Operating by the Book

By A. Lawrie Gardner

So you have always wanted to own your own business. You believe this is the way to financial security and inner happiness. Well-you may or may not realize those goals, depending on whether you begin your business on the proverbial “right foot” or whether you overlook some essential starting blocks.

The first item to get out of the way is to decide under which business entity you want to operate. Should you operate as a sole proprietorship, a general partnership, a corporation (C or S), an LLC or an LLP? A good place to consult regarding this choice is the “Small Business Startup Kit,” which can be accessed through the IRS Web site, www.irs.gov. Actually, the general IRS Web site has a plethora of excellent information for someone wanting to start his or her own business. Another very good reference for starting up your own business is available through Maryland’s State Department of Assessment and Taxation Web site. The title is Guide to Legal Aspects of Doing Business in Maryland.

Once you have decided upon your business entity type, you will need to choose a name for your business. In the state of Maryland, if you operate as a corporation, LLC or LLP, you will first need to file for a state identification number with the Maryland State Department of Assessments and Taxation (SDAT). You can call their office at 410-767-1340 or e-mail them at charterhelp@dat.state.md.us. You also may go directly to their Web site to download the appropriate forms. This is where you need to check to see if the business name you want to use is available. In addition to the business’s legal name, you may want to assign your business a trade name or “DBA” (doing business as) name for easy recognition. To set up a trade name, either call 410-767-1340 or download the application to apply for a trade name and send it to the SDAT with the appropriate fee.

If you are operating as a corporation (C or S), LLP, LLC or limited partnership, the state also requires you to file for a corporate charter while requesting a state identification number. Applying for a corporate charter involves filing Articles of Incorporation with SDAT and a $100–$150 fee to accompany the application. All of the necessary forms are available on SDAT’s Web site at www.dllr.md.us.

The Web site also contains sample Articles of Incorporation forms, if you would like to do all of the work yourself. However, if there is more than one owner involved in the business, it would be much more expeditious if you hired an attorney to prepare all of the proper paperwork. If you will be operating as a sole proprietorship, there is no corporate charter to file, but you still need to register with the state. The number to call is 410-767-4991.

After you have obtained your state identification number, you now legally exist in the state of Maryland. As part of doing business in Maryland, you will be required to file a Form 1 on a yearly basis. This form serves the dual purpose of 1) reporting all of your personal property, except licensed vehicles, to the state for purposes of tax assessments, and 2) keeping your corporate charter alive. The yearly filing fee for a Form 1 is $300 per year per entity. Sole proprietorships are also required to file a similar form, Form AT3-51, on a yearly basis, but only if their total personal property plus inventory is over $10,000. There is no yearly filing fee for sole proprietorships. Both forms are required to be filed by April 15, or June 15 if the proper time extension is filed.

Now that you have established yourself in Maryland, it is time to file for a federal identification number (FEIN) with the IRS. Who needs to apply for a FEIN? Any business that has employees must file for a FEIN. Corporations, LLCs and partnerships with multiple partners who have no employees must also file for a FEIN, because they will be filing separate tax returns for the business. It is very simple to file for a FEIN and may be done either on-line through www.irs.gov, by phone, or via mail. The form required to file for a FEIN is the SS-4. It asks very basic questions about the business and takes about five minutes to complete. You may obtain the number via Tele-TIN in a matter of minutes. The number for Tele-TIN is also on the IRS Web site. Once a FEIN is assigned to a business entity, all correspondence to the IRS should use the entity’s FEIN number. The number will be used for payroll tax returns and income tax returns.

As soon as you have been assigned your FEIN, you will need to file a Combined Registration with Maryland. If you will be 1) paying employees, 2) collecting sales and use taxes, 3) collecting admission and amusement taxes, 4) collecting tire recycling fees, or 5) needing a transient vendor license, you must file a CRU-1 with Maryland. A copy of the form may be downloaded from Maryland’s Web site, www.md.gov. The form also allows you to apply for an alcohol and tobacco license, a motor fuel tax account, or a sales and use tax exemption. Once the CRU-1 is filed, you will receive state tax withholding booklets, quarterly unemployment forms, and sales and use tax reports if applicable. Some businesses may require additional licenses in order to operate. For example, accounting firms need to obtain a CPA license in the firm’s name in order to operate legitimately; restaurants also need various licenses from the health department in order to operate within the law.

Setting up a business is not a difficult task, but one that should not be taken lightly. If you are unsure about any of the necessary steps to take, it is always good to involve a professional in the process. A trusted CPA or attorney is the best source for information. You will probably need a CPA eventually to help with tax issues, so before you get too far along in your business, it is a good idea to find someone you can work with in the setup and maintenance of your business. Good prior planning is a surefire way to know you are operating by the book.

© 2010, A. Lawrie Gardner

A. Lawrie Gardner, CPA

Professor, Business Administration

Anne Arundel Community College

algardner1@aacc.edu

410-777-2179

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