How to Start an S Corp in Maryland
While Maryland is home to some major corporations, it also has a thriving small business landscape. With a great location near some of the nation’s biggest markets, favorable tax rates, and a supportive business culture, Maryland is a great place to start your new venture.
As you prepare to launch your business, choosing a business structure is one of the most important decisions you’ll make. By opting to form your business as an S corporation (S corp), you can set yourself up for success by reducing your tax burden.
Read on to learn how to set your business up as a Maryland S corp. This guide also provides tips to help you keep your business in good standing with all state laws and regulations.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp in Maryland
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Maryland S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S corp tax calculator.
Businesses that elect S corp status will need to hire payroll and accounting services.
How to Form a Maryland S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the Internal Revenue Service (IRS) when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Maryland
Starting a Maryland LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Tailor Brands to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Maryland.
Be sure to choose a name that complies with Maryland naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Maryland LLC:
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Your name must include the phrase “limited liability company” or one of the following abbreviations: LLC, L.L.C., LC, or L.C.
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Your name cannot imply that the LLC is organized for a purpose other than the one outlined in its Articles of Organization.
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Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.
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Restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
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Your name must be distinguishable from any existing business in Maryland. This includes reserved names.
You can also read the Maryland state statutes about LLC naming guidelines for more information.
2. Is the name available in Maryland? You can use the business entity search on the Maryland Business Express website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your Maryland Registered Agent
You must elect a resident agent, also known as a Maryland Registered Agent, for your Maryland LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Maryland Registered Agent Consent to Appointment
Registered agents must consent to their appointment in Maryland by signing the LLC’s Articles of Organization. If filing electronically, you must check the box indicating that the registered agent has consented.
Step 3: File the Maryland LLC Articles of Organization
The Maryland Articles of Organization is used to officially register an LLC.
OPTION 1: File Online With Maryland Business Express
- OR -
OPTION 2: File by Mail or in Person
State Filing Cost: $100
Filing Address:
Maryland Department of Assessments and Taxation
301 W. Preston St.
Baltimore, MD 21201
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Maryland LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Maryland S corp for you, so you can focus on the things that matter most - growing you business.
Keep Your Maryland S Corp Compliant
Once you have your Maryland S corp up and running, you’ll want to keep your business in good standing by following state laws and guidelines. Maryland requires businesses to file an annual report and pay Maryland state taxes each year.
Maryland S Corp Annual Report
Your Maryland S corp must file an annual report each year with the Maryland Department of Assessments and Taxation. Because your business technically is an LLC taxed as an S corp, you’ll file the same annual report as an LLC.
Annual reports provide the state with up-to-date information regarding your business’s mailing address, the nature of its business activity, and sales. Even if your business’s information remains the same, you still need to file an annual report before April 15 each year. Failure to file your Maryland annual report and pay the filing fee may result in the dissolution of your business.
Check out our Maryland Annual Report page for a step-by-step guide.
Maryland S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Maryland S corp owners will need to pay various taxes.
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Maryland Income Taxes
Maryland has a graduated income tax rate, ranging from 2% to 5.75%. Some jurisdictions also levy their own local income tax in addition to the state rate.
Many states have income tax rates that exceed 10%, while some have no income tax. That makes Maryland’s income tax rate fairly standard when compared to other states.
Maryland Combined Registration Application
In order to make sales within the state of Maryland, you must obtain a sales and use tax license. To do this, file a Combined Registration Application with the Comptroller of Maryland.
Maryland Sales and Use Tax
Once you obtain your sales and use tax license, you’ll need to start collecting sales tax and making quarterly payments. The state of Maryland has a 6% sales tax, but there are no local sales taxes in addition to this. Visit the Comptroller of Maryland website for more information.
Additional State Taxes
The Comptroller of Maryland provides details on numerous state-specific taxes your business may need to pay, depending on its industry, number of employees, and location. Some examples of these additional taxes include:
- Admissions and Amusement Tax
- Bay Restoration Fund Fee
- Boxing and Wrestling Tax
- Digital Advertising Gross Revenues Tax
- Motor Fuel Tax
Visit the Comptroller of Maryland website for additional details.
Maryland Local Taxes
Local jurisdictions may have their own laws and regulations that can impact your business. Whether your business is based in Baltimore, Columbia, or a smaller town, remember to research any local laws that could affect your business’s operations.
Start a Maryland S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
Are taxes for LLCs and S corps the same?
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
What is a reasonable salary for an S corp?
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
What is a distribution?
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Is Maryland a good state for forming an S corp?
The best place to open your business and elect S corp status for it is the state where you’ll primarily conduct business. Maryland is a good place to form an S corp given its great location near many of the nation’s major markets, supportive small business community, and affordable cost of doing business.
Can I change from an LLC to an S corp in Maryland?
If you already established an LLC in Maryland, you have the option to change its tax status. Setting up your business as an S corp follows the same steps as filing to form an LLC with only one additional form. It’s a simple process to elect S corp status for your business by filing Form 2553 with the IRS.