Four Basic Forms
Recently Developed Alternatives
The United States does not have a nationwide law for ordinary business corporations. Business Corporations are formed under the laws of the particular state selected as the place of incorporation. Maryland’s General Corporation Law governs Maryland corporations.
Incorporation is accomplished by filing a charter (articles of incorporation) with the Maryland State Departments of Assessments and Taxation (SDAT-located in Baltimore City). Filing a charter requires payment of a modest fee, designating a Maryland principal office and designating a resident agent for the corporation.
Stockholder’s (Owner’s) Liability for debts of the corporation is limited to the amount paid for their capital stock.
Taxation – A corporation is generally subject to state and federal tax as a separate taxpaying entity, unless the company (if eligible under federal tax rules) becomes exempt from federal income tax by electing “S corporation” status. Income of an S corporation is taxed directly to the stockholders, as if they were partners in a partnership. Dividends paid to shareholders are not tax deductible to the corporation.
Operation – Stockholders elect the directors and are responsible for approving major decisions, such as merger, sale of substantially all of the assets, share exchange, charter amendment and dissolution.
Two or more individuals or legal entities may associate to carry on a business for profit as a general partnership under the Maryland’s Revised Uniform Partnership Act (RUPA).
A Partner may be any legally competent person or entity.
Formation of a Partnership - There are no formal prerequisites or filing requirements for establishing a Maryland general partnership. The respective rights and obligations of the partners are customarily set forth in a written partnership agreement.
Taxation – A partnership is not a separate taxpayer and its income is taxed directly to the partners.
Formation of an LLP - A Maryland general partnership may become an LLP by filing with the SDAT a simple certificate, which must designate a Maryland principal office and resident agent.
Partners’ Liability – A partner of an LLP, in the person’s capacity as a partner, is not personally liable for the debts of the partnership and is not liable for the acts of another partner, employee or agent of the partnership, unless the partner is negligent in appointing, directly supervising, or cooperating with the other individual. This limitation of liability of a Maryland LLP may or may not be recognized under the laws of many states that have not adopted similar legislation.
Taxation – An LLP is not a separate taxpayer and its income is taxed directly to the partners.
A limited partnership is a partnership that has one or more limited partners and one or more general partners. Maryland limited partnerships are formed under the Maryland Revised Uniform Limited Partnership Act.
Formation of a Limited Partnership - A limited partnership is formed by filing, at a nominal cost, a “certificate of limited partnership” with the SDAT. The certificate, as in the case of a corporation, must designate a principal office and resident agent. There are no eligibility requirements for becoming a partner, and the limited partnership is not required to have a minimal amount of capital. The rights and obligations of the partners are customarily set forth in a limited partnership agreement.
Partners’ Liability – The principal difference between a general and a limited partnership is that (unlike all partners of a general partnership) a limited partner who does not actively participate in the operation of the partnership business does not have personal liability for partnership debts, but is at risk only for the amount invested in the limited partnership. Only the general partners, who control the limited partnership, are liable to the partnership creditors.
Taxation – Unless the limited partnership elects otherwise under IRS regulations, a limited partnership is not taxed as a separate entity, and income is taxed directly to the partners.
Formation of an LLLP - A Maryland limited partnership may become an LLLP by filing with the SDAT a certificate similar to that filed by an LLP. Neither general nor limited partners of an LLLP, in their capacity as partners, are liable to creditors of the LLP.
Liability - An LLC provides the same shield from liability as a corporation. An LLC may have one or more members.
Taxation - Unless the LLC elects to be taxed as a
corporation, federal and state income is taxed directly to the members.
Forming an LLC – An LLC is formed by filing articles of organization.
Sole Proprietorships
Formation - Sole proprietorships require no legal entry formalities
except compliance with State and local licensing and taxation requirements.
Taxation – Income is taxed directly to the sole proprietor.