So you’ve got a great idea for a small business – now what?
Whether you’re still in the R&D phase, you’re meeting your first clients, or you’ve been running a successful small business “under the table” for a while now, at some point you’re going to need to form a business entity to operate legally in the state of Maryland. In today’s legal environment, it is critical to form your small business in a way that protects you, the owner, from personal liability in the event of an unfortunate lawsuit. At Patriots Law Group, we take pride in helping veterans, retirees, and small business owners navigate the legal challenges of business ownership.
Why should I form a business entity in Maryland?
Rather than operating under your own name, forming a business entity allows you to keep your business separate from your personal life. This is important in case of lawsuits and for tax reasons, but it is also important if you plan on growing your business, since you need an Employer ID Number (EIN) to open a business bank account and pay new employees. You can also legally register your trade or business name, protecting it from anyone else’s use.
What are the different types of business structures?
- Sole Proprietorship: This is the most common type of business entity, in which the business is owned, managed, and operated by a single person. While you don’t legally have to register as a sole proprietor, you would need to register your business to get an EIN and open a business bank account. During tax season, you can write off most of your business costs on your personal taxes, but you are responsible for all business taxes, potential lawsuits, and liability issues. Acting as a sole proprietor can also make it difficult to build business credit or get loans, since you are relying on your personal credit to fund your business.
- Partnerships: In a partnership, a business has two or more owners. In a general partnership, all owners split profits and losses, and you do not need to register your business with the state. However, you and any business partners are still personally responsible for debts and other liabilities. A limited partnership, on the other hand, is a registered business entity that treats certain partners as “limited partners” (rather than “general partners”), meaning they are more like investors and don’t have as active of a hand in running the business. This keeps their personal liability low for any business issues, but can often be expensive to form.
- Limited Liability Company (LLC): LLC owners don’t carry personal liability for their business, and can choose how the IRS treats their taxes – as a partnership or a corporation. LLCs are more expensive to register than partnerships or sole proprietorships, but there aren’t as many requirements for bylaws or other corporate formalities.
- Corporations: Corporations are legal entities that are most often used for large companies, although you could still form a corporation as its sole owner and employee. There are two main types: C-corps and S-corps. C-corps exist independently from the company’s owners, and are taxed separately, while S-corps are similar to sole proprietorships and pass profits and losses through the owner’s personal taxes. Corporations can be expensive to form, but offer many tax and liability benefits, especially for larger companies with multiple employees.
How does forming a business entity protect me from personal liability?
Small businesses are often vulnerable to liability issues. For example, if someone gets sick after eating in your restaurant and decides to sue, they would be suing your business if you formed an LLC or C-corp, but would be suing you directly if you ran a sole proprietorship, partnership, or any other business unregistered with the state. It’s critical to separate your business interests from your personal interests – in the event of an emergency, you don’t want your personal assets, your home, or your retirement plans to be in jeopardy because of a business liability issue.
Every business is different. No matter the industry, size, or structure you’re planning for your business, it is in your best interests to consult with an experienced attorney who can help you navigate Maryland’s business laws. Patriots Law Group offers years of experience serving small business owners, especially veterans, retirees, and business owners who cater to military interests. To learn more about forming a business entity in Maryland, visit our website or give us a call at (301) 952-9000. We’re here to help!