LLC vs S-Corp | What Entrepreneurs Need to Know in Maryland

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LLC vs S-Corp in Maryland

When starting a small business in the Maryland, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Maryland. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Maryland. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Maryland

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Maryland?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Maryland?

Unlike a limited liability company (LLC) or other business structures, Maryland S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Maryland

Creating a business in Maryland requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Maryland Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Maryland does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Maryland.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Maryland

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Maryland is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Maryland. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Maryland are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Maryland are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Maryland to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Maryland with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Maryland State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Maryland, it costs $300, which can be paid to the MA Sec. of the Commonwealth. Of course, before forming the whole LLC, you must pay the initial fee of $100 to the Maryland Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Maryland have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Maryland LLC: An LLC can have any number of owners, called members, from starting Maryland Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Maryland S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Maryland LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Maryland.

Maryland S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Maryland LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Maryland S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Maryland LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Maryland Operating Agreement.

Maryland S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Maryland LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Maryland: LLC or S-Corp?

Filing an LLC or S-Corporation in Maryland requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Resident Agent. To establish an LLC in Maryland, you must submit the Articles of Organization to the Maryland Department of Assessments and Taxation. Your Articles of Organization must include information about your Maryland LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Maryland S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Maryland: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Maryland depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Maryland LLC Cost for detailed information.

Maryland S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Maryland LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Maryland?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Maryland. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734​ in Maryland.

FAQs

What is an LLC?
An LLC is a limited liability company, which is a legal business entity that provides personal liability protection to its owners.
What is an S-Corp?
An S-Corp, or S-Corporation, is a type of business entity that is taxed like a partnership, but also provides limited liability protection to its owners.
What are the benefits of forming an LLC in Maryland?
Some benefits of forming an LLC in Maryland include personal liability protection for the owners, ease of management, and flexibility in terms of taxation.
What are the benefits of forming an S-Corp in Maryland?
Some benefits of forming an S-Corp in Maryland include the ability to avoid some double taxation, legal protection for the owners, and the ability to raise capital through stock ownership.
What is the difference between an LLC and an S-Corp in Maryland?
The biggest difference between an LLC and an S-Corp in Maryland is the way they are taxed, with LLCs being taxed like partnerships and S-Corps like corporations.
Can an LLC elect to be taxed as an S-Corp in Maryland?
Yes, LLCs in Maryland can choose to be taxed as S-Corps, allowing them to avoid some double taxation and take advantage of different tax benefits.
How many owners can an LLC have in Maryland?
LLCs in Maryland can have an unlimited number of owners, called “members.”
How many owners can an S-Corp have in Maryland?
S-Corps in Maryland can have up to 100 shareholders.
Can an LLC and an S-Corporation be the same thing in Maryland?
No, an LLC and an S-Corp are different legal business entity types that are taxed differently and have different ownership structures.
Are LLCs and S-Corps necessary to operate a business in Maryland?
No, businesses in Maryland can operate without forming an LLC or S-Corp, but doing so provides additional legal and tax-related benefits.
Which type of business entity is quicker to set up in Maryland – an LLC or an S-Corp?
Forming an LLC is generally quicker and easier than forming an S-Corp in Maryland.
What is the filing fee to form an LLC in Maryland?
The filing fee for forming an LLC in Maryland is $100.
What is the filing fee to form an S-Corp in Maryland?
The filing fee for forming an S-Corp in Maryland is $120.
Can an LLC issue stock in Maryland?
No, LLCs in Maryland cannot issue stock, as they do not have shareholders.
Can an S-Corp issue stock in Maryland?
Yes, S-Corps in Maryland can issue stock to its shareholders.
Can an LLC have subsidiaries in Maryland?
Yes, LLCs can have subsidiaries in Maryland, which are separate legal entities.
Can an S-Corp have subsidiaries in Maryland?
Yes, S-Corps can have subsidiaries in Maryland, which are separate legal entities.
Are LLCs or S-Corps more flexible in terms of management in Maryland?
LLCs are generally more flexible in terms of management, as they do not require a board of directors or a fixed management structure like S-Corps do.
Are LLCs or S-Corps subject to Maryland franchise tax?
Both LLCs and S-Corps in Maryland are subject to the state franchise tax, which is dependent on the entity’s income.
Can LLCs or S-Corps be dissolved in Maryland?
Yes, both LLCs and S-Corps can be dissolved in Maryland.
How are LLCs and S-Corps taxed in Maryland?
LLCs are taxed like partnerships, while S-Corps are taxed like regular corporations.
Are LLCs or S-Corps better for small businesses in Maryland?
The choice between LLCs and S-Corps depends on the specific needs and circumstances of the business.
Can LLCs or S-Corps offer employee stock options in Maryland?
S-Corps can offer employee stock options in Maryland, but LLCs cannot, as they do not issue stock.
Can LLCs or S-Corps be owned by a single person in Maryland?
Yes, LLCs and S-Corps in Maryland can be owned by a single person.
Do LLCs or S-Corps require annual meetings in Maryland?
Both LLCs and S-Corps in Maryland are required to hold meetings of its members or shareholders.
Are LLCs or S-Corps more recognized by potential investors in Maryland?
S-Corps are generally considered more established and recognizable by potential investors in Maryland.
Are LLCs or S-Corps more recognized by potential customers in Maryland?
The type of business entity used by a company is unlikely to affect customer recognition in Maryland.
Can an LLC convert to an S-Corp in Maryland?
Yes, LLCs in Maryland can convert to S-Corps if they meet certain requirements.
Can an S-Corp convert to an LLC in Maryland?
Yes, S-Corps in Maryland can convert to LLCs if they meet certain requirements.
How do I form an LLC in Maryland?
To form an LLC in Maryland, you will need to file articles of organization with the Maryland Secretary of State and pay a fee.
How do I form an S-Corp in Maryland?
To form an S-Corp in Maryland, you will need to incorporate your business with the Maryland Secretary of State and then file a Form 2553 with the IRS to obtain S-Corp tax status.
Can a Maryland LLC elect to become an S-Corp for tax purposes?
Yes, a Maryland LLC can elect to be treated as an S-Corp for tax purposes.
What are the tax implications of forming an LLC in Maryland?
Maryland LLCs are passed through as sole proprietorships or partnerships for tax purposes, which means that owners will pay income tax on the portion of the business they own.
What are the tax implications of forming an S-Corp in Maryland?
Maryland S-Corps are pass-through entities for tax purposes, which means that income is passed through to shareholders and taxed as individual income.
How many owners are required to form an LLC in Maryland?
There is no minimum number of owners required to form an LLC in Maryland.
How many owners are required to form an S-Corp in Maryland?
To form an S-Corp in Maryland, you will need at least one shareholder.
Can the owners of a Maryland LLC be held personally liable for business debts?
Maryland LLC owners cannot be held personally liable for company debts beyond their initial investment.
Can the owners of a Maryland S-Corp be held personally liable for business debts?
Maryland S-Corp owners cannot be held personally liable for company debts beyond their initial investment.
Are there any residency requirements to form an LLC in Maryland?
There are no residency requirements to form an LLC in Maryland.
Are there any residency requirements to form an S-Corp in Maryland?
There are no residency requirements to form an S-Corp in Maryland.
Are there any annual filing requirements for LLCs in Maryland?
Maryland LLCs must file an annual report with the state and pay a fee.
Are there any annual filing requirements for S-Corps in Maryland?
Maryland S-Corps must file an annual corporate tax return and pay a corresponding fee.
Are Maryland LLCs required to have an operating agreement?
While not required, it is highly recommended that all LLCs have an operating agreement to establish legal precedent.
Are S-Corps in Maryland required to have bylaws?
Yes, S-Corps in Maryland are required to have bylaws, which detail the company’s operational policies.
Can an LLC later choose to become an S-Corp in Maryland?
Yes, a Maryland LLC can later choose to become an S-Corp by filing Notice of Election with the IRS.
Can an S-Corp later choose to become an LLC in Maryland?
Yes, a Maryland S-Corp can choose to become an LLC by filing articles of organization with the state.
What is the process for dissolving an LLC in Maryland?
To dissolve an LLC in Maryland, you will need to file articles of dissolution with the state and pay a fee.
What is the process for dissolving an S-Corp in Maryland?
To dissolve an S-Corp in Maryland, you will need to file articles of dissolution with the state and notify the IRS of the dissolution.
Can the name of an LLC be the same as an existing business in Maryland?
No, the name of an LLC cannot be the same as an existing business in Maryland.
Can the name of an S-Corp be the same as an existing business in Maryland?
No, the name of an S-Corp cannot be the same as an existing business in Maryland.
What is the cost of filing for an LLC in Maryland?
As of 2021, the cost of filing for an LLC in Maryland is $100.
What is the cost of filing for an S-Corp in Maryland?
As of 2021, the cost of filing for an S-Corp in Maryland is $120.
What is the difference between a single-member LLC and a multi-member LLC in Maryland?
A single-member LLC in Maryland has one owner while a multi-member LLC in Maryland has multiple owners.
What is the maximum number of owners allowed in an S-Corp in Maryland?
There is no maximum number of owners allowed in an S-Corp in Maryland.
How does Maryland treat the income of an out-of-state LLC operating in the state?
Maryland requires out-of-state LLCs to register with the state and file both annual and income tax returns for any income earned within Maryland.
How does Maryland treat the income of an out-of-state S-Corp operating in the state?
Maryland requires out-of-state S-Corps to register with the state and file both annual and income tax returns for any income earned within Maryland.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Maryland will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Maryland and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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