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STARTING AND OPERATING A BUSINESS IN MARYLAND Copyright © 2000, Michael D. Jenkins
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Maryland has a fairly typical tax and legal structure under which businesses must operate. Like most states, Maryland imposes an income tax on both individuals and corporations, a sales and use tax, and various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Maryland in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. There is no corporate franchise tax in Maryland, unlike most states, except for a franchise tax on financial institutions that is repealed for tax years starting after December 31, 2000. At present, the state's economy is relatively robust, in terms of the level of unemployment, average per capita income levels, and other economic measures. For example, in March, 2000, the state's unemployment rate was only 3%, down from 3.8% a year earlier. This is slightly better than the low national unemployment rate of 4.1%. To view the latest federal Bureau of Labor Statistics unemployment rate data for Maryland or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Maryland can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Maryland also provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In Maryland, you will need to register your business with the appropriate clerk of the circuit court in the county where the business is located. In general, sole proprietorships in Maryland can be formed with no formalities. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the Maryland income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Maryland income tax and filing requirements for individuals. (c) Partnerships. As a rule, general partnerships in Maryland can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Maryland law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the State Department of Assessments and Taxation (SDAT), together with a filing fee of $50. Foreign limited partnerships must also register before being allowed to do business in Maryland, and must pay a registration fee of $50. For information on limited partnership filing requirements, see the contact information for the offices of the Maryland State Department of Assessments and Taxation, listed in Section VI(a). Limited liability partnerships (LLPs) are a new form of partnership permitted under the laws of Maryland. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Maryland state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. To register your partnership as an LLP in Maryland, you must file a Certificate of Limited Liability Partnership with the SDAT and pay a filing fee of $50. Foreign LLPs, those created under the laws of another state, must also register with the SDAT and pay a registration fee of $50. Both foreign and domestic LLPs must file an annual report with the SDAT by April 15th of each year, but no annual report filing fee is imposed. Note that the Maryland LLP law appears to give less protection to partners in an LLP than state law grants to stockholders of a corporation, or members of an LLC, so an LLP should not ordinarily be considered an alternative to a corporation or LLC, if limitation of liability is of great importance to you. For more information on LLP registration and reporting requirements, see the contact information for the offices of the State Department of Assessments and Taxation, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Maryland, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLPs. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
Partnerships, as entities, are not subject to state income tax in Maryland. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). Partnerships are required to file an annual tax information return, Form 510, with the state. For details on Maryland partnership tax return filing requirements, see Section IV(c). (d) Corporations. To form a corporation in Maryland, you must file articles of incorporation with the Corporate Charter Division of the Maryland State Department of Assessments and Taxation (SDAT) and pay an organization fee based on the amount of the corporation's authorized capital stock, plus a $20 recording fee. The organization fee on the par value of capital stock is determined as follows:
(Stock that has no par value is treated as having a value of $20 per share.) A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct business in Maryland, by filing an application for a certificate of authority and paying a filing fee of $50. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Maryland, see the contact information for the offices of the SDAT, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and a filing fee of $100 with the SDAT each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. In addition to paying federal income taxes on its income, a corporation that does business in Maryland must also file corporate income tax returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Maryland, see the contact information for the offices of the State Department of Assessments and Taxation, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Maryland recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. (f) Limited Liability Companies. Maryland, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Maryland may also choose to operate in the form of an LLC. In most states, LLCs are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLCs under Maryland tax laws. To form an LLC under the laws of Maryland, one or more persons must file articles of organization with the State Department of Assessments and Taxation (SDAT), which must be accompanied by a filing fee of $50. Maryland state law also allows formation of one-owner LLCs, which now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Maryland, by filing an application for a certificate of authority with the SDAT and paying a filing fee of $50. In addition to initial filing fees, an LLC formed in Maryland must subsequently file annual reports by April 15th each year. A foreign LLC is also required to file an annual report. No filing fees are imposed for filing LLC annual reports. For more information on filing articles of organization for an LLC, see the contact information for the offices of the State Department of Assessments and Taxation, listed in Section VI(a). III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Maryland has a bulk sale law and you will need to comply with this law when you purchase assets of an existing business. Failure to do so will expose you to liability to any creditors of the seller who do not get paid off when the sale of the business occurs. Maryland's bulk sale law closely follows the bulk transfer provisions of the Uniform Commercial Code. The basic requirements, when purchasing the assets of business in a bulk sale, are as follows:
Compliance with the bulk sales law should be handled by a competent business attorney, as its requirements are quite specific and very technical in nature. (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business transpires. In Maryland, you should obtain tax releases for unemployment and sales and use taxes, when buying an existing business. The Maryland sales tax law also requires a buyer in a bulk sale transaction to notify the Comptroller of the Treasury with regard to the bulk sale of assets, in the event that sales and use taxes may possibly be due from the seller. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. To obtain the seller's favorable experience rating as a successor employer, you will need to apply on a timely basis to the Division of Employment and Training, requesting that you be treated as a successor employer. Otherwise, if you are just going into business, you will be treated as a "new employer" and taxed at the new employer rate for the first two years. (e) Withholding Tax on Real Estate Purchases. Maryland law, effective since October 1, 2003, requires that a buyer withhold state income tax equal to 4.75% or 7% of the sales proceeds actually paid to a nonresident seller of Maryland real property. The 4.75% rate applies if the seller is a nonresident individual; the 7% rate applies if the seller is an entity, such as a corporation. Withholding is not required if the seller certifies that the property being sold is the seller's principal residence or if the seller provides an affidavit that certifies that the seller is a resident of Maryland. The buyer or the settlement officer must withhold the required amount of tax at settlement and remit the tax to the Department of Assessments and Taxation on Form MW 506 NRS. IV. MARYLAND TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Tax rates in Maryland are
neither particularly high or low, compared to most other states.
While the state personal income tax is only 4.85% in 2000, and
declines to 4.8% in 2001 and 4.75% after 2001, the existence
of local "piggy-back" income taxes raise the total state and
local income tax burden to a maximum rate of approximately 6.5%
to 8%, which is similar to typical state rates in many states
that do not have local income taxes. The state sales tax, at
5%, is somewhat lower than that of most other states, however,
and unlike most states, Maryland does not allow localities to
impose sales taxes, in general.
Maryland has adopted income tax and sales tax withholding
requirements with regard to certain payments to nonresident
contractors for real property improvement contracts, effective
for contracts entered into on or after July 1, 2003. The
person or entity contracting with the nonresident contractor
must withhold 3% of the contract price until 30 days after
the contractor makes a written request for a tax clearance
certificate with the Maryland Comptroller of the Treasury.
The Comptroller will issue either a certificate of no tax
due or a certificate of tax due within 30 days of the request
by the contractor, which the party who has withheld the tax
must abide by, either by releasing the funds to the
contractor, or remitting any tax owed by the contractor
to the Comptroller of the Treasury. The withholding requirement
generally applies to any real estate improvement general
contract of $500,000 or more, or any subcontract with a
subcontractor for $50,000 or more.
In 2004, Maryland also adopted legislation that requires
nonresident taxpayers, who are not subject to any Maryland
county income taxes, to pay tax at a rate that is equal to the
state income tax rate plus the lowest tax rate imposed by
any county in Maryland. Previously, nonresident taxpayers
paid Maryland income tax at only the state tax rate, and escaped
the local "piggy-back" income taxes imposed by counties. The
new rule went into effect for tax years beginning on or after
January 1, 2004.
(b) State and Local Licensing. Nearly any business, operated anywhere in the United States, will have to have at least one government license of some kind. In most cases, this will be a local license, issued by your city or county. Before you open your business, contact your local city or county hall and find out if your particular business needs one or more local licenses. Most kinds of local business licenses are granted upon payment of a fee, with no further requirements, except possibly for annual or other periodic renewal fees. In Maryland, local business licenses can be obtained from the Clerk of the Circuit Court in the county where your business is to be located. However, if you are engaging in any kind of food business, you will usually need to also obtain a health department permit and show that you are in compliance with health department food-handling requirements. In addition, be sure to check with an attorney or local government zoning or planning department officials to determine if your business will be in compliance with all local zoning and planning restrictions. If you own or rent any type of facility, you will generally need fire department permits, showing that you meet fire safety codes and any construction or improvements to an existing structure will usually require a building permit. If you intend to simply operate your business from your home, you may be in violation of local zoning requirements, but this is less likely to be a concern if you don't have clients, customers, suppliers, or employees coming to your house on business on a regular basis. State governments have also traditionally required special licenses for many kinds of professionals, such as physicians, dentists, lawyers, and accountants. To further protect consumers, Maryland has expanded the list of occupations that must be licensed by the state to include many other occupations. Most state licenses not only require payment of fees, but are only issued for a given profession or occupation upon showing that you have completed certain educational or experience requirements, or passed certain tests, or some combination of the foregoing. Most professional and occupational licenses in Maryland are issued by subagencies or boards under the State Department of Labor, Licensing, and Regulation, Division of Occupational and Professional Licensing. For information on state licensing and business registration requirements in Maryland, see the contact information for the offices of the Department of Labor, Licensing, and Regulation, listed in Section VI(a). (c) Income and Franchise Taxes. Maryland has both an individual income tax and a corporate income tax, but has no separate franchise tax on corporations. The Maryland individual income tax is imposed at a maximum tax rate of 4.85% on all taxable income in excess of $3,000, in 2000. This rate drops by 0.05% each year after 2000, to 4.80% in 2001, and eventually to 4.75% by 2002. Baltimore City and each of the 23 Maryland counties also levy "piggy-back" local income taxes that currently range from 30% to 60% of the state tax paid by an individual taxpayer. Individual taxpayers generally pay state income tax on their business earnings from a sole proprietorship, or on their share of the earnings of a pass-through entity, such as a partnership, S corporation, or LLC. A Maryland personal income tax return must be filed with the Comptroller of the Treasury each year by April 15th, for the preceding calendar year. Partnerships, or entities taxable as partnerships, such as LLCs, are not subject to state income taxation in Maryland, but must file an information return with the Comptroller of the Treasury each year, showing each partner's share of taxable income, losses, and credits, on Form 510, Pass-Through Entity Income Tax Return. This information return is due by April 15th of the following year, in the case of a calendar year partnership or LLC (or by March 15th, in the case of an S corporation). Pass-through entities (partnerships, LLCs, or S corporations) that have nonresident owners must make estimated tax payments on behalf the nonresidents, at the rate of 5% of their respective shares of the entity's Maryland-source taxable income, generally. Quarterly tax payments are due on Form 510D. Individual taxpayers doing business as sole proprietors, or who are partners in partnerships, or members of LLCs, are required to make payments of estimated Maryland individual income taxes, if their net tax liability (not covered by withholding) exceeds one-half of the federal minimum required for a federal estimated tax declaration (one half of $1,000, or $500 at present). Estimated tax payments are due in four installments, on the 15th day of the 4th, 6th, and 9th months of the taxable year, and the 15th day of the first month of the following year. To avoid penalties for underpayment of estimated tax, you must either pay in 90% of the current year's tax, or 100% of the previous year's tax. The Maryland corporate income tax rate, on corporations other than S corporations, is 7%. A state corporation income tax return must be filed with the Comptroller of the Treasury by the 15th day of the third month following the end of the taxable year, or by March 15th in the case of a corporation whose taxable year is the calendar year. Corporations are required to make estimated tax payments of their state corporate income tax in advance, if their tax liability for the year equals or exceeds $1,000. Estimated tax payments are due in advance, in four equal installments, on the 15th day of the 4th, 6th, 9th, and 12th months of the taxable year. The total estimated tax that must be paid in is usually equal to 90% of the actual tax liability for the year. However, if the preceding year was a full year of 12 months, the current year payments need only be equal to 100% of the prior year's tax liability, if less. Penalties will be imposed for failure to make the required estimated tax payments on a timely basis. S corporations are not subject to tax, except to the extent their income is taxable for federal purposes, in general. Like partnerships or LLCs, an S corporation files Form 510, Pass-Through Entity Income Tax Return, each year, to report the income or loss that is to be reported by its shareholders. For an S corporation, this information return is due by March 15th of the following year, in the case of a calendar year S corporation. Like partnerships or LLCs, an S corporation that has one or more nonresident owners may be required to withhold state income tax equal to 5% of the nonresidents' share of the S corporation's Maryland-source taxable income, and to remit the tax in the form of quarterly estimated tax payments, on Form 510D. In Maryland, a limited liability company (LLC) with two or more members will be taxed in the same manner as a partnership, thus avoiding the possible double taxation of income that can occur with a corporation. Note that under IRS regulations, effective in 1997, an LLC is now able to elect to be treated as a partnership if it has more than one owner, or as a sole proprietorship if it does not, for federal tax purposes. Maryland law currently recognizes the validity of a one-owner LLC, and the state announced in 1997 that it will follow the tax treatment an LLC elects for federal tax purposes on IRS Form 8832. Like partnerships, an LLC in Maryland files Form 510, Pass-Through Entity Income Tax Return. This information return is due by April 15th of the following year, in the case of a calendar year LLC. (d) Sales and Use Tax. Maryland imposes a general sales tax on retail sales of tangible personal property and certain types of services at the statewide rate of 5%. Sellers are required to obtain a seller's permit and to collect and pay over the sales and use taxes to the Comptroller of the Treasury. No local sales or use taxes are imposed, generally. There are numerous exemptions from the sales tax, the most important of which is the resale exemption. If you are a wholesaler or retailer who purchases goods that you will resell, your purchase of such goods may qualify as an exempt sale for resale. Similarly, if you sell goods to wholesalers or retailers for resale by them, your sale may also qualify as an exempt sale for resale. In any such transaction, the exemption is ordinarily available only if the purchaser gives the seller a valid resale certificate, certifying that the items are being purchased for resale, and not for use or consumption by the buyer. A shadow tax, the use tax, is also imposed at the same rate as the sales tax. It is primarily intended to tax property that is acquired from sources outside of the state, in transactions not subject to sales tax, when such property is used or consumed within Maryland. Use tax may also apply to items purchased on an exempt basis, such as for resale, if such items end up being used or consumed, instead of being resold. Vendors who collect sales tax are allowed to keep part of the tax, as a "collection credit" to compensate them for their costs of complying with the sales and use tax law. The amount of the credit is 0.6% of the first $6,000 of tax required to be paid with each return, and 0.45% of any excess over $6,000 of tax. Before making any taxable sales, you will need to register with the Maryland Comptroller of the Treasury, filing a Combined Registration Application form. This form can also be used to register for other state taxes, as an employer, and for an unemployment insurance account. For more information on Maryland sales and use tax registration and compliance, see contact information for the offices of the Comptroller of the Treasury in Section VI(a). (e) Real and Personal Property Taxes. In Maryland, as in every other state, any business real estate you own will be subject to real property taxes. In general, there is little that you must do, unless you wish to challenge your assessed valuation, since the assessor will bill you for each year's property taxes as they come due. Maryland also imposes personal property taxes on tangible personal property. However, certain business personal property, such as business inventories, are exempt from personal property tax in some Maryland counties. While Maryland generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as stocks, bonds, promissory notes, and other such paper assets. In addition, effective since July 1, 1999, Maryland exempts personal property used in a home-based business from all property taxation, if its original value (excluding motor vehicles) did not exceed $10,000. Every LLC, LLP, or limited partnership doing business in Maryland, including both domestic and foreign firms, must file an annual personal property report (Form 1) with the Department of Assessments and Taxation, by April 15th of each year. General partnerships and sole proprietorships file on Form AT3-51. See Section VI(a) below for address and other contact information for the Department of Assessments and Taxation. (f) Other Business Taxes. Maryland imposes a number of other taxes on businesses, some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Maryland, you can register your trade name with the State Department of Assessments and Taxation, Trade Name Search and Registration. The registration fee, for a five-year registration period, is $11 plus $1 for each owner listed on the application form. See Section VI(a) for contact information for the Department of Assessments and Taxation, Trade Name Search and Registration. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Maryland imposes a state income tax on the income of individuals, you will need to also withhold Maryland income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Comptroller of the Treasury by completing a Combined Registration Application. This form can also be used to register for unemployment insurance and for various state taxes, including sales and use tax. Note that, beginning in 2005, quarterly income tax withholding returns will be due on the 15th day of the month following the end of each calendar quarter, rather than on the last day of the month. For more information on Maryland income tax withholding and registration requirements for employers, see the contact information for the offices of the Comptroller of the Treasury, listed in Section VI(a) below. (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Maryland unemployment tax are required to register with the Division of Employment and Training on a Combined Registration Application form, which can also be used to register for state income tax withholding and other Maryland taxes with the State Comptroller of the Treasury. New employers are required to pay tax at a rate of 2.1% in 2000 on the first $8,500 of wages paid to each employee. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. All state unemployment taxes are imposed upon you as the employer, and, under Maryland law, cannot be charged to your employees or withheld from their wages. For more information on your Maryland unemployment tax obligations as an employer, see the contact information for the Unemployment Office of the Division of Employment and Training, listed in Section VI(a) below. (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Maryland, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee. An employee who is an officer of a corporation or a person who is a member of an LLC is generally required to be covered for workers' compensation purposes, although such persons may elect out of coverage in the case of officers in certain "close corporations," farm corporations, and professional corporations, or in the case of a 20% or greater owner of an LLC. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Employers in Maryland may obtain workers' compensation coverage either from private insurers or from the Injured Workers Compensation Fund. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. For more detailed information regarding your obligations as an employer under the Maryland workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Maryland Workers' Compensation Commission, listed in Section VI(a) below. (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Maryland wage-hour laws. The Maryland law provides for a state minimum hourly wage that is the same as the federal minimum, currently $5.15 an hour. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Maryland wage-hour rules, as are outside salespersons and employees paid on a commission basis. Like federal law, Maryland law requires you to pay time-and-a-half to employees for overtime hours worked, in excess of 40 hours a week. However, numerous categories of employees, ranging from restaurant and gasoline station workers to taxicab drivers, are exempted from the Maryland overtime pay requirements. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Division of Labor and Industry of the Maryland Department of Labor, Licensing and Regulation. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Maryland. Under Maryland's child labor laws, you are generally prohibited from hiring children under age 14, and may hire children ages 14 to 17 only if they obtain a work permit (obtained from the local school superintendent). Children may only work specified limited hours and only during certain times of the day. For example, a child worker must not have more than 12 hours of combined school hours and work in a single day, and may not be required to work more than 5 hours without a break of at least one-half an hour. Children 14 or 15 years old are subject to other additional restrictions that do not apply to 16 or 17-year-olds. (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Maryland is one of the states that has its own OSHA-type agency. To determine if your workplace is in compliance with federal and Maryland job safety requirements, you may wish to contact the Consultation Services Unit of the Division of Labor and Industry -- Maryland Occupational Safety and Health (MOSH), and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. Employers are required to post a MOSH poster on job safety in the workplace. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Baltimore offices of Maryland Occupational Safety and Health (part of the Department of Labor, Licensing and Regulation, Division of Labor & Industry), listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Maryland labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. State law requires employers to have regular paydays, which must be no less frequent than every two weeks or twice a month, except for certain executive or administrative employees. If an employee terminates employment, voluntarily or otherwise, any final wages owed must be paid to him or her no later than the next regular payday. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Maryland does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with various state civil rights laws in Maryland, and must display a poster informing employees of their rights. You can obtain this poster from the Maryland Human Relations Commission office, at the address listed in Section VI(a) for that agency. Maryland law, in general, prohibits discrimination in employment, by all employers who employ 15 or more employees during any 20 weeks of the year, on the basis of race, religion, gender, age, national origin, marital status, or physical or mental handicap unrelated in nature and extent so as to reasonably preclude the performance of the employment. (4) Reporting new hires. Under federal welfare reform laws, employers in all states are now required to report newly-hired (or rehired) employees to a designated state agency (the Maryland New Hire Registry, for Maryland employers) within 20 days after the date of hire. (5) Workforce reductions. Maryland has a law, somewhat similar to the federal "WARN" Act, that requires an employer with 50 or more employees in the state to give advance notification (generally 90 days) before making a significant workforce reduction that reduces the number of employees at any workplace in Maryland by the greater of 15 employees or 25% of the total number of employees at such workplace. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Maryland, as many states have done in recent years, has established a "one-stop" center to help your new or existing businesses to obtain necessary state licenses and permits, the Maryland Business License Information System, part of the Department of Business and Economic Development. Contact this helpful agency on the Web at the Internet address (URL) listed in Section VI(c), or at:
To obtain business registration forms and information on starting or relocating your business in Maryland, contact:
CORPORATION CHARTERS. Unlike most states, Maryland's secretary of state's office is not involved in receiving incorporation papers and other corporate and LLC filings. Instead, contact the Department of Assessments and Taxation, Corporate Charter Division, for information on:
Or fax to: (410) 767-1571 STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
PROPERTY TAXES. All legal entities, such as corporations, LLCs, LLPs, and limited partnerships, which are required to register with the Department of Assessment and Taxation, will also register at the same time for state personal property tax. Other forms of business (general partnerships or sole proprietorships) are required to register to register with the Department of Assessment and Taxation for a tax identification number. Contact:
(b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Maryland to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you.
(c) Internet Sites. If you have access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Maryland. Since new sites are appearing constantly, you might also want to search for other Maryland government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Maryland government information, you may want to begin with the following Internet sites: State of Maryland home page: State Department of Assessments and Taxation, Corporate Charter Division: Business Licensing Information Center: Maryland Department of Business and Economic Development: Comptroller of the Treasury (tax forms and assistance): Department of Labor, Licensing and Regulation: Maryland New Hire Registry (for reporting newly hired employees):
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Copyright © 2000 Michael D. Jenkins
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