Single Member LLCs in Maryland: A Comprehensive Guide to Understanding the Benefits and Navigating the Legal Requirements
Limited Liability Companies (LLCs) are popular business structures for small businesses. They offer several benefits of sole proprietorships and partnerships while providing some of the liability protection of a corporation.
In this guide, our Maryland business lawyer covers the benefits of setting up a Maryland LLC while explaining the legal requirements under Maryland law you must meet to maintain the benefits of being a Limited Liability Company.
What is a Maryland Limited Liability Company (LLC)?
An LLC is a business structure recognized and governed by state law. Therefore, the requirements for an LLC can differ by state. The owners of an LLC are called members. An LLC may have one or more members. Some businesses cannot be LLCs, including insurance companies and banks.
By default, the Internal Revenue Service (IRS) does not recognize an LLC as a business entity for federal income tax purposes. Therefore, the IRS taxes LLC profits based on a sole proprietorship (single-member LLC) or a partnership (multi-member LLC). However, LLCs can elect to be taxed as a corporation.
What's the Point of a Single-Member LLC?
The main advantage of forming Maryland LLCs is avoiding personal liability for company debts, liability, and acts. Members are also shielded from liability for acts of the other members. Therefore, creditors cannot pursue a member's personal assets for company debts, except in limited instances.
LLCs are also considered pass-through entities unless they elect to be taxed as a corporation. As a result, the LLC does not pay taxes on its profits. Instead, the owners report the LLC’s business income and losses on their individual tax returns.
Forming a Maryland LLC can add credibility to your company, especially for a new business. Potential customers may view the company as “established” because it has a formal business name instead of a person’s name or a DBA name.
What Are the Pitfalls of a Single Member LLC?
It costs nothing to start a business as a sole proprietor. However, you must pay filing fees and other costs to form an LLC. Depending on state requirements, you will pay an initial filing fee and an annual fee.
The ownership of a Maryland LLC is more difficult to transfer than a corporation. Corporations are sold through shares of stock. Generally, all members of an LLC would need to agree to add a new member or alter the ownership percentages.
Does Maryland Allow Single Member LLCs?
Yes, you can form single-member LLCs in Maryland. However, you must formally register the LLC by filing Articles of Organization with the state.
Forming a Limited Liability Company (LLC) in the State of Maryland
Are you ready to form your Maryland LLC in the State of Maryland? The basic steps for forming a Limited Liability Company in Maryland are:
1. Choose a Name for Your LLC in Maryland
Choose the name you want to use for your LLC in Maryland. Before taking any further steps, check with the Maryland Department of Assessments and Taxation to ensure your chosen name is available for use. Then, register the name so no one else can use the name while you prepare the necessary documents to register the LLC.
2. Appoint a Resident Agent
You must have a resident agent for your Maryland Limited Liability Company. The resident agent is the person designated to accept legal papers for the LLC. The resident agent must be over 18 years old, a Maryland citizen, or a Maryland corporation. The LLC owner can serve as the resident agent.
3. File Maryland LLC Articles of Organization
Complete and file the Articles of Organization with the Department of Assessments and Taxation.
4. Prepare a Maryland LLC Operating Agreement
Your Maryland LLC Operating Agreement establishes how the company will operate. Operating Agreements are customized to meet the needs of the LLC. A standard Maryland LLC Operating Agreement typically includes:
The roles of each member in multi-member Maryland LLCs.
The process of handling a member’s interest if they die or wish to sell/transfer their interest.
The distribution of profits and losses.
Management roles, including how decisions are made for the Maryland LLC.
Voting rights for each member.
The capital contribution for each member to form the Maryland LLC.
The process for conflict resolution.
The steps for dissolving a Maryland LLC.
You can find templates online for Operating Agreements. However, because the Operating Agreement sets the rules for managing and operating the business, consulting a Maryland business lawyer is strongly recommended.
5. Comply With Other Tax and Regulatory Requirements
Compliance with tax and regulatory requirements depends on your business type. You are responsible for determining what tax and regulatory requirements apply to your business. Meeting with a Maryland business attorney before forming an LLC can help you avoid costly mistakes and errors.
6. File an Annual Report for the Personal Property Return
File an annual report for your Personal Property Return every year with the SDAT. The personal property return is due by April 15th. The filing fee for the annual report is $300.
Cost to Set Up an LLC in Maryland
The filing fee payable to the state when you file your LLC are:
Certificate of Organization $100.00
Certified Copy of document above $20.00 + $1.00 page
Certificate of Status at time of filing $20.00
Checks or money orders should be made payable to the State Department of Assessments and Taxation or SDAT. If you file online, you can pay your fees through the Maryland Business Express portal.
You may also incur fees for lawyers, a business accountant, and other professionals who assist and advise you in forming the LLC.
What Do I Have to Do After I File?
The steps you take after you form the LLC depend on the business type and other factors. If you are unsure what to do, an attorney can assist you in ensuring compliance with all regulations and laws.
Important Steps After Forming a Maryland LLC
Examples of steps you might need to take after forming an LLC in Maryland include:
Create an Operating Agreement if you have not done so.
Apply for an Employer Identification Number with the IRS if you have employees or need the EIN.
Open a business tax account with the Maryland Comptroller’s Office.
Apply for required licenses and permits.
Open a business bank account. You will likely need an EIN for this step.
Choose an accounting method for your business.
Obtain business insurance for the company, including liability insurance.
There could be other steps you need to take to ensure your LLC is operating legally. An attorney can help you through these steps and other steps you should take after forming an LLC.
Piercing the Corporate Veil: When LLCs May Be At Risk
A reason for forming an LLC is to have protection from creditors. Section 4A-301 of the Maryland Corporations Code states a member of an LLC is not personally liable for LLC obligations solely by reason of being a member. Therefore, people and creditors cannot sue members and take their personal assets for LLC judgments. However, there are exceptions to the rule.
For example, if a creditor’s claim exceeds the value of the LLC’s assets, the creditor might pierce the corporate veil to attach personal liability to the members. The “veil” is the legal protection from personal liability for the LLC’s obligations and debts.
Examples of ways a creditor could pierce the corporate veil for a Limited Liability Company (LLC) include:
Illegal or fraudulent acts by the members.
Tort claims for negligence or other wrongful conduct.
The LLC owners fail to pay employment or sales tax to the government.
The owners failed to set up the LLC correctly or follow through with the requirements to maintain the LLC.
Members of the LLC sue other members and win. The losing member may have to pay the judgment from personal funds.
These are only a few examples of how LLC members could potentially be liable for the debts and obligations of the LLC.
Frequently Asked Questions
Answers to FAQs about Maryland single-member LLCs include:
What’s the Difference Between a Single Member LLC and a Sole Proprietorship?
A single-member Limited Liability Company is a business entity recognized under Maryland state law. It has one member who benefits from the profits of the business. All business profits and expenses pass through the LLC to the owner to be reported on the owner’s income tax returns.
A sole proprietor is personally liable for all debts and obligations of the company. Creditors and other parties can attach the sole proprietor’s assets to pay for company debts. However, a Maryland LLC offers limited protection from personal liability from company obligations.
What's the Difference Between a Multi-Member LLC and a Single Member LLC?
A multi-member LLC has more than one owner. Several members share the profits and losses from the business. A single-member LLC has just one owner. A multi-member LLC in Maryland needs a Maryland LLC Operating Agreement to reduce disputes among members.
Does a Single Member LLC Need an EIN?
Typically, a single-member LLC classified as a disregarded entity (pass-through entity) might be able to use the owner’s Social Security Number. However, an LLC must have an EIN (Employer Identification Number) if the LLC has employees or if it is required to file certain excise tax forms.
According to the IRS, a single-member LLC that is a disregarded entity, does not have employees, and does not have excise tax liability should not need an EIN. The LLC uses the member's TIN (taxpayer identification number) for federal tax purposes. However, the Limited Liability Company might need an EIN to open a bank account or because of state law.
How to Pay Yourself in a Single-Member LLC
Instead of taking a salary, the member pays themselves through owner draws. The frequency and amount the member withdraws from a Maryland LLC are up to the member. The payment frequency may be established in the Operating Agreement. However, it is wise to leave sufficient funds in the LLC account to pay business expenses, debts, and costs.
How Do I Pay Taxes on a Single Member LLC in Maryland?
The IRS does not recognize LLCs as business entities for tax purposes, even though state law recognizes LLCs as legal entities. Therefore, the tax requirements for LLCs differ from other business structures.
By default, single-member LLCs are taxed as sole proprietorships, and a multi-member LLC is taxed as a partnership. However, you can choose to have your LLC taxed as a C-Corp or S-Corp. If not, your single-member LLC will be a pass-through entity.
Pass-through entities do not pay taxes on the income the business earns. Instead, all income and expenses “pass-through” the company to the member. Each member files a personal income tax return that includes their share of the profits and losses from the business.
While the Limited Liability Company may not be required to file annual tax returns and pay income taxes if it is a pass-through entity, it could be required to file administrative tax returns. The administrative tax return reports and pays other taxes, such as employment taxes, sales taxes, and property taxes. The LLC structure and the type of business dictate whether these taxes are required to be collected, reported, and paid.
If the LLC elects to be taxed as a C-Corp, the LLC must submit corporate tax returns and pay income taxes on the profits at a corporate rate. In addition, the members would pay personal taxes on distributions from the LLC.
Multi-member LLCs are taxed as partnerships unless they elect to be taxed as a corporation. LLC profits and losses are allocated to the members based on the LLC’s operating agreement. The members report the information on their personal income taxes.
How to File Taxes as an LLC Single Member
When you file your personal tax return, you include the income and expenses from the LLC. You pay personal income taxes based on the net profit you receive from your Maryland LLC.
Some members might be required to file and pay estimated quarterly taxes. The IRS says you must pay estimated taxes if:
You anticipate owing at least $1,000 in tax after deducting allowable withholding and refundable credits; AND,
You expect your credits and withholding to be the smaller of 90% of the tax on your tax return for the current year or 100% of the tax on last year’s tax return.
Failing to pay estimated quarterly taxes could result in penalties. You might also be required to file and pay estimated tax payments to Maryland.
How Do You File Taxes for a Single-Member LLC With No Income?
As a single-member LLC, the member files the income and expenses on their personal tax return. However, if the LLC had no income or expenses, the member might not be required to file a Schedule C.
How to Close a Single-Member LLC with the IRS
According to the IRS, you must file a final return and related forms to close your business. For a single-member LLC being taxed as a sole proprietor, you file a Schedule C Profit or Loss from Business with your individual income tax return for the year you close your business. You might also be required to file other forms if you sold business property or owed self-employment tax.
If your Maryland LLC elected to be taxed as a corporation, you must file a Corporate Dissolution or Liquidation (From 966). You must also file the appropriate final tax return for either a C-Corp or S-Corp and the required documents.
What About Forming a Single-Member LLC in Virginia or The District of Columbia?
Virginia recognizes single-member LLCs. To form an LLC in Virginia, you must choose an available unique name. Then, you must appoint a registered agent and file the Articles of Organization. The Virginia State Corporation Commission provides a guide for filing an LLC in Virginia.
The District of Columbia also recognizes a single-member LLC. The name you choose must be available and meet the requirements for LLC names in DC. Then, you must appoint a registered agent and file Articles of Organization with the Department of Licensing and Consumer Protection.
Contact Our Maryland Business Lawyer for More Information
Maryland business lawyer Steve Thienel has extensive experience assisting clients in forming businesses and handling business tax matters. Contact our law office to schedule an appointment for more information.
