Step-By-Step Guide to Forming A Business in Maryland
For many, part of the American dream is about starting your own business. If you work hard enough and smart enough, you just might make a bundle doing what you love. One roadblock holding many people back is not knowing how to start a business.
It could help to have a roadmap, a step-by-step guide to forming a business in Maryland. Also, consulting with a Maryland business attorney for guidance and advice along the way could help you avoid pitfalls that could sabotage your dream.
Action Item #1: Get an Idea for Your Business
Some people merely know they are sick of working for other people and they want to be their own boss, but they have formulated no definitive ideas beyond that point. Others might have a passion for a particular type of work, like running a farmer’s market, doing fashion design, opening a daycare center, or designing websites.
Wherever you fall along that spectrum, you really cannot make any progress until you nail down what kind of business you want to own. It’s tricky to determine whether you have a viable business idea. If you cannot find any similar business in your area, that might mean there is a need for your product or services, or it could mean there is no market for your idea. You will want to spend some time online researching the competition and discovering what they do, how they do it, and how you can do it better than they do.
Action Item #2: Map Out Your Business Plan
Before you invest your money and sweat into your business idea, take the time to write a formal business plan. You can find many sample business plan formats online. After you complete your business plan, you will know if you can actually earn the money you need from your new enterprise. You should know what your expenses will be, as well as turnaround time, overhead, risks, strengths, profit margin, and other expectations.
Action Item #3: Decide on the Structure of Your Business
The structure of your business entity will depend on multiple factors. For example:
A sole proprietorship is as easy to set up administratively as “hanging out a shingle.” Maryland does not require a sole proprietorship to file with the secretary of state to exist legally. On the other hand, with a sole proprietorship, someone who makes a claim or files a lawsuit against your company could go after your personal assets.
If you are going into business with other people, you could set up a partnership. You do not have to file with the Maryland Department of Assessments and Taxation, but you should have a well-written partnership agreement that clearly states the responsibilities and rights of each partner and covers the distribution of income and other issues.
You could protect your personal assets from liability with certain forms of business structure, like a corporation or limited liability company (LLC). It is simpler to form and operate an LLC in Maryland than a corporation and an LLC provides flexibility regarding making tax elections such as being taxed as a partnership, corporation, or s-corporation. You will want to talk with your Maryland business attorney about the benefits and downsides of the different types of business and tax structures. Also, it is smart to work with a legal professional to draft your business entity filings and documents, like articles of organization.
It is not impossible to switch from one business structure to another, but it can involve some expense and work to do so. It is best to select the most advantageous structure for your business at the outset. Besides liability and protection for personal assets, different types of business structures receive different tax treatment.
Action Item #4: Choose a Name for Your Business
You will want to select a name under which you will operate your company. The business entity you choose can impact the details of your business name. For example, as a sole proprietor, you should not hold yourself out as a corporation or an LLC.
Before spending any money on business cards, letterhead, or anything else that would bear the company’s name, you will want to check with the Maryland Department of Assessments and Taxation to make sure the name you want to use is available. If available, then you will want to register that name to protect it from getting used by others. After choosing a business name, your idea can start to feel more real.
Action Item #5: Obtain a Federal Tax Number (EIN)
Most businesses must register with the Internal Revenue Service (IRS) to obtain an employer identification number (EIN). Even if you are not legally required to get an EIN, it can be a good idea to do so. Otherwise, you will have to provide your Social Security number to vendors and some customers or clients.
Action Item #6: Decide How You Will Fund Your Company
Every year, a significant number of start-up businesses fail. One of the common reasons many new companies fail is insufficient funding. Before you actually launch your business, you will want to make sure you have the assets you need to make your company a success.
If your plan is to fund your new venture by racking up debt on your credit cards, you are likely to discover quickly that this plan is likely to leave you with a failed business and a mountain of high-interest credit card debt. It would be better to obtain funding with less onerous repayment terms, like getting loans from friends and family and using some of your savings. Keep in mind, however, you might not have income for the first year or two, and you might have to live off of your savings during that time.
Action Item #7: Choose an Accounting Method
You have choices about the accounting method you use for your business. You are not allowed to switch back and forth between different methods. For example, if you start out using a cash method and the calendar year, you should stick with that plan, rather than using the accrual method and a mid-calendar fiscal year. Inconsistency in accounting methods will create massive tax headaches for you.
Action Item #8: Separate Business and Personal Bank Accounts
When you start running your own business, every penny counts. It could be tempting to run your business and personal finances out of one bank account, but the IRS would call that co-mingling. It is best to begin as you plan to operate going forward, by opening a separate business bank account. To make it less convenient to transfer money between the business and personal accounts, you might want to consider opening your business account in a different bank than the one you use for your personal accounts.
Action Item #9: Register for Sales Tax, Permits, & Licenses
If this is your first venture into being a business owner, you will want to get information about sales tax, licenses and permits, and other governmental issues. The Small Business Administration provides a wealth of free information for business owners. You do not have to buy a state business license to do business in Maryland, but your city or county might have business license requirements.
Action Item #10: Protect Your Company with Business Insurance
Business owners say some people make a career out of filing frivolous lawsuits against companies hoping to get a quick settlement. Also, natural or man-made disasters could destroy your business. The good news is, there are many different types of business insurance that can protect your company and keep it afloat during times of adversity.
Here are a few examples of some of the common types of business insurance:
Most companies with employees in Maryland must carry Worker’s Compensation insurance. This coverage provides benefits like medical treatment, rehabilitative services, income, and death benefits for people who get hurt or sick because of their job.
Interruption of business insurance can provide payments if a covered event causes you to be unable to open your doors for a period of time.
Business property insurance can pay to repair or replace your building, inventory, equipment, supplies, and other items your company uses.
Company vehicle insurance. If your business owns cars or other vehicles, you will want to have comprehensive commercial vehicle and liability insurance. Your personal automobile insurance policy is unlikely to cover claims arising out of the use of a company vehicle.
General liability insurance for your business can provide benefits for losses not covered by other types of insurance.
Cyber security insurance can protect your company if hackers or something else causes a data breach that exposes personal information of your company, employees, and customers.
Depending on the type of business you own and many other factors, you might find it prudent to carry some other types of insurance coverage as well as the ones discussed here.
Work With a Maryland Business Attorney
Of course, if you want anyone to find you and learn about your services or products, you will need to have a business website. After completing these action items and any other steps necessary in your unique situation, you might be ready to start hiring employees and flinging open the doors of your company. Be sure to work with a Maryland Business Attorney as you progress through these steps.
