A comprehensive guide to forming a nonprofit and LLC in Maryland

Forming a business requires careful planning and preparation. It involves a series of legal obligations necessary to establish and run a business legally.

The steps necessary to form a company depend on the type of organization the founders wish to establish. The steps required to create an LLC in Maryland differ from the steps needed to start a nonprofit organization in Maryland.

Deciding the type of organization is the first and most vital step in forming a company.

A Limited Liability Company is one type of business entity ideal for businesses with two or more founding members. It offers flexibility and tax advantages while protecting the founders' personal assets from business debts.

A Nonprofit Organization is usually formed to serve educational, charity, religious, literary, or scientific purposes. These are typically eligible for tax exemptions at both federal and state levels.

How to Start a Limited Liability Company

Choose a Maryland LLC name.

When deciding on a name for an LLC in Maryland, business owners must ensure the name is not misleading, identical, or similar to any other business name already registered with Maryland.

Maryland LLC names must include "Limited Liability Company," "LLC," "L.L.C," LC," or "L.C."

However, an LLC name in Maryland must not include words representing a government agency, like State Department, Treasury, etc.

The availability of an LLC name can be checked on the Maryland Business Express Name Database. If a desired LLC name is available, it can be reserved for 30 days by paying a fee of $25 and filing a Maryland Corporate Name Reservation Application.

LLC owners can check the guidelines for Maryland LLC names for further assistance.

Appoint a Resident Agent

Every LLC in Maryland must appoint a resident agent, an individual authorized to receive legal documents and notices on behalf of the LLC.

A resident agent, or a registered agent in other states, must have a physical address in Maryland and be available during the business hours of the LLC.

An LLC owner can be their own resident agent, appoint an employee as the resident agent, or appoint an individual from resident agent services.

Prepare Articles of Organization for LLC Maryland

The articles of organization outline the key information about the company. It is an essential legal document that officially sets up the company.

When preparing the articles of organization, the following information must be included:

• Name and address of the LLC.
• Name of Maryland LLC resident agent.
• Address of Maryland LLC's resident agent.
• Signature of the resident agent in Maryland.
• The purpose of forming the company.
• Signature of the founder.

The articles of organization can be filed with the Maryland Department of Assessments and Taxation. The filing fee is $100.

LLC owners can file articles of organization online or by mail.

Prepare an LLC Operating Agreement

An operating agreement is an important document outlining important information regarding the company's operation and may reduce the risks of any future disputes.

An operating agreement must include the following information:

• The name and address of the company.
• Period of operation, if not perpetual.
• Name and address of Maryland LLC's resident agent.
• The purpose of forming the company.
• The organizational structure.
• The members of the LLC and their contribution.
• The profits and loss division.
• The process of accepting and terminating members.
• Procedures for conducting meetings.
• The voting rights of members.
• The duties and privileges of the members.
• Clauses of Indemnification and Liability.

Preparing an operating agreement is not a mandated step to form a Maryland LLC.

However, getting one is highly recommended. Without an operating agreement, the company may be governed according to state laws.

Receive an EIN from the Internal Revenue Service

EIN is a nine-digit number obtained from the IRS. An EIN is also referred to as the Employer Identification Number, Federal Tax Identification Number (FTIN), or Federal Employer Identification Number (FEIN).

Obtaining an EIN is necessary for the following reasons:

• To recruit employees.
• To file taxes.
• To open a business bank account.

An EIN can be obtained by mail or online through the official IRS website.

File Annual Report

Every Maryland limited liability company must file annual reports by April 15 every year. The annual reports can be filed online or by mail, with the Maryland Department of Assessments and Taxation, for a yearly fee of $300.

File Annual Report

Every Maryland limited liability company must file annual reports by April 15 every year. The annual reports can be filed online or by mail, with the Maryland Department of Assessments and Taxation, for a yearly fee of $300.

Obtain the necessary Licenses and Permits.

Business entities may require certain business licenses and permits to carry out operations in Maryland. The kind of licenses and permits needed depends on the nature of the business.

How to Start a Nonprofit Corporation

Choose the Board of Directors

When forming a nonprofit corporation in Maryland, choosing the initial board of directors is necessary. Maryland requires at least one director of at least 18 years of age.

An organization's board of directors must review the nonprofit corporation's finances and legality.

A board of directors should preferably consist of five to seven unrelated directors.

Choose a name for the Nonprofit Corporation.

The name of a Maryland corporation must not be identical to any other name already registered with the state or misleading to its purpose.

Furthermore, a Maryland nonprofit corporation must include in the name "Corporation," "Corp.," "Incorporated," "Inc.," "Limited," "Ltd.," or "Company" (if not preceded by "and").

Founders can check online if the desired nonprofit name is available on the Maryland Business Express website.

Appoint a Registered Agent

A nonprofit corporation in Maryland must appoint a registered agent having a physical address in Maryland.

A registered agent or a resident agent is any individual or a business entity authorized to accept legal documents on behalf of the nonprofit. Furthermore, the agent must be available during the regular working hours of the corporation.

Prepare Articles of Incorporation

Nonprofit corporations in Maryland must prepare the articles of incorporation. It is a significant step that officially registers the nonprofit.

While preparing the articles of incorporation, the following information must be included:

• The name and address of the incorporation.
• The names and addresses of all incorporators.
• The purpose of starting the nonprofit corporation.
• Name and address of the resident agent.
• The names of the initial directors.
• A statement explaining the purpose of using the organization's funds and the distribution of assets in case of dissolution.

Founders can file the articles of incorporation for $170 online or by mail.

Prepare Bylaws for the Nonprofit Corporation

The bylaws of a nonprofit corporation explain how the nonprofit may operate. It acts as a guideline on how various vital decisions may be made.

It specifies the rules for conducting meetings, appointing directors, and handling several other formalities.

Though not mandatory, preparing bylaws for Maryland nonprofits is advisable.

Prepare the Conflict of Interest Policy for the organization.

Conflicts of interest may arise when the directors' and officers' personal interests clash with their duty and responsibility to support the organizational interests.

For such times when conflicts arise, the conflict of interest policy acts as a guideline providing the necessary steps to make sure the decisions are made in the interest of the nonprofit rather than the members.

The policy ensures that people with a conflict of interest acknowledge the conflict, provides guidelines to handle such conflicts, and prevents interested members from voting on the matter concerned.

The policy establishes procedures for excluding individuals with a conflict of interest from making decisions or voting on matters that are affected by their personal interests.

Ideally, a conflict of interest policy must include the following:

• The purpose of the policy.
• Explanation of what may be considered a conflict of interest.
• Steps to be taken to resolve a conflict of interest.

Conduct a Board of Directors Meeting

Conduct a board of directors meeting to discuss various important matters of the organization, for instance, assigning roles to the officers, establishing the bylaws and conflict of interest policy, etc.

The initial board of directors meeting is the first organizational meeting.

The first board of directors meeting must include the following:

• Appointing officers.
• Confirm opening a business bank account.
• Sanction initial financial transactions.
• Establishing bylaws and conflict of interest.
• Decide on an accounting period.
• Write down the minutes of the meeting signed by all attended members.

All necessary documents, like the articles of incorporation, bylaws of the nonprofit, and meeting minutes, must be kept secured.

Obtain an EIN from the Internal Revenue Service

An EIN or Employer Identification Number helps the IRS to identify businesses. It is a nine-digit unique number required regardless of the number of employees working for a nonprofit.

An EIN is required for federal and state tax filings, applying for tax exemption status, opening a nonprofit bank account, and hiring employees.

An EIN can be obtained online from the official IRS website.

Obtain the necessary Licenses and Permits.

Nonprofits operating in Maryland do not need to obtain any specific business license. The type of business licenses and permits required in Maryland depends on the nature of the organization and its location.

Nonprofits in Maryland must check with the town or local clerk to find out the local licenses that may be required.

Prepare Annual Report

Maryland nonprofits are required to prepare and submit an annual report on April 15 every year.

File for Tax Exemption

Maryland nonprofits are eligible to apply for tax exemptions if the nonprofit serves at least one of the following purposes:

• Scientific.
• Educational.
• Religious.
• Scientific.
• Literary.
• Promoting amateur sports competitions.
• Conducting tests to ensure public safety.
• Preventing harm or cruelty towards animals and children.

Furthermore, the nonprofit must have at least three unrelated directors in the corporation, registered with Maryland as a nonprofit, obtained an EIN, and approved bylaws.

Federal Tax Exemption

Nonprofits in Maryland can obtain federal tax exemption by filing Form 1023 with the IRS.

The information needed includes the following:

• History of the nonprofit corporation.
• Activities of the nonprofit.
• Organizational structure.
• Governance policies.
• Financial information of the nonprofit.

In addition, nonprofits with annual revenue of less than $50,000 and total business assets worth less than $250,000 are eligible to file Form 1023EZ, a shorter and simpler form for federal tax exemption.

Once approved, the IRS may send a determination letter that states the nonprofit is exempt from federal taxes.

State Tax Exemption

Nonprofits can apply for Maryland state tax exemption once they have received a determination letter from the IRS.

To apply for state tax exemption, nonprofits in Maryland need to provide the following:

• A letter for state tax exemption.
• The purpose of starting the nonprofit organization.
• Copy of IRS determination letter.
• Copy of nonprofit corporation's bylaws.
• Financial statement of the corporation.

Final Thoughts

Forming a company is a significant milestone in successfully establishing a business. It requires taking significant steps like carefully considering the appropriate business structure, followed by registering with the relevant authorities and complying with the necessary regulations.

By successfully navigating all the mentioned steps and fulfilling the legal requirements, business owners can ensure the smooth formation of the company.