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STARTING AND OPERATING A BUSINESS IN MAINE Copyright © 2007, Michael D. Jenkins
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Maine has a fairly typical tax and legal structure under which businesses must operate, not significantly unlike that of most other states. Like most states, Maine imposes an income tax, sales and use taxes, various excise taxes, with property taxes being imposed at the local level. Business and industrial inventories are generally exempt from property tax, as are intangible assets. There is also no state franchise tax in Maine on the capital of corporations, except on banks and certain other financial institutions. However, taxes in Maine are generally quite high, in relation to per capita incomes of residents. A 2005 study by the Tax Foundation found that Maine, at 13.0%, had the highest ratio of state taxes to per capita income of any state in the nation. Thus, in Maine it is especially important for a business to structure its affairs very carefully, through effective tax planning, to minimize both its federal and Maine tax liabilities. The state has adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in Maine in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to federal or Maine corporate taxation, generally. 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, 2007, the state's unemployment rate was 4.3%, unchanged from a year earlier and slightly below the national unemployment rate of 4.4% for the same month, which is the lowest in several years. To view the latest federal Bureau of Labor Statistics unemployment rate data for Maine or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Maine 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. Maine also provides for limited liability partnerships, in which no partner is liable for the debts of the partnership, much like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. UPDATE NOTE: 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 general, sole proprietorships in Maine can be formed with no formalities. However, as discussed in Section IV(b), it will typically 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 Maine 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 Maine income tax and filing requirements for individuals. (c) Partnerships. Maine's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). Partnerships, as entities, are not subject to state income tax in Maine. 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 that have Maine partners or income from Maine sources may be required to file an annual tax information return with the state. For more on Maine partnership tax return filing requirements and required withholding of tax with respect to nonresident partners, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Maine can be formed with no formalities, although it is always 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 as well, for any type of partnership, including general or limited partnerships, or limited liability partnerships. In addition, any business partnership in Maine must file a sworn certificate with the clerk of the city or town where it does business, setting forth the names and addresses of the partners, the nature of the business, and the name under which the partnership will do business. 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 Maine 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 secretary of state, together with a filing fee of $175. Foreign limited partnerships must also register before being allowed to do business in Maine, and must pay a registration fee of $250. Both domestic and foreign limited partnerships are required to file annual reports and pay an annual filing fee of $85 in the case of a domestic limited partnership, or $150 in the case of a foreign limited partnership. The current limited partnership law will be repealed, generally, effective as of July 1, 2007, and replaced by a new Uniform Limited Partnership Act of 2007 on that date. However, the above fees will remain the same under the new law, though the section numbers of the limited partnership statutes will be changed, generally. For forms and more information on limited partnership filing requirements, see the contact information for the offices of the Maine Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLPs) are a relatively new form of partnership permitted under the laws of Maine. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Maine 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. A general partnership can achieve limited liability by simply registering the partnership with the state as an LLP. To form an LLP in Maine, you must register with, and pay a filing fee of $175, to the secretary of state, by filing a certificate of limited liability partnership. Foreign LLPs, those created under the laws of another state, must also register with the secretary of state and pay a fee of $250. The Maine LLP law, prior to July 1, 2007, gives somewhat less protection to partners in an LLP than state law grants to stockholders of a corporation or to the members of an LLC, so prior to that date an LLP is not the complete equivalent of a corporation or LLC, with regard to limitation of your liability as an owner. However, under the new partnership law, effective July 1, 2007, the liability protection provided by an LLP will be essentially the same as for a corporation (or the same as for a professional corporation, in the case of a professional LLP). Under the old law, effective before July 1, 2007, a partner in an LLP was not liable for malpractice, negligence, or misconduct of the other other partners, but remained liable for his or her own actions or those of any person under his or her direct supervision and control, as well as for other debts of the partnership. Thus, under the old law, an LLP provided a greater degree liability protection than a regular general partnership in many instances, but gave considerably less protection than a corporation or LLC. A partner in an LLP that is a professional partnership is subject to liability to the same extent as a shareholder in a professional corporation, in the event of his or her own malpractice or negligence. Every LLP doing business in Maine, including both domestic and foreign LLPs, must file an annual report and pay an annual report filing fee of $85 for a domestic LLP or $150 for a foreign LLP. For more information on LLP registration and reporting requirements, see the contact information for the offices of the secretary of state, listed in Section VI(a). Note that one potential drawback of LLPs, if you will do business in other states besides Maine, 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, Nevada, and New York, only recognize certain types of professional partnerships as LLPs. Such states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. Some states will also deny your LLP limited liability status if you do business there without first registering as a foreign LLP in such state, although most states will simply deny an LLP the right to maintain a lawsuit in the state's courts until the LLP has registered for authority to do business in that state. CAUTION: (d) Corporations. To form a corporation in Maine, you must file articles of incorporation with the Maine Secretary of State and pay a filing fee of $145. 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 Maine, by filing an application for a certificate of authority and paying a filing fee of $250. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Maine, see the contact information for the offices of the secretary of state, listed in Section VI(a). In addition, once your corporation is formed, it will be required to file annual reports and pay a filing fee of $85 with the annual report each year. Failure to file this report on a timely basis could result in suspension or revocation of your corporation's charter. A foreign corporation must also file annual reports and pay an annual fee of $150. In addition to paying federal income taxes on its income, a corporation that does business in Maine generally 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 Maine, see the contact information for the offices of Maine Revenue Services, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal 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. Maine recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. That is, their income is exempt to the same extent as for federal purposes. However, S corporations that have any nonresident shareholders may be required to withhold Maine state income tax on behalf of those shareholders, with respect to their share of the S corporation's Maine-source taxable income. (f) Limited Liability Companies. Maine, 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 Maine may also choose to operate in the form of an LLC. In most states, including Maine, 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 Maine tax laws. To form an LLC under the laws of Maine, one or more persons must file articles of organization with the Maine Secretary of State, which must be accompanied by a filing fee of $175. Maine law now permits formation of a one-member LLC. Foreign LLCs, those formed under the laws of another state, must obtain a certificate of authority to do business in Maine, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $250. In addition to initial filing fees, an LLC formed in Maine must subsequently file annual reports and pay an annual report filing fee of $85 with each such annual report. A foreign LLC is also required to file an annual report and pay the applicable filing fee of $150. For more information on filing articles of organization for an LLC, see the contact information for the offices of the secretary of state, listed in Section VI(a). (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 a number of months, for inspection by the public. Maine is one of the business-friendly states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Maine. (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 occurs. In Maine, you should make sure that the seller signs a written request to the Bureau of Unemployment Compensation of the Maine Department of Labor, to verify that the seller is not delinquent on any state unemployment tax that you might otherwise become liable for as purchaser. Also, the seller should ask Maine Revenue Services to issue a Tax Clearance letter, showing that the seller does not owe any state sales tax, income tax, or withheld employee state income tax, or else to list the amount of such taxes owed, which you, as buyer, must withhold from the purchase price. (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 contact the Bureau of Unemployment Compensation, which is part of Maine Department of Labor, requesting that you be treated as a successor employer. In general, Maine law provides that a successor employer will automatically succeed to the experience rating of the acquired company where the entire business is acquired, unless the Commissioner of Labor determines that the transfer was between related parties or was done for the purpose of reducing state unemployment taxes. Where only a part of an existing business is acquired, you may or may not be considered a successor employer, depending upon whether or not the acquired part of the business, had it previously been treated as a separate unit, would have been considered an employer unit. PLANNING POINT: EXAMPLE: (e) Withholding Tax on Real Estate Purchases. As under federal law, Maine's tax law generally requires a purchaser of real estate that is located in the state to withhold state income tax from the purchase price if the purchaser is a nonresident, except that in this case the Maine tax has to be withheld if the seller is any nonresident of the state, rather than just a nonresident of the United States. As a purchaser of a business in Maine, if, as part of the transaction, you are acquiring real estate owned by a nonresident, you may be required to withhold up to 2.5% of the purchase price, with certain exceptions. The withheld tax must be transmitted to the State Tax Assessor within 30 days of the date of transfer of the property unless the State Tax Assessor authorizes the buyer to release the amount withheld, or a portion of it, to the seller. Any buyer who fails to withhold the tax will be personally liable for the tax There are several exceptions to the withholding requirement. Withholding does not apply if:
The withheld tax on the real estate purchase should be transmitted to Maine Revenue Services on Form REW-1, Real Estate Withholding Return for Transfer of Real Property. In most cases, the escrow agent handling the transaction will be responsible for withholding and paying over the withheld tax. IV. MAINE TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Tax rates in Maine are relatively high, compared to other states,
overall. The Massachusetts Taxpayers Foundation study of state
taxes in 2004 (based on 2002 data) found that Maine had the second
highest total state tax burden of all the states, at $130.16 per
$1,000 of residents' income, second only to New York at $130.79.
In contrast, Tennessee had the lowest tax burden, at just under
$84 per $1,000 of income.
Maine has most of the usual taxes imposed in many other
states, such as individual and corporate income taxes, sales
and use taxes, local property taxes on real and tangible
personal business property, and real estate conveyance
taxes. However, businesses operating in Maine are not subject
to corporate franchise tax (except for banks and financial
institutions) or to property taxes on their business
inventories or on any intangible personal property, such
as stocks, bonds, or bank deposits.
While the personal income tax and corporate income tax
rates are relatively high, with maximum tax brackets of 8.5%
for individuals and 8.93% for corporations, the state sales
tax is only 5%, and unlike most other states, Maine does not
not have local sales taxes, which generally run the total
sales tax rate up to somewhere in the range of 7% to 9% or
more in most states that have sales taxes.
(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.
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 traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Maine 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 firms that begin doing business in Maine will
need to register with Maine Revenue Services on
Form 941/C1-ME, Application for Tax Registration,
which you can use to register your business for sales
and use tax, other taxes, and, if you are an employer,
for employer wage withholding and state unemployment
tax. You may want to order ($4.00) a copy of the
Business Start-Up Kit and Guide
to Doing Business in Maine from Business
Answers, a program of the Maine Department of Economic
and Community Development, at the address listed in
Section VI(a).
In Maine, almost any business will generally require at
least one local business license and a state license. For
assistance with state licensing and business registration
requirements in Maine, see the contact information for
the Department of Economic and Community Development, listed
in Section VI(a). Or, to find out
about state licensing for certain professions and occupations,
contact the Department of Professional and Financial
Regulation, Office of Licensing and Registration, at the
address listed in Section VI(a) for
that agency.
(c) Income and Franchise Taxes.
Maine has both individual and corporate income taxes,
but no franchise tax on the capital of corporations,
except for franchise taxes on banks and certain other
financial institutions. These income taxes and their
application to the different types of legal entities
are discussed in the remainder of this section.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Maine individual income tax is imposed at graduated
tax rates, starting at 2%, and quickly rising to a maximum
tax rate of 8.5% in 2007 on taxable income over $18,950 for
a single taxpayer or over $37,950 for a married couple filing
jointly. 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. The Maine personal
income tax return is Form 1040ME, which must
be filed with Maine Revenue Services.
Effective since January 1, 2003, Maine requires withholding
of Maine income tax on Maine-source income of nonresident
owners of interests in pass-through entities, including general
and limited partnerships, LLPs, LLCs, and S corporations,
unless the Maine-source income of the nonresident from the
entity was less than $1,000 for the previous year or will be
less than $1,000 for the current year. Withholding applies
to the nonresident owner's share of the entity's Maine-source
income, whether or not any income is distributed. Tax must be
withheld at the rate of 8.5%, unless the nonresident is a
corporation (other than an S corporation), in which case the
withholding tax rate is 8.93%.
Withheld tax is remitted with Form 941P-ME.
Where tax is withheld, the nonresident owner may file a Maine
income tax return, claiming the withheld tax as a credit, and
thus will usually be entitled to a partial refund of the withheld
tax, since the withholding is all done at the maximum applicable
tax rate, and not at the lower graduated tax rates.
As an alternative to such withholding, a nonresident may
file an affidavit with the pass-through entity, either
agreeing to participate in a composite return for all the
nonresident owners of the entity (Form 941CF-ME)
or agreeing to file any required Maine income tax returns
with regard to income from the pass-through entity (Form
941AF-ME). Where the entity files a composite return
on behalf of its nonresident owners, only natural persons or
certain trusts may participate in the composite tax return.
The composite return is a schedule, Form 1040C-ME,
attached to a Maine personal income tax return, Form
1040ME.
Partnerships, or entities taxable as partnerships, such
as LLCs, are not subject to state income taxation in Maine.
However, a partnership may be required to file an information
return with Maine Revenue Services each year, showing each
partner's share of taxable income, losses, and credits, on
Form 1065ME/1120S-ME, which is the same return
filed by S corporations. The partnership information return
is due by April 15th of the following year, in the case of a
calendar year partnership. No partnership return need be filed,
in general, unless the partnership has Maine-source income or
at least one partner that is a Maine resident.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLCs,
or shareholders in S corporations), who have taxable
income from the business, are required to make advance
payments of estimated Maine individual income taxes, on
Form 1040ES-ME, if their net tax liability
(not covered by withholding) is $1,000 or more and if their
Maine tax liability for the prior year was at least $1,000.
(Taxpayers should ignore information in the current editions of
certain major state and local tax reporting services that still
show the estimated tax filing threshold for Maine as $500,
since that threshold was increased to $1,000 several years ago.)
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 Maine corporate income tax, on corporations other
than S corporations, is imposed at graduated tax rates from
3.5% on the first $25,000 of taxable income up to 8.93% on
taxable income over $250,000. An alternative minimum tax may
also apply, at a rate of 5.4% on alternative minimum taxable
income, to the extent the alternative minimum tax as computed
exceeds the regular corporate tax.
The state corporation income tax return is Form 1120ME,
which must be filed with Maine Revenue Services 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 both the current year and the previous year
equals or exceeds $1,000. (As in the case of Maine individual
estimated tax requirements, readers should ignore information
in current editions of state and local tax guides from certain
major tax publishers, stating that corporations must make
estimated tax payments if their Maine corporate tax equals or
exceeds $500, since that filing threshold was raised to $1,000
several years ago.)
Corporate estimated tax payments are due in advance, in
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
estimated tax payments need only be equal to 100% of the
prior year's tax liability, if less.
This latter exception, based on 100% of the prior year's
tax liability, is not available except for the first quarterly
installment for certain large corporations, those with annual
taxable income of $1 million or more. Such large corporations
must then make a "catch-up" second quarter payment that is equal
to 90% of half of the current year's tax, less the amount paid
for the first quarterly estimate.
Penalties will be imposed for failure to make the
required estimated tax payments on a timely basis.
S corporations, as under federal tax law, are generally
exempt from Maine corporate income taxes. However, it will
be necessary to file a Maine S corporation tax return,
Form 1065ME/1120S-ME, and a copy of the
federal return (or, in some cases, with permission of the
State Tax Assessor, simply file a copy of the federal return),
if the S corporation has Maine-source taxable income or has
one or more Maine residents as shareholders.
In addition, Maine requires withholding of state income
tax on Maine-source income of nonresident shareholders of
S corporations, unless the Maine-source income of the
nonresident from the entity was less than $1,000 for the
previous year or will be less than $1,000 for the current
year. Tax must be withheld at the rate of 8.5%, generally.
Withholding can be avoided if the S corporation files a
composite return on behalf of the nonresident shareholders,
or for any shareholder who executes an affidavit, agreeing
to file Maine income tax returns and pay Maine income
taxes on his or her share of Maine-source income from the
S corporation.
Unlike many states, Maine does not impose a franchise
tax or other tax on the capital of a corporation, except
on certain financial institutions.
TAXATION OF LIMITED LIABILITY COMPANIES
In Maine, a limited liability company (LLC) is 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, an LLC is
allowed to elect to be treated as a partnership if it has
more than one owner, or as a sole proprietorship if it
has only one owner, for federal tax purposes. Maine law
treats an LLC as a partnership, unless it is categorized
differently for federal income tax purposes, in which case
Maine will follow the federal treatment.
Under a 1997 amendment, Maine's LLC law now permits the
formation of a single-member LLC.
A single-member LLC is generally disregarded as a taxable
entity for federal and Maine tax purposes (treated as a
sole proprietorship if owned by an individual).
Note that it is not always entirely clear whether an LLC is
a "single-member LLC" or not, where the "single owner" is a
married couple who hold the entire ownership of the LLC in some
form of co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, where a couple hold the LLC interest as community
property, ruling that the IRS will accept whatever choice the couple
makes, either to disregard the LLC as an entity (treating it as a
"single-member LLC") or to treat it as a partnership between the
husband and wife.
However, Maine is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Maine would treat the LLC as a single-member
LLC or as a partnership.
While Maine does not generally tax an LLC as a separate entity,
it requires withholding of state income tax on Maine-source income
of nonresident owners of interests in pass-through entities,
LLCs, unless the Maine-source income of the nonresident from the
LLC was less than $1,000 for the previous year or will be less
than $1,000 for the current year. Tax must be withheld at the rate
of 8.5%, unless the nonresident member is a corporation (other than
an S corporation), in which case the withholding tax rate is 8.93%.
See the discussion above of partnership
requirements for pass-through entity withholding, which apply
equally to LLCs.
(d) Sales and Use Tax.
Maine imposes a general sales tax on retail sales of tangible
personal property and certain types of services at the statewide
rate of 5%. No local sales taxes are imposed, which makes compliance
with Maine's sales and use tax laws considerably simpler than in
most states, which often have hundreds of different jurisdictions
with varying tax rates. Higher rates apply to certain types of
sales, such as a 7% tax rate on transient accommodations, food
prepared by a retailer, and liquor sold for on-site consumption,
and a 10% tax rate on car rentals for periods of less than one year.
Sellers are required to obtain a seller's registration certificate
and to collect and pay over the state sales and use taxes to Maine
Revenue Services. Register for sales and use tax and other Maine
taxes on Form 941/C1-ME, Application for Tax Registration.
There are numerous exemptions from the sales tax, which
applies to sales of tangible personal property. For example,
custom computer software is not considered tangible personal
property and thus is not taxable. However, the most important
sales tax exemption 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.
Effective September 15, 2004, all existing resale certificates
were canceled, and Maine Revenue Services began issuing an Annual
Resale Certificate to every retailer who had reported annual
gross sales of $10,000 or more. However, legislation effective
March 29, 2006 changed the annual certificates to 3-year
certificates (5 years after the initial 3-year period), and
lowered the $10,000 threshold to $3,000.
Retailers with less than $3,000 of annual gross sales will
not be issued the 3- or 5-year Resale Certificates -- they must
instead pay sales tax on purchases (but may claim a tax credit
for such tax paid, when filing sales tax returns, if the items
are resold at retail). A provisional Resale Certificate will be
issued to new businesses that estimate their annual gross sales
will be $3,000 or more.
Under the sales tax law, delivery (transportation) charges are
not subject to tax if:
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 Maine. 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.
As of July 1, 2004, the sales tax on various types of
services was repealed and was replaced with the Service
Provider Tax (also at the 5% tax rate), on a number of types
of service businesses, including the following:
Businesses subject to the Service Provider Tax must file Service
Provider Tax returns, rather than sales or use tax returns, and
may pass the tax on to customers (like sales tax), provided that
they identify the tax as a "service provider tax," rather than
sales tax.
Before making any taxable sales, you will need to register
with Maine Revenue Services, on the same form you use to
register for income tax withholding. If subject to the
Service Provider Tax, you will need to obtain a Service
Provider Tax license, instead of a sales tax license.
For more information on Maine sales and use tax registration
and compliance, see contact information for the offices of
Maine Revenue Services in Section VI(a).
(e) Real and Personal Property Taxes.
In Maine, 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.
Maine local governments also impose personal property taxes
on tangible personal property. ("Personal property" is any kind
of property that is not real estate.) However, certain kinds of
business personal property, such as business and industrial
inventories, are exempt from personal property tax in Maine.
While Maine 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.
The Massachusetts Taxpayers Foundation study of state
taxes in 2004 (based on 2002 data) found that Maine had the
highest property taxes in the nation, in relation to residents'
income, at $55 of tax per $1,000 of income. (Alabama had the
lowest property taxes, at $13 per $1,000 of income, in comparison,
and Delaware was second-lowest, at just under $15 per $1,000 of
income.)
(f) Other Business Taxes.
Maine imposes a number of excise and other taxes on businesses,
some of which may be applicable to your business. 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 Maine, any sole proprietor operating under an assumed name must file a certificate of assumed name with the municipal clerk of the town or city where you will do business, before commencing business. Partnerships must also file a certificate with the city or town clerk, showing the names and addresses of all partners, the nature of the business to, and the name of the partnership. A limited partnership, LLP, or limited liability company must file an assumed name statement with the secretary of state and pay a filing fee of $125 if it uses an assumed name, except for a foreign limited partnership, foreign LLP, or foreign LLC that must adopt a "fictitious name." Under the assumed name laws that pertain to these entities, an assumed name is any name other than the entity's true name, and other than a "fictitious name." The latter is defined as a name that the foreign business entity adopts because it cannot use its true name in the state, because the name is already taken by another business. Such a foreign entity pays only a $40 filing fee to register the "fictitious name." Similarly, if a corporation wishes to operate in Maine under an assumed name, other than the true name of the corporation, it must file an assumed name statement with the Secretary of State's office and pay the applicable filing fee of $125, or, if the true corporate name is not available, a reduced fee of $40. 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 the state of Maine imposes an income tax on the income of individuals, you will need to also withhold Maine income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with Maine Revenue Services, on Form 941/C1-ME, Application for Tax Registration. This will also serve as your registration for state unemployment tax with the Bureau of Unemployment Compensation. For more information on Maine income tax withholding and registration requirements for employers, see the contact information for the offices of Maine Revenue Services, listed in Section VI(a). (b) Unemployment and Other State Payroll Taxes. If your business employs one or more individuals in each of 20 weeks during any calendar year or if your payroll amounts to $1,500 in any calendar quarter, you, as an employer, are required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Maine unemployment tax are required to register with the Maine Department of Labor for unemployment tax purposes. You should also obtain a copy of their booklet, the Employer's Guide to the Maine Employment Security Law. New employers are required to pay tax at the rate of 1.8% in 2007 on the first $12,000 of wages paid to each employee. The $12,000 wage base is set by statute, but the new employer tax rate varies from year to year, as set by the Bureau of Unemployment Compensation. After you have had employees for a while, you will develop an unemployment tax experience rating. Your experience rating will be 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 Maine law, cannot be charged to your employees or withheld from their wages. For more information on your Maine unemployment tax obligations as an employer, see the contact information for the offices of the Maine Department of Labor, Bureau of Unemployment Compensation, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Maine, virtually all businesses with one or or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor, a partner in a partnership, or a member of a limited liability company is generally not considered an employee, unless the person elects to be covered. Similarly, an employee of a corporation who is a 20% or greater owner of the stock of the corporation (other than a person engaged in harvesting forest products) or a stockholder of a professional corporation may elect not to be covered for workers' compensation purposes. The spouse, parents or children of a sole proprietor, a partner in a partnership, a member of a limited liability company, or an exempt stockholder employee may also elect out of coverage. Real estate brokers or salespersons are also exempted from workers' compensation coverage, if they are paid solely on a commission basis and have signed a contract with the agency indicating the existence of an independent contractor relationship. 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. CAUTION: 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 Maine workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Maine Workers' Compensation Board, listed in Section VI(a). (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 Maine wage-hour laws, which provide for a state minimum hourly wage that is currently $6.75 an hour, effective since October 1, 2006 and will increase to $7.00 on October 1, 2007. Maine labor laws also provide, as under federal law, that covered employees must be paid time-and-one-half for all overtime hours worked in excess of 40 hours a week. Note that, similar to federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Maine wage-hour rules. However, this exemption only applies if the salaried employee's regular compensation, when converted to an annual rate, exceeds 3,000 times the Maine minimum hourly wage. Maine's overtime law also exempts workers in various types of business establishments, including:
Maine laws require most businesses to provide workers a rest break, or meal break, of at least 30 minutes after any 6 consecutive hours of work. This rule does not apply to a small business workplace where fewer than three employees are on duty at any one time or to a business where the nature of the work allows the employee frequent breaks during the work day. 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 Maine Department of Labor. See Section VI(a) for the address and phone number of the Maine Department of Labor. 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 Maine, which require children under the age of 16 to obtain a work permit in order to be employed. Children aged 16 or 17 may work in most occupations, but not in hazardous jobs. They may not work:
Minors under the age of 17 may not work during school hours. Children of the ages of 14 or 15 may work in most businesses, but not in most jobs in manufacturing, mechanical, dry cleaners, laundries, bakeries, hotels/motels, and most commercial places of amusement. They may not work:
Children under the age of 14 generally cannot be employed, except as child actors or in non-hazardous jobs in hospitals, nursing homes, children's camps, agriculture, or domestic work in private homes. (However, where federal labor laws apply, such exceptions may not apply under the federal law.) Maine has no minimum age and no hourly restrictions for child actors, but they must have work permits if under the age of 16. Employers who employ any minors under the age of 18 are required to display a child labor poster in the workplace, which can be obtained free of charge from the Maine Department of Labor. See Section VI(a) for the address and phone number of the Maine Department of Labor. (e) State Occupational Safety and Health Laws. Employers in Maine must comply with state and federal job safety laws designed to prevent injuries resulting from unsafe or unhealthy conditions in the workplace. The federal Occupational Safety and Health Administration (OSHA) enforces health and safety standards in Maine, as Maine has not adopted its own OSHA enforcement program. Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a safety consultation from the Maine Bureau of Labor Standards and they detect violations, they will not cite you if you promptly correct the unsafe conditions. 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 Maine Department of Labor, Bureau of Labor Standards, listed in Section VI(a), or contact the federal OSHA office, whose contact information is also listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Maine labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to terminated employees. State laws in Maine require an employer to pay a terminated employee no later than the next scheduled payday or within two weeks after demand is made for payment, whichever is the earlier. Employees must be paid in full at least every 16 days, on a regular payday. State law also requires that, if requested by a terminated employee, an employer must provide within 15 days a written explanation of the reasons why the employee was terminated. Employers are given immunity from liability for disclosing information about a former employee's job performance or work record to a prospective employer, unless there is clear and convincing evidence that the employer giving the reference is not acting in good faith. (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. Maine does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. In fact, Maine's labor laws are very pro-union and make it illegal for an employer to hire professional strikebreakers to replace union employees during a strike, lockout, or other labor dispute. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Maine. Maine's equal employment opportunity laws prohibit employment discrimination based on race, color, sex, sexual orientation, age, physical or mental disability, genetic predisposition, religion, ancestry, or national origin, or because of asserting a claim under the Workers' Compensation Act or the Whistleblower's Act. You can obtain an optional Maine civil rights poster from the Augusta office of the Maine Human Rights Commission, at the address listed in Section VI(a). Employers are required to display a poster informing employees of their rights under the state's sexual harassment law, and in workplaces with 15 or more employees, employers must conduct an education and training program for all employees, within one year after hiring, regarding the illegality of sexual harassment and giving definitions and examples of what constitutes such harassment. (4) Reporting new hires. Under federal welfare reform laws, employers in all states now have to report their newly-hired (or rehired) employees to a specified state agency (the Maine Department of Health and Human Services for Maine employers) within 20 days after the date of hire. However, unlike most other states, Maine requires such reports to be filed within 7 days after an individual is hired. See the contact information for new hire reporting in Section VI(a). (5) Workforce Reductions. Maine has a mass layoffs provision similar to the federal W.A.R.N. Act. Under the Maine law, if a covered establishment (defined as an industrial or commercial facility which has employed 100 or more persons in the last 12 months) is closed or relocated, the employer will generally be required to pay severance pay to terminated employees in an amount equal to a week's pay for each year the terminated worker was employed, if employed for at least three years. (6) Family leave laws. Maine has a family leave law that applies to employers with 15 or more employees at any one location in the state. Covered employers are required to grant family leave when requested by an employee on account of:
Leave must be granted for up to 10 weeks in any 2-year period to an employee who has been employed for at least 12 consecutive months, unless employed at a permanent work site with fewer than 15 employees. The family leave that is granted may be unpaid leave. (7) Employment of illegal aliens. Maine law, since 1977, has made it illegal to employ any alien individual who does not possess the required work authorization under federal law. Knowing and willful violation of this law is a Class E crime, under the criminal law of Maine, unless the employer has made a good faith inquiry into the worker's citizenship or immigration status and concluded that the worker was not illegal. A social security account number card is not deemed to be evidence that an alien individual is authorized by the U.S. Customs and Immigration Service to accept employment in the United States. (8) Lie Detector Tests Prohibited. Under Maine law, an employer may not, directly or indirectly, require, request or suggest that any applicant for employment submit to a polygraph (lie detector) examination as a condition of obtaining employment, or administer or cause to be administered to an applicant any such examination, or use or refer to the results of such a test for hiring purposes. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Maine, as many states have done in recent years, has set up a "one-stop" business licensing center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. You can register your business with the state for Maine income tax, sales and use tax, employer withholding, and state unemployment tax, on the state application form, Form 941/C1-ME, Application for Tax Registration, which will register you with both Maine Revenue Services and the Maine Department of Labor. You can download this and other forms from the web site of Maine Revenue Services (see web links in Section VI(c)). The Department of Economic and Community Development (DECD) website also includes an online interactive "Business Licensing Assistant" which will help you to determine what types of licenses are required for your particular type of business. See the web link to the DECD website in Section VI(c)). To obtain business registration forms and for assistance in obtaining all necessary licenses and permits required for you to do business in Maine, contact: Maine Department of Economic and Community Development You may also want to purchase the DECD's Business Startup Kit and booklet, A Guide to Doing Business in Maine, for a nominal fee ($4.00). While the information in it may be somewhat less up-to-date than this publication, you may still find it to be helpful on some topics. Order it at this address: Business Answers Addresses and other contact information for other key state and federal government agencies in Maine, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from Maine Revenue Services (formerly the Bureau of Taxation), which is the main tax collection agency in Maine. Also register with this agency and the Maine Department of Labor as an employer, for state sales tax, income tax withholding, and unemployment tax purposes. Maine Revenue Services STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Maine Department of LaborSTATE LICENSES. For assistance with state and local licensing, contact the Maine One-Stop Business Licensing Center, at the address listed above for that agency. They can assist you with all state licensing and tax registration requirements. For information on occupational and professional licensing requirements, contact: Department of Professional and Financial RegulationSTATE SALES TAX. Obtain your sales and use tax license or permit and information on the Maine sales and use tax law, from Maine Revenue Services, at the address listed above for that agency. Also contact Maine Revenue Services if you must register for the Service Provider Tax (which is essentially a sales tax on certain services). STATE UNEMPLOYMENT TAX. Contact the Maine Department of Labor to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Maine Department of Labor NEW HIRES REPORTING. When you hire or rehire any employee, report the required information regarding that employee within 7 days to the Maine Department of Health and Human Services (MDHHS). Contact MDHHS for information on how and where to file such reports by phone, fax, or otherwise, or mail the new hire reports to the following address: Division of Support Enforcement and Recovery WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the Workers Compensation Board regional office near you. The address of the Augusta office is: Workers' Compensation Board STATE OSHA PROGRAM. There is no state OSHA program in Maine. The federal government provides federal OSHA enforcement instead. For workplace job safety consultations and information, contact the Maine Department of Labor, Bureau of Labor Standards, at the address listed above for that agency. For required posters and information on federal occupational safety and health laws that affect you as an employer in Maine, contact: U.S. Department of Labor/OSHA STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Maine civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Maine Human Rights Commission (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Maine 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. SBDC: Maine (c) Internet Sites. For anyone with 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 Maine 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 Maine. Since new sites are appearing frequently, you might also want to search for other Maine government Web sites by using one of the popular Internet search engines, such as Google or Yahoo. To start your Internet search for Maine government information, you may want to begin with the following Internet sites: State of Maine home page: Maine Department of Revenue Services (tax forms and tax information): Maine Bureau of Labor Standards: Maine Department of Economic and Community Development (operates One-Stop Business Licensing Center): Finance Authority of Maine (FAME): Workers' Compensation Board: Maine Small Business Development Centers: (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Maine, or contact the following state agency, which coordinates various state loan programs: Finance Authority of Maine The address of the main SBA Office in Maine is: U.S. Small Business Administration |
Copyright © 2007 Michael D. Jenkins
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