Maryland LLC
Advantages and Disadvantages



Advantages and Disadvantages of a Maryland LLC




Individual Owner LLC: The IRS treats one member LLCs as sole proprietorships for tax purposes. This means that the LLC itself does not pay taxes and does not have to file a return with the IRS. As the sole owner of your LLC, you must report all profits or losses of the LLC on Schedule C, and submit it with your 1040 tax return. If you leave money in the company's bank account at the end of the year, to cover future expenses or expand the business you must pay taxes on that money.

Multi-Owner LLCThe IRS treats co owned LLCs as partnerships for tax purposes. Co owned LLCs themselves do not pay taxes on business income; instead, the LLC owners each pay taxes on their lawful share of the profits on their personal income tax returns, with Schedule E. Each LLC member's share of profits and losses, which is called a distributive share, is set out in the companies' operating agreement.

Most operating agreements provide that a member's distributive share is in proportion to his percentage interest in the business. For example, if Donna owns 60% of the LLC, and Tony owns the remaining 40%, Donna will be entitled to 60% of the LLC's profits and losses, and Tony will be entitled to 40%. If you'd like to split up profits and losses in a way that is not proportionate to the members' percentage interests in the business, this is called a "Special-Allocation," and you must follow IRS rules.However the distributive shares are divided up, the IRS treats each LLC member as though she receives her entire distributive share each year. This means that each LLC member must pay taxes on their distributive share whether or not the LLC actually distributes the money to her. The practical significance of this IRS rule is that even if LLC members need to leave profits in the LLC -- for example, to buy products or expand the business each LLC member is liable for income tax on their share of that money.

Even though a co-owned LLC itself does not pay income taxes, it must file Form 1065 with the IRS. This form, the same one that a partnership files, is an informational return that the IRS reviews to make sure the LLC members are reporting their income correctly. The LLC must also provide each LLC member with a "Schedule K-1," which breaks down each member's share of the LLC's profits and losses. In turn, each LLC member reports this profit and loss information on his individual Form 1040, with Schedule E.

A LLC can decide on Corporate Taxation Methods If your LLC will regularly need to retain a amount of profits in the company, you can save money by electing to have your LLC taxed as a corporation.

Paying Income Taxes Because LLC members are not considered employees of the LLC, but rather Self Employment business owners, they are not subject to withholding taxes. Instead, each LLC member is responsible for setting aside enough money to pay taxes on his share of the profits. You must estimate the amount of tax you will owe for the year and make payments to the IRS each quarter -- in April, June, September and January.


Limited Liability Structures - LLC

Expenses and Deductions You do not have to pay income taxes or self-employment taxes on money that your business spends in pursuit of profit. You can deduct your legitimate business expenses from your business income, which can greatly lower the profits you must report to the IRS. Deductible expenses include start-up costs, automobile, travel and entertainment expenses and advertising and promotion costs.

State Taxes and Fees Most states tax LLC profits the same way the IRS does: The LLC owners pay taxes to the state on their personal returns; the LLC itself does not pay a state tax. A few states, however, do charge the LLC a tax based on the amount of income the LLC makes, in addition to the income tax its owners pay. For instance, California levies a tax on LLCs that make over $250,000 per year; the tax ranges from about $1,000 to $9,000.


Maryland's 2011 Business Tax Climate Ranks 44th

Maryland ranks 44th in the Tax Foundation's State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property, including residential and commercial property.

Maryland's Individual Income Tax System

Maryland's personal income tax system consists of eight separate brackets with a top rate of 6.25%, kicking in at an income level of $1,000,000. Among states levying an individual income tax, Maryland's top rate ranks 22nd highest nationally. Maryland's 2008 state-level individual income tax collections were $1,229 per person, which ranked 9th highest nationally.

Maryland's Corporate Income Tax System

Maryland's corporate tax structure consists of a flat rate of 8.25% on all corporate income. Among states levying corporate income taxes, Maryland's rate ranks 16th highest nationally. In 2006, state-level corporate tax collections (excluding local taxes) were $150.80 per capita, which ranked the state 21st highest nationally.


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