A primer on selecting a business entity for your new Maryland business

Choosing the entity for a new business is crucial in setting it up for success.

The Maryland workforce grew by 40,000 jobs in 2015, according to an interview with state Comptroller Peter Franchot by WTOP. In January 2016, The Baltimore Sun cited Jeffrey Lacker, president of the Federal Reserve Bank in Richmond, Virginia, as saying that the Maryland economy experienced 2.2 percent economic growth in 2015, a trend he believes will continue and considers very positive in a time of slowing population and productivity growth.

In this economic atmosphere, Maryland entrepreneurs may decide that now is the time to start their new business ventures. One of the first things a new business owner should do is find legal counsel with which to partner as the business finds its roots. With his or her lawyer, the client can shape short- and long-term goals for the business and make important decisions for the new enterprise. For a healthy start and to position the business for success, the owner must choose a business entity within which to operate.

The particular entities available are determined by state law and Maryland offers many – more than 20, according to Borek’s Maryland Business Planning Guidebook. While a more obscure choice may be the better one for a particular business, something legal counsel can advise, a handful of entities are most well known.

Major factors considered in the choice of business entity:

  • Owner’s personal risk of liability for business debt
  • Control and management
  • Tax issues
  • Type of business

If a person goes into business alone, a sole proprietorship is created. A sole proprietor has complete control of the business, but also is personally taxed for business profit and at risk for business liabilities.

When two or more people go into business, a general partnership is created. Unless a partnership agreement alters the relationships among partners, they generally divide profits and debts, including tax liability, equally between them, and all have management power.

The corporation is a fictitious legal entity with one main advantage, that it normally shields owners from personal liability for business debt and obligation. However, the corporate structure can be cumbersome because of its relatively high level of regulation that requires certain formalities be continually observed such as regular meetings and public disclosures. In addition, unless the corporation is closely held by one or a handful of people, management and control are decentralized in a board of directors elected by the shareholders, who own the corporation.

Finally, some view the corporate structure as disadvantageous because of so-called double taxation. First, the corporation itself is taxed as its own entity on business profit, and second, individuals as stockholders or employees are taxed on dividends or salaries paid out to them by the corporation.

A popular and often advantageous business entity is the relatively new limited liability company or LLC, available in Maryland since 1992. The LLC is a hybrid of the positive aspects of the partnership and of the corporation: limited owner liability and the option of pass-through taxation in which owners are taxed directly, rather than using the double-taxation model of the corporation.

Many more options exist in Maryland; this is only a broad introduction to the topic. An attorney can provide advice and guidance about the choices potentially appropriate for a new business.

The attorneys at Lusk Law, LLC, with offices in Frederick County, Maryland, advise entrepreneurs in all aspects of the creation of new businesses, including the choice of business entity.