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Editorial 11 MIN READ

Maryland in August 2018: the $100 LLC with a $300 return

A flat formation fee, a Personal Property Return that most founders do not know exists, and the state that wrote the country's first benefit-corporation statute

The Editors
Staff, Incorporator.org
11 min read Updated
Contents 7 sections
  1. The mechanics
  2. The Personal Property Return, which nobody warns you about
  3. What Maryland actually taxes
  4. Sales tax, payroll, and the Wayfair aftermath
  5. The benefit-corporation angle, which is Maryland's
  6. Who Maryland actually makes sense for
  7. Sources

Maryland LLC costs $100 to form and $300 a year to keep, and the $300 is not an income tax. It is a separate filing called the Annual Report and Personal Property Return, due every April 15 to the State Department of Assessments and Taxation, and it is the line item most out-of-state founders miss when they price the state.

This is a guide for someone forming a Maryland LLC in August 2018, seven months into the federal Tax Cuts and Jobs Act and in the shadow of the Supreme Court's June decision in South Dakota v. Wayfair, which has rewritten the nexus calculus for every state-registered entity selling across state lines. Maryland has not moved on either front yet. The state's own mechanics, however, are stable enough to file against this week.

The mechanics

You file Articles of Organization with the State Department of Assessments and Taxation (SDAT), which in Maryland performs the functions a Secretary of State does in most other jurisdictions. The statutory authority is the Maryland Limited Liability Company Act, codified at Md. Code Ann., Corps. & Ass'ns §§ 4A-101 through 4A-1104, with the content of the Articles specified at § 4A-204. The required fields are narrow: the name of the LLC (with one of the statutory designators, most commonly "LLC" or "L.L.C."), a statement of the purpose for which the LLC is formed, the address of the principal office in Maryland, and the name and address of a resident agent. The form SDAT publishes fits on one page.

The filing fee is $100, set by Md. Code Ann., Corps. & Ass'ns § 1-203(b). You can file on paper through the Charter Division or online through Maryland Business Express, the state portal that now handles most entity filings. The paper route is the base fee; the online route is the same $100 plus a small processing surcharge. Standard turnaround at SDAT has historically run four to six weeks during ordinary load, which is slow by the standards of any state with a functioning online queue, and the backlog has been the subject of legislative attention for several sessions. Expedited processing is available for an additional $50, which brings the turnaround to seven business days on paper and typically faster online. The $50 expedited charge is the one most founders end up paying; the standard route is long enough that a closing timeline or a bank-account opening will usually force the question.

After the Articles clear, the rest of the stack is the usual one. You obtain an EIN from the IRS through Form SS-4 online, which arrives as soon as you finish the form. You write an operating agreement, which Maryland does not require you to file and does not require you to have but which § 4A-402 of the Act repeatedly assumes exists. And you pick a federal tax classification: disregarded entity for a single member, partnership for multiple members, or an S-corp or C-corp election if the tax math supports the change. The default is almost always fine for the first year, and the conversion to an S-corp can be made later by filing Form 2553, discussed in our guide to the §83(b) and election mechanics.

The Personal Property Return, which nobody warns you about

Maryland is one of a small set of states that taxes business personal property, and the filing that operationalizes that tax is the same one SDAT uses for the annual report. Every Maryland LLC must file a combined Annual Report and Personal Property Return by April 15 each year, under Md. Code Ann., Tax-Property §§ 11-101 and 11-104 and the annual-report requirement at Md. Code Ann., Corps. & Ass'ns § 4A-907. The filing fee is $300, paid to SDAT regardless of whether the LLC actually owns any taxable personal property in the state. The $300 is a base filing fee; if the LLC does own business personal property (furniture, equipment, inventory in some cases), there is a separate local personal-property tax assessed by the county or Baltimore City on top, keyed to the form's property schedule.

The $300 is the figure most founders miscount when they compare Maryland to its neighbors. Delaware's annual LLC tax is $300, due June 1. Virginia's annual registration is $50, due on the last day of the formation month. Pennsylvania has no annual report fee for standard LLCs. Maryland sits at the top of the Mid-Atlantic range and the filing is not, in any useful sense, an income tax. The LLC owes it as a standalone charge, the state owes nothing back, and the purpose is the administrative maintenance of the entity on the Maryland rolls plus, where applicable, the collection of personal property values for the counties. Missing the April 15 deadline triggers a $30 to $500 late penalty under SDAT's schedule and, if unaddressed, forfeiture of the entity's right to do business. SDAT will then list the LLC as "not in good standing," and banks and counterparties will notice.

The resident agent requirement is at § 4A-210. Every Maryland LLC must maintain a resident agent with a physical Maryland address; a post office box alone is not sufficient. The agent may be an individual resident of Maryland or a business entity authorized to do business in the state. Commercial resident agents in Maryland charge between $50 and $200 a year, with the usual spread between mailbox-forwarding shops and full-service firms that catch the April 15 notice and push the Personal Property Return through on time.

What Maryland actually taxes

Maryland's individual income tax is graduated, and the top state bracket in 2018 is 5.75%, reached at $250,000 of Maryland taxable income for single filers and $300,000 for married-filing-jointly, under Md. Code Ann., Tax-Gen. § 10-105. The state rate alone is middle-of-the-pack. The number that matters for a Maryland founder is the local piggyback. Every Maryland county and Baltimore City imposes its own local income tax, collected by the Comptroller on the same return, at a rate set annually by the local government. Under Md. Code Ann., Tax-Gen. § 10-103, the 2018 local rates run from a statutory floor around 1.75% (Worcester County) to a ceiling of 3.20% in Howard and Montgomery Counties and in Baltimore City.

The combined state-plus-local top rate, for a Montgomery County resident with income over $250,000, is therefore 8.95%, which puts Maryland's marginal burden on high-income pass-through members in the same range as California (13.3% top), New York (8.82% state plus the Yonkers or NYC surcharge), and New Jersey (10.75%). For flow-through income from a Maryland LLC taxed as a partnership, a disregarded entity, or an S-corp, this is the rate that lands on the resident member's return.

Maryland's corporate income tax is a flat 8.25% on Maryland-taxable corporate income, set by Md. Code Ann., Tax-Gen. § 10-105(b). An LLC that elects C-corp treatment under the check-the-box regulations pays at this rate. The corporate rate is not further localized; the local piggyback applies to individual filers only. A Maryland C-corp with a Maryland office and two Maryland shareholders therefore pays 8.25% at the entity level and then each shareholder pays the state 5.75% plus the local rate on distributed earnings, which is the familiar double-tax problem that pushes most small Maryland businesses toward the LLC or the S-corp on the operating side.

Maryland's income-tax base is computed off federal taxable income, and the state uses rolling conformity to the Internal Revenue Code under Md. Code Ann., Tax-Gen. § 10-107. In practice, that means the federal Tax Cuts and Jobs Act changes that took effect January 1, 2018 flowed into Maryland's starting point automatically. The 2018 Maryland General Assembly session passed decoupling legislation from specific TCJA provisions, most visibly preserving the state's own personal exemption after the federal one went to zero, but did not decouple from the new § 199A pass-through deduction in any structural way. The state's decoupling work is worth reading against the machinery described in our earlier piece on state conformity to federal tax changes.

Sales tax, payroll, and the Wayfair aftermath

Maryland imposes a 6% state sales and use tax under Md. Code Ann., Tax-Gen. § 11-104, with no local-option add-on; unlike most states, Maryland's sales tax rate is uniform across the state. Any LLC selling taxable goods or services in Maryland registers for a Maryland sales and use tax license through the Comptroller and files returns monthly, quarterly, or annually depending on volume. The registration is a separate filing from the SDAT entity record and is the obligation most often missed by out-of-state founders who assume the entity filing is the whole set.

The June 21, 2018 decision in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), has put every state on notice that physical presence is no longer the constitutional floor for sales-tax nexus. Maryland has not yet passed an economic-nexus statute of its own, and the Comptroller's published guidance as of August 2018 still reflects pre-Wayfair physical-presence rules. That will change, on the timeline the General Assembly and the Comptroller choose. A Maryland LLC selling into other states should assume that its sales-tax compliance burden is about to expand in most of them, and an out-of-state LLC selling into Maryland should assume the same about Maryland by the 2019 session. For the moment, the August 2018 rule is the pre-Wayfair rule.

Payroll adds a Maryland withholding account with the Comptroller and an unemployment insurance account with the Department of Labor, Licensing and Regulation. The 2018 Maryland unemployment taxable wage base is $8,500, which is low by multi-state standards, and the new-employer rate is set by the Department each January. Workers' compensation coverage is mandatory for any LLC with one or more employees under Md. Code Ann., Labor & Empl. § 9-402, with narrow exceptions for sole proprietors and certain LLC members who own a substantial share and waive coverage in writing.

The benefit-corporation angle, which is Maryland's

One detail is specific to Maryland and worth flagging for founders who care about entity governance. Maryland was the first state in the country to pass a benefit-corporation statute, enacted in 2010 and codified at Md. Code Ann., Corps. & Ass'ns §§ 5-6C-01 through 5-6C-08. Eight years on, more than thirty states have followed, with the Delaware public benefit corporation (2013) and the various benefit LLC statutes each staking out slightly different design choices. The mechanics of Maryland's original model and how it has aged against the subsequent variants are worked through in our state-level benefit-corp scorecard and in the public benefit corporation examined. For a Maryland LLC founder, the practical question is whether the business wants to register as a benefit LLC under the separate statute at §§ 4A-1301 through 4A-1304, added to the Act in 2011. The benefit election is available at formation or by amendment, it triggers a separate annual benefit report filed with SDAT, and it does not change the $100 formation fee or the $300 annual return.

Who Maryland actually makes sense for

A Maryland operating company with Maryland employees or customers belongs in Maryland. The $100 filing fee is modest, the $300 annual return is real but manageable, and the resident-agent market is competitive. For a Bethesda software firm, a Baltimore logistics company, a Rockville consulting practice, or a farm operation on the Eastern Shore, the straightforward answer is the in-state LLC. The 5.75% state rate plus a local piggyback between 1.75% and 3.20% is the price of the state's services, and it is paid on the member's personal return anyway once the entity has real income.

A Maryland holding company whose operations are elsewhere is a harder call. The $300 annual return is owed regardless of activity, the local piggyback catches the resident member on her individual return, and the state has little of the case-law advantage that makes Delaware worth its own premium for sophisticated governance disputes. A founder who expects to raise venture capital will convert to a Delaware C-corp before a Series A, and the interim state of the holding entity does not justify a Maryland formation unless Maryland is where the founder and the operations actually live.

An out-of-state founder forming a Maryland LLC for a business that is genuinely elsewhere is almost always better off forming in the operating state. Maryland formation requires a Maryland resident agent, brings the entity under the $300 Personal Property Return floor, and opens a Maryland apportionment question if any revenue touches the state. Maryland residency, employees, or customers are what justify the choice; the 5.75% state rate, read alone, does not travel.

If you are in Maryland this quarter and the business is operational and local, file the Articles through Maryland Business Express, pay the $100 plus the $50 expedite, and put April 15 on a calendar as the annual Personal Property Return date. The $300 is not an income tax, it is not waived by inactivity, and it is the single most common reason a Maryland LLC quietly slides out of good standing between its first and second years.

Sources

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