11.4 Business Formation and Maryland Taxes

Choosing a Business Structure

The legal form of the business determines who pays when something goes wrong and how profits are taxed. Three forms dominate home improvement contracting:

Two cautions the exam likes: liability protection is not absolute — an owner who personally performs negligent work, personally guarantees a loan, or ignores corporate formalities can still be reached personally. And a trade name or "doing business as" (DBA) registration creates no entity and no liability protection — it is only a name.

Choosing in Practice

Most small home improvement firms pick the LLC because it combines the liability shield with simple administration — no board meetings or stock records required. A corporation demands ongoing formalities: bylaws, annual meeting minutes, separate bank accounts, and clean separation between company and personal funds. An owner who treats the corporate checkbook as a personal wallet invites a court to pierce the corporate veil and reach personal assets anyway. Note also that an MHIC license is issued to a specific legal person — individual or entity — so the entity choice should be settled before applying, and the licensed name must match the contracts and advertising.

Registering with the State Department of Assessments and Taxation

Maryland business entities are formed and maintained through the State Department of Assessments and Taxation (SDAT). An LLC files articles of organization; a corporation files articles of incorporation; every entity must designate a resident agent with a Maryland street address to accept legal papers. A contractor operating under a name other than the entity's exact legal name registers that trade name with SDAT — and MHIC expects the name on the license, the contract, and the advertising to match.

The Federal Employer Identification Number

An Employer Identification Number (EIN) is the business's federal tax ID, issued free by the Internal Revenue Service (Form SS-4 or the online application). You need an EIN to hire employees, open most business bank accounts, and file business tax returns. Sole proprietors with no employees may use their Social Security number, but most contractors obtain an EIN anyway to keep business and personal identity separate.

Maryland Sales and Use Tax: Contractors Are Usually the Consumers

Maryland's general sales and use tax rate is 6 percent. The rule that surprises new contractors — and that the Comptroller states plainly in Business Tax Tip #18 — is that a contractor performing real property construction or improvement is generally treated as the consumer of the building materials it installs. The contractor pays the 6 percent tax to the supplier when buying lumber, drywall, roofing, and fixtures (or accrues use tax on untaxed out-of-state purchases), builds that tax into job costs, and does not separately charge the homeowner sales tax on materials incorporated into the real property. This holds whether the contract is lump sum, cost-plus, or time-and-materials.

The contrast case: if you sell tangible personal property over the counter without installing it — a homeowner walks in and buys a door slab — you are acting as a retailer, must hold a Maryland sales and use tax license, and must collect the 6 percent tax from the customer. Contractors who do both track the two roles separately. Misreading this distinction either overcharges homeowners or leaves the contractor paying uncollected tax plus penalties on audit.

The Annual Report and Personal Property Return

Every Maryland business entity must file an Annual Report (combined with the Business Personal Property Return for entities owning personal property) with SDAT each year, due April 15, with a $300 filing fee. Skip it and the entity falls out of good standing; continued neglect leads to forfeiture of the charter or LLC — which can jeopardize an MHIC license issued to that entity.

Business Personal Property

The personal property return matters because Maryland counties and Baltimore City tax business personal property — the furniture, equipment, tools, and inventory a business owns. The SDAT filing is how that property is reported and assessed, so a contractor with significant tools and equipment should not treat the annual report as a mere formality.

Employer Tax Accounts

The day you hire your first employee, new obligations attach: register with the Comptroller of Maryland for income tax withholding, register with the Maryland Department of Labor for unemployment insurance contributions, carry workers' compensation insurance (mandatory for employers, with narrow exceptions), and withhold and match federal FICA (Social Security and Medicare) taxes. Misclassifying employees as independent contractors to dodge these accounts is a perennial enforcement target — and a licensing problem when discovered.