Most people starting a business in Maryland ask some version of the same question: should I be an LLC, an S corp, or a corporation? The question is natural, but it mixes together two separate decisions, and untangling them is the first step to getting the answer right.

The first decision is the legal form. This is the entity you create under Maryland law by filing with SDAT, such as a limited liability company, a corporation, or a limited partnership. The legal form controls who owns the business, who manages it, how owners are protected from its debts, and what happens when an owner leaves, dies, or disagrees with the others.

The second decision is the tax classification. This is how the IRS and the Comptroller of Maryland tax the entity’s income. Under the federal “check-the-box” regulations, many entities can choose how they are taxed. An LLC, for example, can be taxed as a sole proprietorship, a partnership, a C corporation, or an S corporation, without ever changing its legal form.

That is why “S corp” is not an entity you form. An S corporation is a corporation or an LLC that has made a federal tax election under Subchapter S of the Internal Revenue Code. When someone says they have “an S corp,” they usually mean either a Maryland corporation or a Maryland LLC that has filed IRS Form 2553.

The best structure is the combination of the two that fits the owners, the business, and the exit plan. This guide walks through both decisions, the Maryland rules that shape them, and the scenarios where one choice clearly beats another.

Sole proprietorship

A sole proprietorship is not an entity at all. It is one person doing business in his or her own name, or under a trade name. Nothing has to be filed to create one. The owner and the business are legally the same, so the owner is personally responsible for every debt, contract, and judgment of the business. If the business operates under a name other than the owner’s own name, Maryland’s trade name statute may require a trade name certificate filed with SDAT before the business begins, but a trade name filing does not create an entity or limit liability.

General partnership

Under Corporations and Associations Section 9A-202, “the unincorporated association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership”. That last phrase matters. Two people who start a business together without forming an LLC or corporation may already be partners, with no written agreement and no liability protection. Under Section 9A-306, partners are generally liable jointly and severally for all obligations of the partnership. A general partnership can register as a limited liability partnership (LLP) to add a liability shield, but that shield does not cover a partner’s own negligence or wrongful acts.

Limited liability company

An LLC is formed by filing articles of organization with SDAT. Its owners are called members, and it can be managed by its members or by managers they appoint. Under Section 4A-301, no member is personally liable for the LLC’s obligations, “whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company”. The LLC combines that liability protection with flexible governance and flexible tax treatment, which is why it has become the default choice for most small and closely held businesses.

Corporation

A corporation is formed by filing articles of incorporation. It is owned by stockholders, governed by a board of directors, and run day to day by officers. Under Section 2-215, a stockholder generally is not obligated to the corporation or its creditors with respect to the stock beyond paying the agreed price for it. Maryland also offers two variations: the close corporation, which lets a small group of stockholders run the business more like a partnership, and the benefit corporation, which adopts a purpose of creating a general public benefit and must publish an annual benefit report.

Limited partnership

A limited partnership has at least one general partner, who manages the business and is personally liable for its obligations, and one or more limited partners, who generally are not liable for the partnership’s obligations unless they are also general partners or take part in control of the business, and even then are liable only to persons who reasonably believe, based on the limited partner’s conduct, that the limited partner is a general partner (Corporations and Associations Section 10-303). Limited partnerships are used mainly for investment funds and some real estate ventures. For most operating businesses, an LLC offers the same tax treatment with better liability protection for everyone.

The single most important reason to form an LLC or corporation is to keep the business’s debts and lawsuits from reaching the owners’ homes, savings, and other assets. That protection is real, and it is worth having for almost any business with customers, employees, a lease, or debt. But owners regularly overestimate it. The shield does not protect against:

• Your own wrongful conduct. An owner who personally commits a tort, such as negligently injuring someone or making a fraudulent statement, is liable for his or her own conduct regardless of the entity. Licensed professionals remain responsible for their own professional negligence.
• Personal guarantees. Landlords, banks, equipment lessors, and many suppliers require owners to personally guarantee the business’s obligations. A guarantee is a separate contract that makes the owner directly liable. Our guide on personal guarantees for Maryland business owners explains what to negotiate before signing.
• Trust fund taxes. Federal law can make the people responsible for a business’s finances personally liable for unpaid payroll withholding taxes, and Maryland has similar rules for certain unpaid state taxes. See our guide to the Trust Fund Recovery Penalty.
• Veil piercing. Maryland courts are reluctant to disregard the entity, and generally do so only to prevent fraud or to enforce a paramount equity. But commingling funds, ignoring the entity’s separate existence, and using the business to evade obligations all invite the argument. Our guide on piercing the corporate veil covers how those claims work.
• Forfeiture. An entity that stops filing annual reports with SDAT can forfeit its charter or right to do business, which creates its own problems for owners who keep operating.

The practical rule is simple: form the entity before you sign the lease, take the loan, or hire the first employee; sign every contract in the entity’s name with your title; keep a separate bank account; and keep the entity in good standing. Those habits do more to protect owners than the choice between an LLC and a corporation, which offer comparable liability protection.

Under the federal entity classification regulations, Treasury Regulation Section 301.7701-3, an LLC with one member is by default disregarded as an entity separate from its owner (taxed like a sole proprietorship when the owner is an individual), and an LLC with two or more members is taxed by default as a partnership. It can instead elect to be taxed as a corporation by filing Form 8832, and an LLC that files a timely S election on Form 2553 is treated as having elected corporate classification at the same time. A corporation is taxed as a C corporation unless it elects S status.

Self-employment tax: the reason the S election exists

A sole proprietor or active partner pays self-employment tax on net business earnings: 12.4% for Social Security up to the annual wage base, plus 2.9% for Medicare on all earnings, with an additional 0.9% Medicare tax on earnings above certain thresholds. For a profitable business, that tax can exceed the owner’s federal income tax. An S corporation changes the math by splitting the owner’s income into a salary, which bears payroll taxes, and remaining profit, which does not. That split is legitimate only if the salary is reasonable for the work the owner performs, as our guide on S corporation reasonable compensation explains.

The qualified business income deduction

Owners of pass-through businesses, including sole proprietorships, partnerships, LLCs, and S corporations, may be able to deduct up to 20% of their qualified business income under IRC Section 199A, a deduction that federal legislation enacted in 2025 made permanent. The deduction is not available for C corporation income, and it is limited above annually adjusted income thresholds, particularly for specified service businesses such as law, health, accounting, and consulting. Wages an S corporation pays its owner are not qualified business income, which is one reason the S election requires running the numbers rather than assuming it always saves tax.

Forming the LLC

Under Section 4A-202, any person may form an LLC by filing articles of organization with SDAT, and the LLC exists when SDAT accepts the articles for record or at a later time the articles specify. The articles themselves are short. Under Section 4A-204, they must state the LLC’s name, the address of its principal office in Maryland, and the name and address of its resident agent. Unlike a corporation’s articles, they do not need to state a business purpose. Most LLCs file online through Maryland Business Express.

The operating agreement

Maryland does not require an LLC to have an operating agreement, and under Section 4A-402, unless the articles require otherwise, an operating agreement need not even be in writing. That flexibility is a trap. Without a written agreement, the LLC Act’s default rules govern voting, distributions, transfers, and withdrawal, and those defaults were not written with your business in mind. If the agreement says nothing about how it can be amended, all members must agree to any amendment.

For a single-member LLC, a written operating agreement supports the separateness of the entity and makes succession planning, banking, and later admission of new members easier. For a multi-member LLC, it is essential. It should address capital contributions, profit allocations and distributions (including tax distributions), management authority, deadlock, transfer restrictions, buyouts on death, disability, or departure, and how disputes will be resolved. Our guides to the Maryland LLC operating agreement and buy-sell agreements go deeper.

What Maryland does not offer

Maryland does not authorize domestic series LLCs, the structure some states allow for holding separate assets in separately protected “series” within one LLC. Maryland does recognize series LLCs formed in other states for registration purposes, but owners who want to separate risky assets, such as multiple rental properties, generally form separate Maryland LLCs, sometimes under a common holding company. Maryland does authorize benefit LLCs, which elect in their articles of organization to have the purpose of creating a general public benefit and must deliver an annual benefit report to their members.

A Maryland corporation is formed by one or more adult incorporators who file articles of incorporation with SDAT. The articles must state, among other things, the corporation’s name and purposes, its principal office and resident agent, the number and classes of shares it is authorized to issue, and the number and names of its initial directors.

Corporations come with more required structure than LLCs:

• Under Section 2-402, each corporation must have at least one director.
• The board adopts the initial bylaws, and after that the power to amend them belongs to the stockholders unless the charter or bylaws give it to the board.
• Under Section 2-501, each corporation must hold an annual meeting of stockholders to elect directors.
• Officers, stock issuances, and major transactions are authorized through board action, which should be documented in minutes or written consents.

Those formalities are not a reason to avoid the corporate form, and many owners find the clear roles helpful. But a corporation that ignores them weakens its own records in a dispute with a co-owner, a lender, or a creditor.

The close corporation

Maryland’s close corporation statute lets a corporation with a small group of stockholders operate with partnership-like flexibility. A corporation elects close corporation status by including a statement in its charter that it is a close corporation. Once it does:

• It may elect to have no board of directors, with the stockholders managing the business directly.
• Under Section 4-401, the stockholders may enter into a unanimous stockholders’ agreement regulating any aspect of the corporation’s affairs, including management of the business.
• An annual meeting need not be held unless a stockholder requests one.
• Stock transfers generally require the written consent of every stockholder, unless made under a unanimous stockholders’ agreement.
• Any stockholder may petition for dissolution on the grounds available to other corporations or on the ground that internal dissension prevents the business from being conducted to the advantage of the stockholders generally.

That last feature cuts both ways. It gives a minority stockholder real leverage, which some owners want and others do not. Close corporations are less common today because an LLC achieves most of the same flexibility, but they remain useful for owners who want a corporation for tax reasons and partnership-style governance.

Benefit corporations

A Maryland corporation can also elect to be a benefit corporation by including a statement in its charter. A benefit corporation has the purpose of creating a general public benefit, may identify specific public benefits, and must deliver to its stockholders, within 120 days after the end of each fiscal year, an annual benefit report that includes an assessment of its societal and environmental performance prepared in accordance with a third-party standard, and must post the report on its public website, if it has one. The election is about mission and governance; it does not change how the corporation is taxed.

Eligibility

Under IRC Section 1361, an S corporation may not have more than 100 shareholders (with members of a family treated as one shareholder under Section 1361(c)(1)), may not have shareholders other than individuals, estates, and certain trusts and tax-exempt organizations, may not have a nonresident alien shareholder, and may not have more than one class of stock. Differences in voting rights are allowed under Section 1361(c)(4), but under Treasury Regulation Section 1.1361-1(l)(1) every outstanding share must confer identical rights to distribution and liquidation proceeds.

Those limits rule out the S election for many businesses:

• A business with a foreign owner who is not a U.S. resident for tax purposes cannot be an S corporation. Foreign-owned LLCs face their own reporting rules, covered in our guide to Form 5472.
• Corporations, partnerships, and LLCs treated as separate entities for federal income tax purposes generally cannot be S corporation shareholders. However, an eligible individual may hold S corporation shares through a single-member LLC that is disregarded for federal income tax purposes, because the individual is treated as the shareholder for federal tax purposes. The ownership structure must be evaluated carefully to avoid an inadvertent termination of S corporation status.
• Preferred returns, special allocations, and profits interests for key employees, which are routine in an LLC taxed as a partnership, can violate the one-class-of-stock rule in an S corporation.

Timing

Under IRC Section 1362(b), an election is effective for a tax year if it is made during the preceding year or by the 15th day of the third month of the year, which the IRS describes as no more than 2 months and 15 days after the beginning of the tax year. All shareholders must consent. The IRS offers relief for late elections in many cases, but it is better not to need it.

Maryland follows the federal election

Maryland generally does not tax an S corporation at the entity level. Under Tax-General Section 10-104, S corporations are exempt from the Maryland corporate income tax except as the pass-through entity rules provide and except for income that is subject to federal tax at the corporate level, such as built-in gains, under Section 10-304(3). The income flows through to shareholders, who pay Maryland income tax on it, and the S corporation files Maryland Form 510 or, if it elects the entity-level tax described below, Form 511. If the S corporation has nonresident shareholders and does not make that election, it must pay Maryland tax on their shares of its Maryland-source income.

A C corporation pays its own income tax: 21% federally under IRC Section 11(b), and 8.25% to Maryland under Tax-General Section 10-105(b). Because the Maryland tax is deductible for federal purposes, the combined rate on corporate income is roughly 27.5%. When the corporation distributes its after-tax profit as dividends, shareholders pay tax again: qualified dividends are taxed federally at capital gains rates, sometimes with the 3.8% net investment income tax, and Maryland taxes dividends as ordinary income at state and county rates.

For an owner-operated business that distributes its profits, that second layer of tax usually makes the C corporation the most expensive choice. It can still be the right one in several situations:

• Venture capital and institutional investors. Investors in high-growth companies commonly require a C corporation, often a Delaware corporation, with preferred stock. A business that expects to raise that kind of capital often forms as, or converts to, a C corporation early.
• Retained earnings. A business that will reinvest most of its profits may pay less current tax at the 21% federal corporate rate than its owners would pay on pass-through income at the top individual rates, although the second tax eventually arrives when profits are distributed or the business is sold.
• Qualified small business stock. Under IRC Section 1202, a noncorporate shareholder who acquires original-issue stock of a qualifying C corporation may exclude gain on a later sale. For stock acquired after July 4, 2025, the exclusion is 50% after 3 years, 75% after 4 years, and 100% after 5 years, the per-company cap is generally $15 million, and the corporation’s gross assets generally may not exceed $75 million when the stock is issued, with both figures indexed for inflation after 2026. The exclusion is not available to many service businesses, including those in health, law, accounting, consulting, and financial services.

Because converting a C corporation into an LLC taxed as a partnership is generally treated as a taxable liquidation, the decision to start as a C corporation is harder to undo than the decision to start as an LLC. That asymmetry is another reason most closely held businesses start as LLCs and convert only when a real investment or exit plan calls for it.

Federal tax drives most entity decisions, but Maryland adds rules that can change the answer, and several of them changed recently.

Individual and county rates

Pass-through income is taxed to Maryland residents at the state’s graduated individual rates plus a county income tax. Legislation enacted in 2025 added higher brackets for tax years beginning after December 31, 2024, including a top state rate of 6.50% on taxable income over $1,000,000 for single filers and $1,200,000 for joint filers, and it allowed counties and Baltimore City to set local income tax rates up to 3.30% for tax years beginning after December 31, 2025. Rates and brackets are published by the Comptroller of Maryland and the Department of Legislative Services, and owners should check the current figures for their county.

The elective pass-through entity tax

Under Tax-General Section 10-102.1, an S corporation, a partnership, or an LLC not taxed as a corporation may elect to pay Maryland income tax at the entity level on its members’ shares of income. Members then claim a credit for their share of the tax on their own Maryland returns. The election matters because of the federal cap on itemized deductions for state and local taxes. In IRS Notice 2020-75, the IRS announced that a state income tax imposed on and paid by a partnership or S corporation is deductible in computing the entity’s income and is not taken into account in applying the cap to the owners. Federal legislation enacted in 2025 raised the cap to $40,000 for 2025, with small annual increases, a reduction for higher-income taxpayers, and a scheduled return to $10,000 for tax years after 2029, but it left the entity-level workaround in place.

For tax year 2025 and later, the Comptroller applies an 8.75% rate to the shares of individual and fiduciary members and 8.25% to the shares of entity members. The election must be made with the entity’s first filing of the tax year, which is often the first quarterly estimated payment on Form 510/511D, is irrevocable for that year, and requires the entity to file Form 511. For tax year 2026 only, the Comptroller is disregarding elections made with the first-quarter estimated payment and honoring the election made with the next filing or payment after April 15, 2026. A 2025 law that would have required an electing entity to pay tax on its resident members’ income from all sources, rather than only Maryland-source income, was postponed to tax year 2027 by the 2026 Budget Reconciliation and Financing Act, which also gave electing entities options for calculating the tax, as the Comptroller explains in its April 2026 tax alert. Whether the election helps depends on each owner’s federal itemized deductions, income, and residence, so it should be modeled each year rather than adopted by default.

The capital gains surtax

Beginning with tax year 2025, Maryland imposes an additional 2% tax on net capital gain of individuals whose federal adjusted gross income exceeds $350,000, regardless of filing status, subject to exclusions described in the Comptroller’s Technical Bulletin 58. The surtax is not imposed on corporations, but capital gain that passes through an LLC, partnership, or S corporation is taxed to the owners. Owners planning an eventual sale of the business should factor it into the structure and the exit plan.

Maryland’s state filing costs are modest, but they recur, and the annual report is the obligation owners most often miss. The figures below come from SDAT’s published fee schedule and the Corporations and Associations Article; confirm current amounts before filing.

The resident agent

Every Maryland corporation and LLC must maintain a principal office in Maryland and a resident agent, under Section 2-108 for corporations and Section 4A-210 for LLCs. Under Section 1-101, the resident agent must be an individual residing in Maryland or a Maryland corporation, LLC, or limited partnership. The resident agent receives lawsuits and official notices, so an owner who serves as his or her own agent must keep the address current and actually check the mail.

The annual report and personal property return

Each Maryland LLC, corporation, limited partnership, and LLP must generally file an annual report with SDAT by April 15, unless an extension has been obtained. Businesses that own, lease, or use Maryland business personal property with a total original cost of $20,000 or more generally must also complete the applicable personal property reporting section. Businesses below that threshold may qualify for the low-assessment exemption, although applicable reporting and certification requirements must still be satisfied. Sole proprietorships and general partnerships are not subject to the $300 entity annual report fee, but they may be required to file SDAT Form 2 based on their business personal property or licensing circumstances.

An entity that fails to file its annual report can forfeit its charter or its right to do business in Maryland. Under Section 4A-911, an LLC that forfeits loses its right to do business in Maryland and the right to use its name, without any further proceeding. Our guide on SDAT forfeiture and reinstatement explains how to fix the problem.

Beyond SDAT

Forming the entity is only the state filing. Most businesses also need an employer identification number from the IRS, Maryland tax registrations with the Comptroller for withholding and, if applicable, sales and use tax, county or local business licenses depending on the activity, and the industry-specific licenses that apply to regulated businesses. The entity should open its own bank account before it takes in or pays out money.

Online formation services often suggest forming in Delaware, Wyoming, or Nevada for privacy, lower fees, or business-friendly courts. For a business that operates in Maryland, that advice usually backfires. A foreign LLC must register with SDAT before doing interstate, intrastate, or foreign business in Maryland, and a foreign corporation must qualify before doing intrastate business here. Once registered, the business pays Maryland’s $300 annual report fee in addition to its home state’s fees, maintains registered agents in two states, and its Maryland income remains subject to Maryland income tax, paid by the owners or, for nonresident owners, generally by the entity. An unregistered foreign LLC also faces a bar on maintaining suits in Maryland courts until it registers.

Delaware does make sense for some businesses, most notably companies that will raise venture capital, where investors and their counsel expect Delaware law. For everyone else, a Maryland entity is usually simpler and cheaper. Our guides on forming an LLC in Maryland, Delaware, or Wyoming and foreign LLC registration in Maryland cover the comparison in detail.

The federal analysis is the same in Pennsylvania, but the state layer is different:

• Corporate tax is falling. Pennsylvania’s corporate net income tax rate is being reduced each year under a schedule enacted in 2022, from 7.49% for 2026 to 4.99% for 2031 and later, according to the Pennsylvania Department of Revenue.
• The personal income tax is flat. Pennsylvania taxes individual income at a flat 3.07%, and many municipalities and school districts add local earned income taxes.
• S elections follow automatically. A business with a federal S election is treated as a Pennsylvania S corporation unless it affirmatively elects out.
• No entity-level election. As of this writing, Pennsylvania has not adopted an elective pass-through entity tax like Maryland’s, so Pennsylvania owners do not have the same state-level workaround for the federal deduction cap.
• Annual reports are new. Pennsylvania began requiring annual reports in 2025. Starting with reports due in 2027, entities that fail to file face administrative dissolution, termination, or cancellation, as explained by the Pennsylvania Department of State.
• Philadelphia adds its own taxes. Businesses in Philadelphia face the Business Income and Receipts Tax and, for unincorporated businesses and individuals, the Net Profits Tax.

Businesses that operate in both states should decide where to form based on where the owners live and where the business operates, then register in the other state as needed. Our guide on forming an LLC in Pennsylvania, Delaware, or Wyoming covers the Pennsylvania formation side.

Every business is different, and the right answer depends on numbers that only the owners and their advisors can see. But the same patterns come up again and again:

Plan for the exit at the start

How the business will eventually be sold affects the choice now. Buyers generally prefer to buy assets, which gives them a stepped-up tax basis, while sellers often prefer to sell stock or membership interests. A C corporation that sells its assets pays corporate tax on the gain before distributing what is left, while a pass-through entity generally does not. Our guide to asset sales versus stock sales explains why that difference can be worth a great deal at closing.

You can change course, but not always cheaply

Many changes are relatively straightforward. A single-member LLC that adds another member generally becomes a partnership for federal income tax purposes unless it has elected corporate classification, and an eligible LLC can make an S election when profits justify it. Maryland law also permits conversions between certain entity types. Other changes can be expensive. Converting a C corporation into an LLC taxed as a partnership is generally treated as a taxable liquidation that can trigger tax at both the corporate and shareholder levels. Under the federal check-the-box regulations, an entity that changes its tax classification by election generally cannot elect another classification change during the following 60 months, subject to exceptions, including an initial election effective on the date a newly formed entity comes into existence. Our guide on adding a member to a Maryland LLC covers one of the most common changes.

• Starting a business with a partner without forming an entity, and becoming a general partnership with unlimited personal liability.
• Treating “S corp” as a separate entity type and forming a new entity when the existing LLC could simply have made the election.
• Making the S election too early, before profits are high enough to justify payroll, a separate return, and the compliance burden.
• Paying no salary, or an unreasonably low one, from an S corporation.
• Making the S election when an owner is ineligible, such as a nonresident alien or another entity, or when the owners’ economic deal violates the one-class-of-stock rule.
• Forming a C corporation for a business that will distribute its profits, and paying two levels of tax without a reason.
• Forming in Delaware or Wyoming for a Maryland-only business and paying two states’ fees for no added protection.
• Operating without a written operating agreement or shareholder agreement, leaving buyouts, deadlocks, and departures to default rules.
• Signing contracts or leases in an owner’s own name before the entity exists, or without showing the entity and the signer’s title.
• Missing the April 15 SDAT annual report and forfeiting the entity’s good standing.
• Holding appreciating real estate in a corporation, where getting it out later can be a taxable event.

The question compares two different things. An LLC is a legal entity formed under Maryland law, while an S corporation is a federal tax election that an eligible corporation or LLC can make. Many Maryland businesses are LLCs that have elected S corporation tax treatment. The real choice is whether your LLC should be taxed as a disregarded entity or partnership, which is simpler, or as an S corporation, which can reduce self-employment taxes when profits are well above a reasonable salary for the owner’s work.

Maryland law does not require one, and under Corporations and Associations Section 4A-402, an operating agreement need not be in writing unless the articles of organization require it. But without a written agreement, the LLC Act’s default rules govern voting, distributions, transfers, and withdrawal, and any amendment requires the agreement of all members if the agreement does not say otherwise. A written operating agreement is strongly recommended for every LLC and is essential for an LLC with more than one member.

SDAT’s filing fee for articles of organization is $100, with an optional $50 fee for expedited service. Every Maryland LLC must also file an annual report by April 15 each year, with a $300 fee for LLCs, corporations, limited partnerships, and LLPs, unless the business qualifies for a fee waiver. Owners should budget separately for a resident agent if they do not serve as their own, any required local licenses, and legal fees for an operating agreement.

Usually not, if the business operates in Maryland. A foreign LLC doing business in Maryland must register with SDAT, pay Maryland’s annual report fee in addition to its home state’s fees, and maintain registered agents in both states. Its Maryland income also remains subject to Maryland income tax. Delaware can make sense for companies that will raise venture capital, but for most Maryland businesses a Maryland LLC is simpler and less expensive.

Yes. A single-member LLC that meets the eligibility requirements can file Form 2553, and under the federal entity classification regulations a timely S election is treated as an election to be classified as a corporation. The owner then must take a reasonable salary through payroll, and the LLC files Form 1120-S federally and Form 510 or 511 in Maryland. The LLC remains an LLC under Maryland law.

Yes. Maryland generally follows the federal S election and does not impose its corporate income tax on S corporations except as its pass-through entity rules provide and on income taxed federally at the corporate level. S corporation income passes through to the shareholders, who pay Maryland income tax on it. An S corporation with nonresident shareholders must pay Maryland tax on their shares of its Maryland-source income unless it elects to pay the entity-level tax on all members’ shares.

Under Tax-General Section 10-102.1, an S corporation, partnership, or LLC taxed as a partnership may elect to pay Maryland income tax at the entity level on its members’ shares, and members claim a credit for their share of the tax. The benefit is federal: a tax paid by the entity is generally deductible in computing its income and is not subject to the cap on individual deductions for state and local taxes. Whether the election saves money depends on each owner’s income, deductions, and residence, so it should be modeled with your tax advisor each year.

A C corporation usually makes sense when the business plans to raise venture capital or other institutional equity, will retain most of its earnings for growth, or wants its owners to qualify for the federal qualified small business stock exclusion under IRC Section 1202. For an owner-operated business that distributes its profits, the two levels of tax on corporate income usually make a C corporation more expensive than a pass-through entity.

An LLC generally protects members from personal liability for the LLC’s debts and obligations solely because they are members. It does not protect an owner from liability for his or her own wrongful acts, from obligations the owner personally guarantees, or from certain unpaid trust fund taxes. Courts may also disregard the entity in limited circumstances, such as fraud. Keeping the LLC in good standing, maintaining a separate bank account, and signing contracts in the LLC’s name all help preserve the protection.

Yes, but the cost depends on the change. An LLC can usually make an S election without forming a new entity, and Maryland law allows conversions between entity types. Revoking an S election is different: the LLC remains classified as a corporation and becomes a C corporation, and it generally cannot re-elect S status for five years. Moving from a C corporation to an LLC taxed as a partnership, however, is generally treated as a taxable liquidation, and an entity that changes its tax classification by election generally cannot elect another change during the following 60 months, subject to exceptions such as an initial election effective on the date a newly formed entity comes into existence. Because starting as an LLC preserves more options, it is usually easier to move from an LLC to a corporation than the reverse.