LEGAL GUIDE
Written by attorney Seth Hamilton Kramer | Aug 23, 2010

The Pros and Cons of Maryland Limited Liability Companies

In most states, including Maryland, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal and Maryland tax purposes.

To form an LLC under the laws of Maryland, one or more persons must file articles of organization with the State Department of Assessments and Taxation (SDAT), which must be accompanied by a filing fee of $100. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Maryland, by filing an application for a certificate of authority with the SDAT and paying a filing fee of $100.

Once an LLC has been formed in Maryland, or a foreign LLC has registered to do business, it will have to file a annual report and personal property tax return each year and pay a fee of $300 in addition to any personal property tax.

PROs

Advantages of the LLC include the following:

  • It combines the limited liability features of a corporation and the flow-through tax treatment of income and losses of a partnership;

  • It provides the simplicity of a sole proprietorship, for a one-owner business, but with the limited liability features of a corporation;

  • Unlike a general partnership, owners of an LLC have limited liability, and, unlike limited partners in a limited partnership, they do not lose their limited liability if they actively participate in management;

  • While its flow-through tax advantages are generally only slightly superior to those of an S corporation, an LLC is not subject to the numerous technical rules that apply to S corporations. Thus, for example, an LLC can have more than 100 shareholders; have foreign owners ("members"); have owners that are corporations, partnerships, trusts, or other LLC's; derive a large portion of its revenue from certain net passive income sources; and issue more than one class of ownership (stock). Violation of any one of these technical restrictions may disqualify an S corporation; and

  • For certain leveraged real estate investments, LLC's have significant advantages over either partnerships or S corporations with regard to the ability of the owners to take tax losses, under technical tax rules having to do with "tax basis."

CONs

Disadvantages of operating your business as an LLC are as follows:

  • In Maryland, LLC laws are new and relatively untested, unlike the corporation and partnership laws, which have evolved over time. Because Maryland courts have not interpreted many provisions of the state's LLC Act, business owners face increased risk and uncertainty when operating with this form of entity. This is NOT the case with Delaware LLCs, which benefit from a large volume of established case law from that state's respected judiciary;

  • Single-member LLC's (other than those electing to be taxed as corporations) are generally disregarded as taxable entities. While this is generally a good thing, one major disadvantage has recently surfaced -- the courts have held that the owner of a single-member LLC is liable to the IRS for the employer's share of federal payroll taxes, when the LLC is a disregarded entity. (Even owners of a corporation or multi-member LLC can be held liable for failing to pay over withheld employee income and FICA taxes, but are not personally liable for the federal taxes imposed on the employer, such as federal unemployment tax and the employer's half of the FICA tax.); and

  • LLCs are poorly suited for companies that intend to be publicly traded or seek venture capital

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