May 26, 2007
Maryland Limited Liability Company Act- A Flexible Statute
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You want to have your own business, but you are not sure whether you will adapt a sole proprietorship, a partnership, or a corporation. Although you have three structure options in a row, but you... |
You want to have your own business, but you are not sure whether you will adapt a sole proprietorship, a partnership, or a corporation. Although you have three structure options in a row, but you are still undecided. You are looking for a structure that will provide you the utmost personal security from liability and at the same time giving you the best tax advantage. You are also considering the most flexible in terms of management structure. Which is which?
Thanks to the state of Wyoming, they have initiated a legislation in 1977 giving birth to the newest and attractive business structure ever introducedthe Limited Liability Company or LLC. It gives both local and foreign entrepreneurs an additional option with regards to the structure they want to adapt to their business. As an overview, an LLC is a type of legal entity that combines the best attributes of a limited partnership and a corporation in terms of tax advantages and limited liability, respectively.
After the declaration of the United States’ Internal Revenue Service (IRS) that an LLC has a pass-through-entity feature for tax purposes (this feature can also be found in a limited partnership), all the states start to pass legislations to allow formation of LLCs within their respective territories. And recently, the state of Maryland formally passes a legislation giving way to the birth of LLC. This legislation is also known as the Maryland Limited Liability Company Act.
Also known as the Maryland Act, the Maryland Limited Liability Company act is distinct from the LLC legislation of other states mainly because of the higher degree of flexibility it offers to the LLC owners within their jurisdiction.
Under the Operating Agreement, which is considered to be the LLC equivalent of the conventional Articles of Organization, every attribute of the operation and manipulation of the LLC is negotiable. Thus, it gives rights to the LLC owners to set their own management structure as well as in the operation of their business. In other words, Maryland’s LLC Act is categorized to be flexible in contrast to a stationary or enforceable decree.
The terms which are commonly found on the LLC legislation of other states are amended in the Maryland Act to assure that an LLC would be recognized as a partnership for federal income tax purposes. As mentioned earlier, the pass-through-entity feature of an LLC gives way to the popularity of LLC because income tax is much lesser if you it will be applied to individual LLC owners and not on the LLC itself as an entity.
On the other hand, the Maryland’s Act also avoids the rigidity of a stationary or an enforceable decree by giving away the flexibility and freedom to LLC owners to organize its management structure. The management can now be decentralized; owners can impose policies with regards to free transferability of interests; and others that is now a prime attraction for a Maryland LLC.
To fully declare the recognition of the Maryland’s Act as a flexible act, the IRS replaced the four-part corporate classification test with a check box method effective December 17, 1996. In this new policy, an LLC can now decide whether it wants to be recognized as a partnership or corporation for income tax purposes simply by checking the suitable box in the IRS form.
That is all about the Maryland LLC Act. An Act that will give you optimum flexibility both for income and tax matters for your LLC.
Recommended Reading
- What you Should Know in Forming a Nevada LLC
- Maryland Venture Capital Companies
- An Attorney’s Role in an LLC Start-up Story
- How to Form an LLC: 3 Basic Steps
- Stock Trading: Investing In a Company
