Income Taxes on Business Income in Maryland

April 13, 2006

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In Maryland, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Corporations. If your corporation is a domestic corporation (a corporation organized in Maryland), you must pay tax at the rate of 7 percent of taxable net income. For foreign corporations (corporations organized in a state other than Maryland), you pay at the rate of 7 percent of the taxable net income derived from property and business transacted in Maryland.

S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

In Maryland, the law extends this favorable tax treatment to state corporate income tax liability for resident members and S corporations will not be subject to the corporate income tax.

Warning

In Maryland a tax is imposed on each S corporation, partnership, and limited liability company(LLC) that has nonresident members and taxable income. The tax on the nonresident's taxable income ranges from 2 percent through 4.75 percent in 2005.

Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Maryland taxable adjusted gross income their distributive share of partnership income.

Limited liability companies (LLCs). Maryland law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Maryland are classified as partnerships for Maryland tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Maryland taxable adjusted gross income their distributive share of LLC income.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Maryland tax purposes.