Converting Your Maryland Sole Proprietorship to an LLC in 2024

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Convert Maryland Sole Proprietorship to LLC

As a small business owner in Maryland, you may have started your business as a sole proprietorship due to its simplicity and low initial costs. However, as your business grows, you may want to start an LLC in Maryland, which is more suitable for your needs. Converting your Maryland sole proprietorship to an LLC can protect your assets and optimize your business’s growth potential.

In this comprehensive guide, Webinarcare Editorial Team will walk you through the step-by-step process of Converting your Maryland Sole Proprietorship to an LLC, enabling you to make an informed decision for your business.

How to Convert your Maryland Sole Proprietorship to an LLC

What is a Sole Proprietorship and Limited Liability Company?

A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the entire business. A sole proprietorship has no legal distinction between the owner and the business, meaning the owner is responsible for all the business’s debts, liabilities, and obligations. 

On the other hand, a Limited Liability Company (LLC) is a legal business structure that combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. This means the owners, known as members, are not personally responsible for the company’s debts and liabilities. The company’s profits and losses are reported on the members’ tax returns. We reviewed some of the Best LLC Services and provided features as an add-on with their packages for you to check out.

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Having a sole properietorship had given you freedom and comfortability, but, starting an LLC in Maryland has a lot to offer, which is why it is a highly recommended business structure. It is suggested that you speak with a legal professional first before you begin coverting your sole proprietorship to an LLC. They will understand what’s best for you and your company.

– WEBINARCARE EDITORIAL TEAM

Steps on Converting Maryland Sole Proprietorship to an LLC

To convert Maryland sole proprietorship to an LLC, you must follow the guidelines that include choosing a name for your LLC, appointing a Resident Agent, preparing for the Articles of Organization, creating an Operating Agreement, obtaining an EIN, opening a business bank account, registering for state tax and licenses, and lastly, informing clients and vendors of conversation.

Step 1: Choose A Name For Your LLC

The first step in converting your sole proprietorship to an LLC is selecting a unique and distinguishable name for your new entity. In Maryland, there are specific naming requirements and restrictions that you must adhere to when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “LLC.“
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in Maryland.

In Maryland, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 30 days. You must file a name reservation application in the Maryland Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for a DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for Maryland DBA, you can file it in three methods, online, by mail, and in person filing.. However, before filing a DBA, you should know that you need to renew your DBA from up to five years, which costs around $25 Filing Fee and $50 Expedited Fee.

You can check the availability of your desired business name by searching the Maryland Business Express‘s website.

Step 2: Appoint a Resident Agent

In Maryland, all LLCs are required to appoint a Resident Agent. Resident Agent is a person or entity responsible for receiving and forwarding legal and tax documents on behalf of your Maryland LLC, such as service of process, Maryland Annual Report, and state tax notifications. Your Resident Agent must have a physical address in Maryland and be available during regular business hours. In Maryland, the cost of Resident Agent usually ranges from $50 – $200.

When selecting a Resident Agent, consider their reliability, knowledge of state requirements, and ability to manage sensitive legal documents. You can serve as your own Resident Agent, appoint another individual, or hire the Best Registered Agent Service.

Step 3: Prepare and File the Maryland Articles of Organization

To officially form your Maryland LLC, you must prepare and file Maryland Articles of Organization with the Maryland Secretary of State. The Articles of Organization is a legal document that outlines essential information about your  Maryland LLC, including:

  • The LLC’s name
  • The Resident Agent’s name and address
  • The LLC’s purpose
  • The LLC’s duration (perpetual or for a specific term)
  • The names and addresses of the initial members or managers

In Maryland, the filing fee for the Articles of Organization is $100. You can submit the document online through the Maryland Secretary of State’s website or by mail. Processing times may vary, so check the website for current information.

Step 4: Create an Operating Agreement

Although not legally required, Maryland Operating Agreement is a crucial document that outlines the structure, management, and financial arrangements of your Maryland LLC. The operating agreement should include the following:

  • The roles and responsibilities of members and managers.
  • The process for admitting or removing members.
  • The allocation of profits and losses among members.
  • The procedure for making major decisions.
  • The process for dissolving the LLC.

Having a written Maryland operating agreement can help prevent disputes and ensure a smooth operation of your LLC. It is advisable to work with Maryland Business Attorney to draft an operating agreement that meets the specific needs of your business and complies with Maryland laws.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) in Maryland, or Federal Tax Identification Number, is a unique nine-digit number issued by the Internal Revenue Service (IRS) to identify your business for tax purposes. With an EIN, you can open a business bank account, file tax returns, and hire employees.

To obtain an EIN for your Maryland LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in Maryland can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

Recommended: Professional services have the EIN included in their LLC formation package. We recommend using –

LegalZoom – ($0 + State Fee for LLC formation)

Step 6: Opening of Maryland Business Bank Account

When converting your sole proprietorship to an LLC, separating your personal and business finances is essential by opening a dedicated business bank account. Maryland business bank account helps maintain limited liability protection and makes managing your business’s finances and taxes easier.

To open a business bank account in Maryland, you will need the following documentation:

  • Your LLC’s Certificate of Formation
  • Your LLC’s EIN
  • Your LLC’s operating agreement (if applicable)
  • A resolution authorizing the opening of the account (if required by the bank)

You can check out the Best Banks in Maryland, which offers the best fees, services, and convenience for your business needs.

Step 7: Register for Maryland Taxes and Licenses

As an LLC in Maryland, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, you must register for Maryland sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Maryland unemployment insurance and workers’ compensation coverage.
  • Business License: Maryland Business License is a legal document granted by a state government body that permits you to conduct business within the area under its jurisdiction. The price of business licenses and permits in Maryland ranges from $50 – $300.

To ensure you comply with all applicable Maryland tax and licensing requirements, you can check out the Maryland Comptroller of Maryland for more information.

Step 8: Inform Clients and Vendors of the Conversion

After converting your Maryland sole proprietorship to an LLC, you must inform your clients, vendors, and other business contacts of the change. Update your contracts, invoices, and marketing materials with your new LLC name, and communicate the transition to ensure a smooth and professional process.

Ongoing Compliance For Maryland LLCs

As an LLC in Maryland, you are subject to ongoing compliance and reporting requirements, including:

  • Filing Annual Report with the Maryland Secretary of State and pay the associated fee and which you can pay every 1 year (15th April).
  • Maintaining accurate and up-to-date records of your Maryland LLC’s finances, meetings, and decisions. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in Maryland.
  • Adhering to any industry-specific licensing and regulatory requirements.

Benefits of Converting Maryland Sole Proprietorship to an LLC

In converting Maryland Sole Proprietorship, there are benefits that you should consider. Here are the benefits you must know before converting your sole proprietorship:

Limited Liability Protection

Converting a sole proprietorship to an LLC provides limited liability protection for the business owner. This means that the owner’s assets (such as their home or car) are separate from the business assets and are protected from being seized to pay off business debts or in case of a lawsuit.

Credibility and Professionalism

Maryland LLC can help improve the credibility and professionalism of the business. Many customers and suppliers prefer dealing with an LLC, which shows commitment and stability.

Tax Flexibility

With Maryland LLC, you can choose how your business will be taxed. It can be taxed as a sole proprietorship, a partnership, or a corporation. This allows you to choose the tax structure that best fits your business and may result in potential tax savings.

Easier Access to Funding

Maryland LLC may have an easier time obtaining funding from banks and investors than a sole proprietorship. Many lenders and investors prefer to work with an LLC, as it demonstrates a commitment to the business and provides legal protection.

Ownership and Management Flexibility

Maryland LLC allows you to have multiple owners (called members) and to divide ownership and management responsibilities among them. This can make growing your business easier or bring in new partners.

Enhanced Privacy

In some states, such as Maryland, an LLC can offer more privacy than a sole proprietorship. This is because the business owner’s personal information may not be as public as it would be with a sole proprietorship.

Easier Transfer of Ownership

With Maryland LLC, transferring business ownership to another person or entity is generally easier. This can be beneficial if you decide to sell your business, bring on new partners, or plan for succession.

Continuity of Existence

Unlike a sole proprietorship, which ceases to exist upon the death or incapacity of the owner, Maryland LLC can continue to operate even if the owner passes away or becomes incapacitated. This provides stability and continuity for the business and its employees.

Compliance with Maryland Requirements

Some states require certain types of businesses, such as those in the professional services industry, to operate as Maryland LLC or another corporate entity. Converting your sole proprietorship to an LLC in Maryland ensures that your business complies with these regulations and avoids potential legal issues.

Access to Additional Benefits

Maryland LLC may be eligible for additional benefits, such as state-specific tax incentives or credits, not available to sole proprietorships. These benefits can help reduce your tax burden and support the growth of your business.

In summary, converting a sole proprietorship to an LLC in Maryland can provide significant benefits, including limited liability protection, tax flexibility, increased credibility, and easier access to funding. It’s essential to carefully consider these advantages and consult with a legal or tax professional before deciding to convert your business structure.

FAQs

How do I convert my Maryland sole proprietorship to an LLC?
You can file Articles of Organization for an LLC with the Maryland Department of Assessments and Taxation.
What is the advantage of converting my Maryland sole proprietorship to an LLC?
LLC status limits personal liability, separates business finances from personal finances, and can bring tax advantages.
Do I need to file a new EIN when I convert my Maryland sole proprietorship to an LLC?
Generally, yes. You will need to apply for a new EIN with the IRS if you had one as a sole proprietor.
How much does it cost to convert my Maryland sole proprietorship to an LLC?
Filing Articles of Organization costs $100 for online filings and $150 for paper filings.
How long does it take to convert my Maryland sole proprietorship to an LLC?
Typically, it takes up to 10 business days to process LLC formation documents in Maryland.
Do I need a lawyer to convert my Maryland sole proprietorship to an LLC?
No, but legal advice may be beneficial in certain situations.
Will I still be taxed as a sole proprietorship after converting to an LLC in Maryland?
No, you will need to choose a tax classification for your LLC, which may impact your tax obligations.
Can I change the name of my business when converting to an LLC in Maryland?
Yes, you can choose a new name for your LLC or maintain your current name.
Do I need to register the name of my LLC in Maryland?
Yes, you must conduct a name search and reserve your LLC name with the Maryland Department of Assessments and Taxation.
How can I check if my desired LLC name is available in Maryland?
Use the Maryland Department of Assessments and Taxation’s name search tool.
When will my Maryland LLC officially be recognized by the state after filing Articles of Organization?
Your LLC will be officially recognized once the Articles have been processed and issued a charter number by the Department of Assessments and Taxation.
Do I need to file ongoing paperwork to maintain my LLC in Maryland?
Yes, you must file an annual report and pay a $300 fee to maintain your LLC status in Maryland.
Can I still operate as a sole proprietor while my LLC status is pending in Maryland?
Yes, but it may affect limited liability protections if you engage in business activities prior to being recognized as an LLC.
Do I need to notify my current clients/customers of my LLC conversion in Maryland?
It is recommended that you notify clients/customers, vendors, and other parties of your LLC conversion.
Can I have a single-member LLC in Maryland?
Yes, Maryland allows for the formation of single-member LLCs.
Can an LLC be owned by non-US residents in Maryland?
Yes, non-US residents can own and manage LLCs in Maryland.
Is there a personal income tax in Maryland for LLC owners?
Yes, LLC owners in Maryland are subject to personal income tax on any share of profits or losses as deemed on the K-1 income tax form.
Can I use a registered agent service for my LLC in Maryland?
Yes, Maryland LLCs are required to have a registered agent, who can be either an individual or a registered agent service.
Do I need to have an operating agreement for my LLC in Maryland?
An operating agreement is not legally required in Maryland, but it is recommended to ensure clarity and limit misunderstandings.
How can I dissolve my LLC in Maryland?
You can file Articles of Dissolution with the Maryland Department of Assessments and Taxation to dissolve your Maryland LLC.
Can I change the tax classification of my LLC in Maryland?
Yes, you can change the tax classification of your Maryland LLC by filing Form 8832 with the IRS.
Can a Maryland LLC have unlimited members?
Yes, there is no limit to the number of members in a Maryland LLC.
Will converting my Maryland sole proprietorship to an LLC affect any contracts or agreements already in place?
Generally, the LLC replacement does not void, amend, or require re-execution of pre-existing contracts.
Will my Maryland LLC formation be visible to the public?
Yes, your LLC name, addresses, and registered agent information will be publicly available on Maryland’s searchable database.
What happens to any loans or debts my sole proprietorship has after converting to an LLC in Maryland?
The LLC becomes a new entity, and thus financial obligations must be reviewed for transfer prohibitions and modification requirements.
Can Maryland LLC members manage the business, or do they need to hire a separate manager?
Members of a Maryland LLC can manage the business or hire a separate manager if desired.
Is there a business income tax return for Maryland LLCs?
Yes, Maryland LLCs must file Form 510 with the state each year unless they operate as a disregarded entity.
Can Maryland LLCs skip paying taxes on profits if they reinvest those profits back into the business?
Reinvesting may help avoid federal profits taxation, but most Maryland LLC profits will still count toward fileable business and personal taxable earnings.
Can a Maryland sole proprietorship be converted to an LLC?
Yes, it is possible to convert a Maryland sole proprietorship to an LLC.
Why would I want to convert my Maryland sole proprietorship to an LLC?
Converting to an LLC can offer you more protection and flexibility as a business owner.
How is an LLC taxed differently than a sole proprietorship in Maryland?
LLCs can choose to be taxed as a partnership, an S corporation or a C corporation, whereas sole proprietorships are taxed at the personal income tax rate.
What are the benefits of being taxed as an S corporation in Maryland?
This type of taxation can provide significant savings on employment taxes.
How much does it cost to convert a Maryland sole proprietorship to an LLC?
The fees associated with converting vary depending on factors such as the filing type, business entity type, and business location.
Do I need to hire an attorney to convert my Maryland sole proprietorship to an LLC?
It is not necessary to have an attorney assist you with the conversion process, though it can be beneficial.
What paperwork needs to be filed to convert my Maryland sole proprietorship to an LLC?
You will need to file articles of organization with the Maryland Secretary of State.
How long does the conversion process take in Maryland?
It generally takes around 5 to 10 business days for your LLC to be officially established in Maryland.
Do I need a separate EIN (Employer Identification Number) when converting to an LLC in Maryland?
If you had employees as a sole proprietorship, then you will need a new EIN for your LLC in Maryland.
Will I need to get a new business license when converting to an LLC in Maryland?
If you plan to conduct business in a new Maryland locality, it may be necessary to obtain a new license following your LLC conversion.
Will I still need to pay Maryland income taxes as an LLC?
Yes, your LLC will still be subject to Maryland’s corporate taxation laws.
What kinds of liability protection does an LLC afford small business owners in Maryland?
LLCs provide protection for the personal assets of the business owner.
Are LLCs more tax-efficient than sole proprietorships in Maryland?
While this depends on the business, LLCs in Maryland can be more tax-friendly than sole proprietorships due to greater tax deductions.
How long can a Maryland LLC exist?
LLCs in Maryland operate with perpetual succession, meaning your LLC can continue as an ongoing entity.
Can I be the sole member of an LLC in Maryland?
Yes, a single-member LLC is allowed in Maryland and may deliver important liability protections.
How important are operating agreements in Maryland LLCs?
Operating agreements govern the operation of your LLC, making them necessary for conducting business efficiently.
Is Maryland a business-friendly state for LLCs?
Yes, Maryland is known for being business-friendly, particularly for LLC formation.
Do I have to go through a formal dissolution if I no longer want to own an LLC in Maryland?
Yes, it is necessary to dissolve your LLC correctly in Maryland.
What actions should I take after forming my LLC in Maryland?
You should consider opening a business bank account, getting proper insurance coverage, and obtaining any necessary permits and licenses.
Can I convert my LLC to another type of business entity in Maryland?
An LLC in Maryland can transform into other business types with Secretary of State approval.
Can a foreign entity convert to an LLC in Maryland?
No, foreign business entities need to form a new LLC in Maryland.
Is an LLC transferable to another party in Maryland?
The mid-term or long-term success of your LLC is intricately tied to the transferability of the LLC interest.
What are the disadvantages of being taxed as a C corporation in Maryland?
The major daily headache to operating a C corporation in Maryland is its “double taxation”.
How do I satisfy the name requirements for forming an LLC in Maryland?
The Maryland Secretary of State office inspects each LLC name application to safeguard that the name the person chooses satisfies legal overview.
Can a foreign entity own an LLC in Maryland?
Yes, A foreign entity can own an LLC in Maryland.
How do I select the registered agent for my Maryland LLC?
The Maryland LLC statute requires choosing a registered agent who stays in Maryland.
What is the capital amount required to set up an LLC in Maryland?
Maryland doesn’t require creating any startup capital for forming an LLC; you only pay a mandatory $100 filing fee of your articles of organization.
Do I need a specialist CPA for Maryland LLC taxes?
Depending upon the level of difficulty and the requirements for your LLC, it is wisest to seek the professional help of a skilled CPA.

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Conclusion

Converting your Maryland sole proprietorship to an LLC is a significant decision that can provide valuable benefits, such as limited liability protection, tax advantages, and enhanced credibility. Following the steps outlined in this guide and consulting with legal and financial professionals, you can successfully navigate the conversion process and position your business for future growth and success.

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