If you’re considering starting a business in Maryland, you’ll likely be impressed with the state’s well-educated populace, one of the country’s lowest poverty rates and the strong economic presence of defense contracting and medical research. Tax planning is a key part of starting a business in Maryland, however, because the state has one of the higher combinations of business, sales and individual income taxes. Here’s what you need to know about starting a business in the state.
Make a Business Plan
A good business plan underlies most successful startups. One of the first factors to consider is what service or product line the business will offer for sale.
Thanks to its perch on the Chesapeake Bay, Maryland has a long history of providing seafood. The presence of Johns Hopkins University makes it a magnet for medical research enterprises. And the roster of major defense contractors located in the state is rivaled by few others. Businesses catering to these industries will find ready-made markets and networks of support.
Sales and marketing is the next key part of a business plan. And marketing to Marylanders has to take into account the fact that 40% have college degrees, the third highest among all states. And only New Hampshire has a lower poverty rate.
That well-educated workforce is one of Maryland’s strongest draws and one the new business start-up working on its staffing plan will want to consider. The high proportion of federal workers, thanks to the proximity of Washington, D.C., also lends a special character to the state’s labor force.
Start-ups are usually financed by owners’ savings, friends and family and bank loans. In Maryland, a number of government-backed financial incentives provide tax credits, loan guarantees and grants to select businesses. Among firms that may be eligible for financial incentives are those in cybersecurity, biotechnology, defense, manufacturing and higher education.
Choose a Business Structure
All businesses have to register through the Maryland Business Express portal, which is run by the Department of Assessments and Taxation. When registering, business start-ups have to select which structure they will employ.
Maryland recognizes four main types of business entities – sole proprietor, partnership, corporation and limited liability company. Choosing an entity has significant ramifications for a business’s ability to grow and the amount of oversight and paperwork required by the state.
- Sole proprietorship: This simplest and most common business form consists of a single individual engaged in a business activity without formal organization. There is no state filing requirement for a sole proprietorship. If the business is done under an assumed name, an assumed name certificate should be filed with the local county clerk.
- General partnership: A partnership consists of two or more persons joining together to conduct a business for profit. Like the sole proprietorship, this form has no state filing requirement. Also like sole proprietorships, partnerships may have to file assumed name certificates in the counties where they are located.
- Corporation: Corporations are separate legal entities that provide shareholders with limited liability and ease of ownership transfer but at the cost of more documentation and regulatory filings. There are two types of corporations, C corporations and S corporations. The latter type lets profits pass directly to the owner(s), who therefore avoid double taxation. Corporations have to file articles of incorporation with the state’s Department of Assessments and Taxation.
- Limited liability company: Texas limited liability companies offer liability limit advantages without the complexity and filing requirement of corporations. They must, however, file a certificate of formation with the secretary of state’s office.
Register the Business Name
All Maryland businesses have to register with the state’s Maryland Business Express portal. The site provides step-by-step directions for searching for available business names, identifying necessary licenses and more.
Get Tax ID numbers
Businesses must set up tax accounts and obtain tax numbers for both federal and state governments in order to withhold, file and pay taxes.
Registering with the Internal Revenue Service provides a federal Employee Identification Number. The EIN lets employers withhold taxes on worker wages and salaries and file the business’s federal tax return. Sole proprietorships and single-member LLCs don’t need an EIN. They can use the owner’s Social Security number.
Maryland businesses can get both state tax numbers and a federal EIN when they register with Maryland Business Express. Registration for a variety of Maryland tax and insurance accounts can be done online in a single step with the Maryland Comptroller’s Combined Registration Application.
How Businesses Are Taxed
All Maryland corporations pay state income tax at a rate of 8.25% of net income. Owners of pass-through entities including S corporations, LLCs and partnerships pay individual state income taxes at 7.5%.
There’s no Maryland corporate franchise tax. And schools in the state don’t collect separate taxes either.
The state collects a 6% sales tax on taxable goods sold in the state. Alcohol sales are taxed at 9% and there are a few additional variations for other products.
Obtain Licenses and Permits
Maryland and its cities and counties require occupational and professional licenses and permits for a number of different types of businesses. An online statewide licensing database that is part of Maryland Business Express has information on county as well as state licensing requirements.
The Maryland OneStop Portal allows business owners to browse alphabetized lists of occupational, professional and other licensing requirements. The information includes license costs as well as the time it will take to get a license issued. For example, a nursery or plant dealer has to pay $100 and wait a week. A landfill license doesn’t cost anything, but issuing it will require seven to 36 months.
The Bottom Line
Maryland’s high-quality workforce, medical research facilities and a large number of military contractors may offset the challenge of a relatively severe tax environment. Businesses that select the state for a start-up will find the process of getting underway significantly eased by the state’s well-designed online business portal.
Tips: Resources for Starting a Small Business
- Many financial advisors specialize in helping small business owners with their financial planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Some parts of starting a small business are the same no matter where you plan to operate. Here are some of the basic requirements for beginning a new enterprise.
Photo credit: ©iStock.com/Kruck20, ©iStock.com/coastalpics, ©iStock.com/DenisTangneyJr