elections may also result in flow-through taxation. A corporation that does not make a special tax election with the IRS is generally referred to as a "C Corp."

Articles of Incorporation must be filed with Maryland's State Department of Assessments and Taxation ("SDAT") in order to form a corporation. Subsequent to forming the corporation, certain formalities must be followed including, but not limited to, Board of Director meetings, documentation of Board meetings, and subscriptions for and issuance of stock.

Limited Liability Company

The limited liability company ("LLC") has become a popular business form because, like a corporation, it shields owners (members) from personal liability, but, unlike a corporation, it has few mandatory organizational requirements and it can elect flow-through tax treatment other than taxation as an S Corp (i.e., to be taxed as a disregarded entity or a partnership).

Articles of Organization must be filed with SDAT in order to form a limited liability company. An operating agreement governs the LLC's internal organization and owners' relationship.

Other

There are a number of other business forms available, including, but not limited to, sole proprietorship, partnership, limited partnerships, and close corporations. The chart below provides a comparison of these other forms to corporations and LLCs.